How food inflation in India has been de-globalised, what factors can drive prices now

The decline is even more, at 25.8%, if one compares the latest monthly value of 118.5 points for December 2023 over the all-time-high 159.7 points reached in March 2022, immediately after the war broke out.

The contrast with domestic inflation

Globally, food inflation based on the FAO index has been in negative territory since November 2022. It’s been the opposite in India, with the official consumer food price index inflation remaining stubbornly sticky and elevated – at 9.5% in December 2023, as against minus 10.1% for the former.

The accompanying chart plots both global and domestic food inflation over a 10-year period. It can be seen that international food price increases have exhibited far more volatility relative to domestic inflation. During the last three years alone, global food inflation has oscillated from a high of 40.6% to a low of minus 21.5%. Domestic food inflation, in contrast, has been somewhat range-bound between 0.7% and 11.5%.

Food inflation: India vs global.

One reason for the apparent divergence is the limited transmission of international prices to food inflation or deflation in India. The usual route by which that happens is imports and exports. Take vegetable oils, where India imports over 60% of its annual consumption requirement.

No surprise that global supply disruptions, first due to Covid and then the Russia-Ukraine conflict, resulted in domestic retail edible oil inflation soaring to double digits from around June 2020 right through mid-2022. High global prices, likewise, caused runaway inflation in cereals, particularly wheat, from the middle of 2022 – in this case, by making exports attractive and exacerbating domestic shortages.

The scope for such transmission of global inflation to domestic prices in India is, however, largely limited to the two agri-commodities where the country is significantly import-dependent: Edible oils and pulses. In most others – from cereals, sugar, dairy and poultry to fruits and vegetables – India isn’t just self-sufficient, but also an exporter.

In the present environment though, where the Narendra Modi government has banned shipments of wheat, non-basmati white rice, sugar and onion, the potential for even the second route of export-led inflation is effectively shut.

Global cues

Simply put, food inflation in India is today de-globalised. The Modi government has pretty much ensured that, whether through curbs on exports or allowing imports of major pulses and crude edible oils at 0-5.5% duty till March 31, 2025.

Low global prices – Russian wheat is currently being exported at $240-245 per tonne (as against $430 in June 2022), while Indonesian crude palm oil is landing in Mumbai at $940 per tonne (from an average of $1,828 in March 2022) – means that the threat of imported inflation is practically ruled out.

There are issues due to the ongoing attacks in the Red Sea by Yemen’s Houthi militants, disrupting vessel movements from the Mediterranean through the Suez Canal. But the impact of it, at least on big-ticket food item imports into India, seems insignificant for now.

In pulses, imports of arhar (pigeon pea) and urad (black gram) are mainly from Mozambique, Tanzania, Malawi and Myanmar. These do not come via the Suez waterway-Red Sea route. The same goes for masoor (red lentils) from Australia and Canada, where the ships take the North Pacific-Indian Ocean route. The only imports that may be marginally affected are of yellow/white peas – but only from Russia and some European countries, not from the biggest supplier (Canada).

In edible oils, too, the Houthi missiles and drones will not stop imports of palm oil from Indonesia and Malaysia or of soyabean from Argentina and Brazil, routed through the South Atlantic and Indian Ocean.

It’s only vessels carrying sunflower oil from Russia (Taman, Novorossiyk and Kavkaz ports) and Ukraine (Odesa and Yuzhny as well via Romania’s Constanta and Turkey’s Marmara ports) that are facing problems because of not going by the normal shipping lane linking Europe and Asia. They are, instead, being forced to circumnavigate the African continent around the Cape of Good Hope, adding 15-20 days of voyage time and $18-20 per tonne to freight cost.

But sunflower’s share in India’s total edible oil imports of 16.5 million tonnes (mt) in 2022-23 (November-October) was only 3 mt, way behind palm oil (9.8 mt) and soyabean (3.7 mt). Also, there are reports of the Houthi rebels sparing Russian cargo ships that are continuing to take the shorter Black Sea-Mediterranean-Red Sea route.

Domestic factors

In the coming months, the course of food inflation is likely to be determined more by domestic production, not global, factors.

The crops of concern are primarily cereals, pulses and sugar – in other words, roti-dal-chini. Retail cereal and pulses inflation, at 9.9% and 20.7% year-on-year respectively in December, are ruling higher than the overall 9.5% food inflation. Pulses inflation has been in double digits since June 2023, while cereals recorded the same for 15 consecutive months from September 2022 to November 2023.

The Modi government can take comfort from the area sown under wheat this time crossing 34 million hectares (mh), surpassing the 33.5 mh of 2022-23 and the normal five-year average of 30.7 mh. The weather and crop conditions so far appear conducive to a bumper harvest. But wheat is highly sensitive to heat stress, more so during March at the time of grain formation and filling. Any sudden temperature spikes when the kernels are accumulating starch and protein can translate into yield loss through premature ripening, as it happened to the 2021-22 crop.

A repeat of that, or even last year’s unseasonal heavy rain in March leading to the lodging (bending) of the standing crop in many places, can put further pressure on cereal stocks with the government. These are already at a seven-year-low for wheat (table). In sugar, too, mills started the new season from October 2023 with six-year-low stocks and no clarity on actual production when they stop crushing by April-May.

Wheat, rice stocks in central pool.

As for pulses, the current elevated prices (arhar and chana or chickpea are trading at Rs 9,000-9,200 and Rs 5,300-5,400 per quintal, as against Rs 7,000-7,200 and Rs4,500-4,600 respectively a year ago) aren’t helped by farmers planting less area this rabi season (15.5 mh versus 16.3 mh in 2022-23).

Clearly, the drivers of food inflation are more “domestic” than “global” now.