By Dipti Deshpande and Sharvari Rajadhyaksha
Food components have been in a veritable relay race in the past few years, taking turns to keep inflation up. When the price of one component completes its lap, another takes the baton to surge.
The fallout – food inflation has been sticky even though core and fuel inflations have eased significantly of late, thereby obviating a faster reduction in overall retail inflation.
A closer look reveals the quirks.
Inflation as measured by the Consumer Price Index (CPI) fell in the first quarter, peaked in the second, moderated in the third and held firm in the fourth quarter of fiscal 2024 despite printing at 4.9% in March, down 80 basis points (bps) compared with 5.7% in March 2023.
For the full fiscal, the inflation was down to 5.4%, from 6.7% in fiscal 2023.
Much of this drop has been because of the decline in energy and commodity prices during 2023, some pass-through of this as government reduced domestic fuel prices (LPG and petrol), and sluggish consumer demand that kept the core inflation (CPI excluding food and fuel inflation) in check. Core inflation fell to 4.3% in fiscal 2024, from 6.1% in fiscal 2023, whereas fuel inflation fell to 1.2% average from 10.3%.
The recent rise in oil prices – from a low of $77.9/bb average in November to over $90/bb so far in April – raises red flags, though. The resurgence of geopolitical tensions and their impact on oil, commodities, shipping, and other input costs are a key concern now.
The other big concern is the weather, yet again. Truant weather has been a constant bane of India’s agriculture economy, food supply situation and inflation in recent years.
In fact, food inflation had played spoilsport in fiscal 2023 as well, restricting the fall in CPI inflation. The softening in inflation was driven by non-food components, while food inflation surged to 7.5% from an already high 6.6%.
In March 2023, non-food inflation contributed 70% to headline inflation while food inflation contribution was 30%. In March 2024, the two swapped places such that food was responsible for 68% of inflation while non-food contributed 32%.
The problem with food inflation is that it is associated with not one but a multitude of factors – heatwave, unseasonal, deficient, ill-distributed or excess rains, pest attacks, fertilizer costs – that affect different food components.
Unfavourable weather conditions exacerbated by El Niño conditions were the principal reason behind surging food inflation last fiscal.
For now, the signals on weather conditions are somewhat mixed. Weather forecasters predict El Niño to weaken, making way for La Nina conditions – which typically favour Indian monsoons. Private weather forecaster Skymet and the Indian Meteorological Department (IMD)’s latest prediction is of a normal and above normal southwest monsoon respectively, this year.
The other prediction, however, is of higher-than-average temperatures during summers – that can cause stress for vegetable production and some of the rabi crop that is yet to be harvested. Reservoir levels this year are slim and intense heat can cause levels to reduce further. The Central Water Commission reports that as of April 12, the live storage capacity of 150 key reservoirs in India stands at 33% of their total capacity, which is lower than last year’s level of 39%.
In months ahead, some easing of foodgrain inflation could be expected assuming a favourable southwest monsoon and healthy kharif output.
Pulses inflation is expected to witness its seasonal downturn (our previous studies have elaborated on the cobweb pattern that causes periodic spikes and troughs in pulses inflation).
Vegetables inflation, however, remains a risk given their higher susceptibility to weather shocks relative to other food components. In fiscal 2024, vegetables inflation spiked several times, with rising to 14.9% on average from 3% in fiscal 2023. About 30% of the rise in food inflation in fiscal 2024 was on account of vegetables. In fact, vegetable prices have again been rising since November 2023, with the inflation rate at 28.3% in March 2024. Weak onion output from the rabi harvest could keep the upside pressure on prices for a few months.
That said, a high base of last fiscal could provide some downside to food inflation this fiscal. The high base does not come into play before June for the overall index, though. Also, for the base effect to provide significant benefit, food price rise will have to abate or soften. Any sharp rise in food prices could nullify the impact of a high base.
Yet, we expect the disinflationary path to continue and CPI inflation to ease to 4.5% on average this fiscal in the base case.
A key assumption here is that normal monsoons support a healthy agriculture output and softening of food inflation. For now, the risks to food appear to be tilted upwards due to weather related uncertainties.
The other is that core inflation remains benign. With the recovery in economy driven by investments rather than consumption, core demand – which is typically consumer demand led – has stayed soft. But the rising pressure on input costs could in our base case, bring a mild upside compared with last fiscal.
Meanwhile, the government’s budget is getting slimmer, which means the fiscal impulse to growth is also leaner and, therefore, less inflationary. Growth, too, remains strong or rather indifferent to the monetary policy tightening in the recent cycle.
Global central banks too are now looking at a turn in their tightening cycle.
All these create favourable grounds for rate cuts this fiscal. But notorious food inflation can get in the way and delay this decision.
It is time the baton dropped. Fingers crossed on the weather to allow that now.
The authors are Principal Economist and Economic analyst, CRISIL. Views are personal.
