Managing India’s food and beverages Inflation

In News

• India needs to focus on cereal and milk inflation, both of which have high weights in CPI.

About the Inflation

• Responsibility & objective:
  • In India, the RBI is entrusted with the responsibility of devising monetary policy with the primary objective of maintaining price stability while keeping in mind the objective of growth.
• About Inflation:
  • Maintaining the inflation level:
    • The central bank is supposed to target a 4% retail inflation level, although the RBI has the leeway of inflation going up to 6% or falling to 2% in any particular month. 
    • Some degree of inflation is desirable as it promotes economic activity.
  • Relation of growth & inflation:
    • Typically when an economy experiences fast economic growth — that is, there is a lot of demand in the economy — prices rise.
  • Drivers of Inflation:
    • Demand-pull Inflation: 
      • Increases in prices due to the gap between the demand (higher) and supply (lower).
    • Cost-push Inflation: 
      • Higher prices of goods and services due to increased cost of production.
    • Exchange Rates: 
      • Exposure to foreign markets is based on the dollar value. Fluctuations in the exchange rate have an impact on the rate of inflation.
    • Demand-supply gap: 
      • High demand and low production or supply of multiple commodities create a demand-supply gap, which leads to a hike in prices.
• How is Inflation measured?
  • In India, inflation is primarily measured by two main indices — WPI (Wholesale Price Index) and CPI (Consumer Price Index), which measure wholesale and retail-level price changes, respectively. 
• What are WPI and CPI inflation rates?
  • Consumer Price Index (CPI)
    • It is an index measuring retail inflation in the economy by collecting the change in prices of most common goods and services used by consumers.
    • CPI is also called a market basket, it is calculated for a fixed list of items including food, housing, apparel, transportation, electronics, medical care, education, etc.
    • The base Year for CPI is 2012.
  • The Wholesale Price Index(WPI):
    • The new series of Wholesale Price Index(WPI) with base 2011-12 is effective from April 2017. 
    • WPI captures the average movement of wholesale prices of goods and is primarily used as a GDP deflator. 
    • WPI(2011-12) reckons only basic prices and does not include taxes, rebate/trade discounts, transport and other charges.
    • WPI-based inflation data is put together by the Department for Promotion of Industry and Internal Trade (or DPIIT).

Issues & Challenges with food and beverages component in the Indian CPI

• Management of food and beverages component:
  • The food and beverages component in the Indian CPI has a weightage of 45.86 percent, the highest amongst G20 countries. 
  • Managing this component to around 4 percent is critical to taming overall inflation. 
  • Interestingly, this component of inflation can not be managed only through monetary policy, nor even by fiscal policy. 
    • Triggered by external shocks:
      • The simple reason is that it is often triggered by external shocks, such as droughts and breakdown of supply chains — for instance, during the Covid pandemic and the Russia-Ukraine conflict.
    • Affected by changes in wether:
      • The brewing El Nino is a looming danger and it’s feared that it could cause below normal rainfall, even a drought. 
      • So, it may be worth thinking about how best to keep food inflation below 4 percent in case the monsoon rainfall turns out to be below normal.
• Protection for Rice & wheat crops:
  • The biggest crop of the kharif season is rice. And rice inflation (non-PDS) for April was 11.4 percent. 
  • Wheat inflation — that of the most important rabi crop — is still very high at 15.5 percent. 
    • More than 800 million people are getting free rice and/or wheat (5kg/person/month) under the PM-Garib Kalyan Yojana. 
      • So, they are well protected from rice & wheat inflation. 
    • The rice stocks with the Food Corporation of India (FCI) are more than three times the buffer stock norms for rice. 
      • If the government wants to tame rice price inflation, it can unload 5 million tonnes (MT) of rice from the Central Pool in open market operations, and easily bring down the rice inflation to around 4 per cent.
    • The wheat procurement has been sufficiently good (touching 26MT) to meet the requirements of the public distribution system (PDS) — around 22 MT — and give some room for open market operations.
• Cereal inflation:
  • The overall cereal and products inflation is still at a very uncomfortable level, 13.7 percent.
    • To tame cereal inflation, we have to use the buffer stocking policy more proactively. This would be much more effective than any monetary policy instrument. 
    • However, there is a concern about milk and milk products. 
• Milk inflation:
  • India is currently facing price inflation in milk mainly due to milk fat shortage.
  • It has led dairies to increase full-cream milk prices more or to cut down fat content through rebranding of existing products. 
  • There have even been reports of branded ghee and butter disappearing from store shelves.