What is the issue?
- It is said that food inflation has made a comeback, both in India and globally.
- The Indian food inflation may be influenced by global price movements.
How can it be said that there is a return of food inflation?
- Global - The UN Food and Agriculture Organisation’s (FAO) food price index is a measure of the change in international prices of a basket of major food commodities.
- With 2002-04 (100 points) as a base period to the index, it touched 182.5 points in January 2020, the highest since December 2014.
- Also, the year-on-year inflation rate based on this index has risen steadily from 1.13% in August 2019 to 11.33% for January 2020.
- This sharp surge in global food prices is reflected in trends in India.
- India - Consumer and wholesale food inflation rates for December 2019 were the highest since November 2013 and December 2013 respectively.
- Simply put, since October 2019, food inflation has made a comeback, both in India and globally.
What were the factors contributing to the inflation?
- Local factors - While the recent rise in domestic food prices has been blamed largely on “local” factors,
- Poor rainfall during the monsoon season (June-July 2019)
- Too much of rainfall thereafter till about mid-November.
- This led to both reduced/delayed kharif sowings and damage to the standing crop at maturity/harvesting stage, some of it is also “imported”.
- Foreign factors - Since India imports most of its edible oil, higher international prices would have been automatically transmitted to the domestic market.
- As global prices can be transmitted to the domestic market through exports, the government has foreclosed that possibility by restricting onion shipments since September 2019.
When was the period of divergence?
- The FAO food price index and the domestic consumer food price index (CFPI) inflation rates started moving in tandem from March 2018.
- They exhibited a significant divergence in the period prior to that.
- FAO index - The FAO index peaked at 240 in February 2011, but remained at 200-plus levels until July 2014.
- Global prices crashed after that, and stayed low up to early 2016, with the FAO index dipping to 149.3 in February 2016.
- Domestic food index - It also fell by early 2016, as lower global commodity prices reduced the demand for Indian farm exports, even as they made imports cheaper.
- However, the actual fall in domestic inflation took place after September 2016 which had more to do with domestic factors than global prices.
- Between August 2016 and October 2017, the FAO index inflation exceeded the corresponding CPFI rate.
What can happen now?
- Both international and domestic food prices are showing signs of renewed hardening.
- So the question now is how sustainable this trend is. There are at least three bearish factors currently at play.
- The novel coronavirus epidemic that has reduced Chinese buying of everything like palm oil, milk powder, meat, etc from outside.
- The price of crude oil is another factor.
- The prospect of a bumper rabi (winter-spring) crop in India is the third one. The kharif harvest turned out to be not so good because of excess and unseasonal rain.
- Against these bearish factors are the relatively “bullish” factors.
- Global palm oil ending stocks this year are projected to be the lowest since 2009-10 and sugar is also expected to move into deficit.
- Supply tightness is being seen both globally and in India, even in milk.
- If Brent crude too, were to rally again, there could be uncertainty ahead.
Source: The Indian Express
