Jordbrukare > Dairy > Is India’s  food inflation imported?

A comparison of the CPI Food and FAO’s FPI show that the two have been moving in tandem in the last one year. Does this mean that India’s food inflation is driven by global factors?

In December, the food component of the Consumer Price Index (CPI), India’s benchmark inflation measure, rose 14.2% on an annual basis. This was the highest increase in food inflation since December 2013. The Food Price Index (FPI) of the United Nations Food and Agricultural Organization (FAO) rose 12.2% in December. This was the highest increase since April 2017.

In fact, a comparison of the CPI Food and FAO’s FPI show that the two have been moving in tandem in the last one year. Does this mean that India’s food inflation is driven by global factors?

The FPI has five sub-components: cereals, dairy, meat, vegetable oil and sugar. CPI’s food basket has nine components: cereals and products, egg, fish and meat, milk and products, oils and fats, fruits, vegetables, pulses and products, sugar and condiments and spices. The weight of each sub-group is given in the following table. It is important to note that the FPI does not have items such as pulses and vegetables in its sub-components (more on this later).

It is also possible to calculate the contribution of each of these sub-components to increases in CPI Food and FPI.

As can be seen, both in December and January, vegetables alone contributed more than 50% of the rise in India’s food inflation. The FPI does not have even have this category. Similarly, role of cereal prices in CPI Food and FPI is completely different. Cereal inflation had a contribution of -4.7% and 0.8% to FPI in December and January. The contribution of the cereals and products sub-category to CPI Food was 7.7% and 9.7% in December and January. In fact, the cereal sub-components of FPI and CPI Food have behaved very differently in the recent period. While the cereal component of CPI has been rising, the cereal part of FPI has been contracting.

Why are Indian cereal prices rising at a time when production is set to break yet another record and the global price environment is benign?

In his column published on January 16 in Mint, Himanshu, an associate professor of economics at Jawaharlal Nehru University, blamed government policy for this development.

“In the run-up to the General Elections, the government procured 34 million tonnes of wheat in 2019, on top of the 36 million tonnes procured in 2018. These are the highest procurement levels since 2012-13. But it failed to distribute the wheat through the public distribution system, so there just wasn’t enough to go around. As of January, total stocks with Food Corporation of India (FCI) stand at 75 million tonnes, 33 million tonnes of it wheat, and the rest, rice. This implies that almost all the wheat that the FCI procured before the polls is still with it. This is almost a third of the country’s total wheat production.”

To be sure, the movement in oil and fats sub-category of the CPI could have been affected by a spike in the vegetable oils component of FPI via the import route. However, as the analysis here shows, this cannot explain even a small fraction of the recent spike in food inflation in the country.

Because food has a 39% share in the overall inflation basket, a spike in food inflation in December also led to overall CPI rising 7.35%, the highest since July 2014. Given the importance of food in our inflation basket, it is important that no wrong conclusions are drawn about the sources of food inflation. As this analysis clearly shows: it’s local.