Retail inflation rose to 5.49% (y-o-y basis) in the month of September on the account of elevated food prices according to the latest NSO data. Inflation in the food and beverages segment crossed the 8% mark after a 2-month lull sparking concerns regarding sticky food inflation and the overall impact it has on price stability. The Reserve Bank’s Monetary Policy Committee while keeping the key policy-rate steady at 6.50% in its October meeting hinted at delivering the first rate cut in the coming meetings. The latest CPI print casts a shadow of doubt on that development.
Food (including beverages), which is the largest component in the CPI basket with a weight of 45.86%, is subject to the vagaries of weather. The existing element of uncertainty is at the risk of increasing manifold times as the climate gets warmer, and the frequency of climate change induced weather-shocks goes up. Dry monsoons, unseasonal rains, and heatwaves has already adversely impacted food production in India leading to heightened inflation, uncertainty, and volatility in food prices. El-Nino (warming of the equatorial Pacific) led to the driest August in India last year. The prices of tomatoes, onions, and potatoes (TOPs) remained elevated in 2023 on the account of supply and supply-chain related disruptions caused by extreme weather conditions leading to market price volatility. While food inflation is influenced by climatic uncertainty and weather-related factors, its bearing on household inflationary expectations has huge ramifications. Not only can it feed into actual inflation but could also threaten financial stability in the long run.
Even as the combination of monetary and supply-side measures (export bans, minimum export price and stocking limits) has been effective at significantly lowering core and fuel inflation, a more comprehensive approach is required to rein in food inflation. Interaction of climate change with our complex economic and food systems have compounded the challenge but it is also where the key to bring down elevated food prices lies. Adaptation and resilience-building practices integrated with policy management can stave off weather-related uncertainties and allow for better supply-side management – carving a path for disinflation.
Bulwarking Against Food Inflation
Food expenditure as a percentage of the total expenditure remains high and persistent food inflation directly impacts household budgets. Lingering inflation in food-components with relatively large weights like cereals, pulses, and vegetables have led to an uptick in headline inflation. Inflation in cereals, pulses, and vegetables in the month of September is estimated at 6.8%, 9.81% and 36% respectively and has remained high despite the Government’s deployment of various supply-side measures like imposing export curbs and stocking limits. These inflationary trends may persist in the future as uncertainty around production grows further on the account of frequent weather shocks which may hold back production and cause supply-chain disruptions.
It is imperative to tinker our approach and employ all means possible to rein in food inflation. Supply-side measures like export curbs, stocking limits and minimum export pricing coupled with demand-side monetary policy measures have not been enough to deal with sticky inflation in the food segment. Warmer temperatures will pose mutli-faceted challenges which will require a holistic approach along with monetary measures and supply-side interventions. There are already existing ecological concerns which lead to lower yield like extremely low reservoir levels, rapidly drying soil moisture, and depleting top-soil.
Ensuring sufficient supply is imperative to alleviating food price pressures and this must be ensured even as the interaction of our economic and food systems with climate-change compound our challenges. Spillovers from high and persistent food inflation can threaten inflation outlook making it imperative to include climate-resilient practices in our policy framework. Adapting to our changing realities can help us plug critical production and supply related gaps that lead to enhanced production. An overhaul is required across the entire Agri-infrastrucure: production, transportation, and storage.
The following approaches may serve us well in our battle to tame food inflation in the context of climate-change:
- Promotion of climate-resilient seed/crop varieties can enhance production in a warmer world. Heat tolerant wheat varieties (DBW-187 and HD-3086) can withstand extreme dry and hot weather conditions.
- Investments in Agri-R&D can fetch substantial returns – there remains an immediate need of increasing the share of Agri-R&D and incentivising agricultural research.
- Developing and promoting the use of precision agriculture (drip-irrigation and sensor-based irrigation systems) to ensure resource efficiency and enhance productivity.
- Expansion of latest irrigation technologies to areas that are not covered under existing irrigation systems. Only 57% of agri-land is covered and this may not be sufficient to act as a bulwark against heat-related stress.
- Building new cold storages and updgrading the existing ones can provide protection against heatwaves, reduce food wastage and extend shelf-life.
The economic imperative of maintaining long term price stability requires addressing short-term price fluctuations caused by rising food prices. The task cut out has to be done in a complex setting where climate-change interacts with our exisiting economic and agricultural systems. A tailored approach which integrates adaptation and climate-resilient practices along with monetary and supply-side measures is required to tame food price pressures. The path to dis-inflation entails increasing agri-productivity, building resilient supply-chains, and mitigating the adverse impacts of climatic variations on agriculture.
About the author …
Aneesh is a researcher based out of Delhi and holds a degree in International Affairs from the School of International Studies, Jawaharlal Nehru University. He follows the discourse on matters related to economy, international relations, climate change and energy with great intrigue.
