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In 1991, the average food inflation in India was 17.9 percent and in the two decades that followed, food inflation was in double digits most years. Being a fledgling manufacturing economy, still dominated by farming, India’s fiscal and monetary policies were tied intimately with food prices. Food had more than 60 percent weight in official inflation indices as well. Food also accounted for the lion’s share of household expenses.
More importantly, food inflation was something very closely associated with emerging markets, especially India. The prices of pulses or vegetables hardly made headlines in developed nations such as the US and European countries, but in India, it toppled governments.
Fast forward to today, food isn’t as threatening to the political economy as before. But the challenges that come in the way of maintaining price stability remain and new hurdles have emerged as well. It should not surprise us that monetary policy, which never had much to do with food inflation, continues to be influenced significantly by it. This influence has stayed after adoption of the consumer price index where the weight of food is lower than in the wholesale price index.
Ergo, the Reserve Bank of India (RBI) has not been able to enjoy the fruits of a record low core inflation (which excludes food but stands for everything else that reflects rising affluence) because a handful of pulses and vegetables continue to thwart price stability.
Should food be accorded a high weight in how we measure inflation?
This question was indeed posed to past central bankers of India and the answer has been a maybe. Take a look at the latest household consumption survey that has been explained by Manas Chakravarty here and you would not be remiss in thinking of reducing food’s weight. The share of food in total household expenditure used to be 59.4 percent in 1999-2000, but came down to 53.1 percent in 2004-05, to 52.9 percent in 2011-12 and now, for 2022-23, it’s down to 46.38 percent.
Rising affluence, better farm productivity, access to global markets and of course some progressive fiscal measures albeit temporary have helped in keeping us from worrying about our meals. Why make food the central problem when households can manage it better, given more affluence? For the poor and downtrodden, the government runs a free food scheme anyway.
But a new challenge has the power to make food central and perhaps even force policymakers to increase its weightage in inflation eventually. That challenge is climate change. Farm productivity has been hit across the globe due to climate events that range from bothersome to catastrophic. Over the next decade, global warming could add 3.2 percentage points to food inflation every year, it is estimated. Climate change has made it necessary for the US Federal Reserve to closely watch what is called the hurricane season to gauge the economy’s strength as this June 6 Financial times article points out. It is no longer only an emerging market economy problem. India too has just come out of a brutal heat wave which sent temperatures soaring across regions, some of them key farm output contributors.
Food prices have begun to bother the government, too. With elections just behind us, the newly elected government wants to monitor 16 more items across a wide range of food items for policy purposes, as a June 12 Business Standard article states. The government wants to closely monitor the “garib ki thali” or the poor man’s plate.
The month of May and the rising temperatures drove up prices of vegetables (vegetable inflation was 27.33 percent), pulses are back to high double-digit inflation and grains became 9 percent dearer.
Notwithstanding technological advancement (even the use of artificial intelligence), the fortunes of farming are still closely tied to the intensity and spread of the annual monsoon. This year, rainfall is expected to be bountiful which could cool food prices in the coming months.
But if India’s farm output and food prices must be managed in the long run, policymakers will need to make significant progress in tackling the outcomes of an altered climate. The Economic Survey of 2019-20 introduced the concept of “Thalinomics” that tracked the affordability of a plate of food. The survey observed that a plate of food has become more affordable between 2015-16 and 2019-20. But there is a storm brewing on our plates from climate change.
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