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Explained: Why food prices are likely to rise at a faster rate in coming months

India is ranked 44 in Nomura's Food Vulnerability Index (NFVI) that compiled the vulnerability of 110 countries in the world.

Written by Udit Misra , Edited by Explained Desk | New Delhi | Updated: November 21, 2019 6:55:08 am
India is ranked 44 in Nomura’s Food Vulnerability Index (NFVI) that compiled the vulnerability of 110 countries in the world. (File Photo)

According to a new report by Nomura Global Market Research, the 50 countries most vulnerable to food price surges in the coming months largely belong to the Emerging Market group.

The top 50 together account for almost 60 per cent of the global population – reflecting the massive number of individuals and households that are vulnerable.

India is ranked 44 in Nomura’s Food Vulnerability Index (NFVI) that compiled the vulnerability of 110 countries in the world.

What is Nomura’s Food Vulnerability Index?

The NFVI ranks countries on the basis of their exposure to large swings in food prices. To arrive at this estimate, Nomura looks at a country’s GDP per person, the share of food in household consumption and the net food imports. Typically, lower per capita GDP, higher share of food in household consumption and high net food imports would make a country more vulnerable to spikes in food prices.

What could cause food prices to rise?

Nomura states that the dip in food prices from the highs of 2010 and 2011 could quickly reverse. It lists three potential triggers for a rise in food prices and three potential amplifiers.

The three potential triggers are weather-related shocks (that may reduce supply), higher oil prices (which will raise costs of transportation), and a sharp depreciation in US dollar (that undermines the purchasing power of a country that imports food).

The three amplifiers are the protectionist agricultural trade policies (such as additional tariffs that what would otherwise have been cheap food imports, costly), increased hoarding and speculation in food articles (as traders realise that hoarding will increase their profits), and the already highly (and often hidden) national debt in some of the most vulnerable countries.

“Overall, we would argue that the next food price surge could have a disproportionately larger impact on the more vulnerable NFVI group than in the past, as these economies are more exposed to climate change-induced disruptions and have also experienced a sharp rise in debt to dangerously high levels. This is double trouble,” it states.

Where does India stand?

As mentioned above, India has been ranked 44 out of 110 countries; a higher rank is worse.

It is true that, at 4.6%, India’s retail inflation – that is the one based on Consumer Price Index – for October touched a 16-month high. Worse, most projections suggest that retail inflation will stay above the RBI’s target level of 4% until the end of the current financial year.

At one level this is odd because there is a lack of demand in the economy as it is deceleration every passing quarter. For retail inflation to be so high when overall demand coming down tricky questions for policymakers.

Why has food inflation risen in India?

A big part of the reason for the spurt in retail inflation has been the jump in food prices. Food inflation grew by almost 8% – almost double the rate of overall retail inflation. Key items that contributed to this rise were pulses (inflation rate 12%) and vegetables (inflation rate 26%) and fish and meat (inflation rate 10%).

What is the forecast for India’s food price inflation?

“India’s food price inflation has started to rise sharply after a multi-year decline – from an average of 8.5% y-o-y during 2012-15 to an average of 2.4% during 2016-19 (until September),” it states but cautions that this trend is likely to reverse.

It specifically points to two commodities – pulses and sugar, which have a weight of 6% and 3% in the CPI.

“The last 2-3 years of low food prices have resulted in lower production and this is setting the stage for higher inflationary pressures in FY20. Supplemented by rising inflation among cereals and proteins, we expect food & beverages price inflation to rise to 3.7% y-o-y in 2020 from 2.8% in 2019”.

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