High food inflation has plagued India since 2009, posing a significant challenge for the country’s poor populations who spend a large share of their income on food. This high food inflation was originally blamed on drought-reduced agricultural output and harmful trade policies; however, the inflation has persisted even after these causes were addressed. Thus, understanding the trends and determinants of food inflation remains an important goal for researchers and policymakers.
In a new discussion paper, IFPRI authors examine food inflation trends over the past decade in India as a whole and in three separate states (Andhra Pradesh, Bihar, and Gujarat), utilizing a decomposition exercise along a range of commodities to identify the major contributors to food inflation. It also carries out an econometric analysis in a dynamic panel regression framework to quantify the effect of plausible causal factors on food prices. The period under study extends from January 2005 to July 2015 at the national level; at the state level, the period extends from 2001 to 2015. This difference is due to the fact that some of the national data used was only available beginning in 2005.
The study utilizes a wide-ranging set of data from a variety of sources including data from relevant ministries, international organizations such as FAO and the World Bank as well as local sources; it includes retail prices of individual commodities at different markets, crop production costs and wage rates, and trade data. Annual data on real per capita expenditure on commodities and global price data were also utilized.
The study found that food inflation in India was 7 percent for the entire study period, with the exception of 2014 and 2015. Food inflation was also higher than overall inflation in eight of the last 10 years. Different commodities appear to have contributed to the high food inflation in different years, suggesting that there may not be any one major problem with a single commodity behind the country’s persistent high food inflation.
In India as a whole, the major contributors to food inflation throughout the study period were milk (22 percent); eggs, milk and fish, or EMF (20 percent); rice (11 percent); sugar (9 percent); wheat (5 percent); bananas (3 percent); and tomatoes, eggplant, and cabbage (1-2 percent each). Together, these commodities account for around 76 percent of India’s overall food inflation during the period. The authors also find that commodities that are relatively more important the country’s consumption basket - specifically milk, EMF, rice, bananas, and cabbage – have higher base price levels and have also seen faster food inflation.
In Andhra Pradesh, the major contributors to food inflation were found to be milk (21 percent), common rice (10 percent), fish (8 percent), wheat, (7 percent), chicken (5 percent), mutton (5 percent), fine rice (3 percent), and coriander and tea (3 percent each). In Bihar, the top contributors are rice and milk (19 percent each), wheat (9 percent), fish and mutton (5 percent each), chicken, mustard oil, and pigeon peas (4 percent each), and onions and eggplant (3 percent each). Finally, in Gujarat, the major contributors are milk (22 percent), common rice (12 percent), wheat (10 percent), turmeric (8 percent), mustard oil (5 percent), tea (4 percent), fine rice, chicken, pigeon peas, and tomatoes (3 percent each), red chilies and coriander (3 percent each), and onions (2 percent). Similar to the findings at the national level, state-level results also indicate that most of these commodities have a greater weight in the consumption basket and are also showing both higher price levels and faster price increases.
For India as a whole, it appears that food prices are being driven by both supply-side and demand-side factors. For both cereal prices and edible oil prices, supply-side factors such as production, wage rate, and MSP are the main drivers; on the demand side, monthly per capita expenditures (MPCE) also plays a role in the price of these commodities. Eggs, meat, fish, milk, and fruits and vegetables, on the other hand, appear to be driven more by demand-side factors like wage rates and MPCE, while pulse prices are driven equally by supply-side and demand-side factors.
At the state level, production appears to be a major driver of food inflation for cereals, edible oils, and pulses; MSP is also significant for cereals, while MPCE is significant for pulses. For other commodities, including meat, milk, and fruits and vegetables, both wage rate and MPCE appear to be significant.
The authors conclude with several policy implications. They emphasize that the large contribution of EMF, milk, and cereals to India’s overall food inflation is concerning, as these commodities play a large role in the country’s overall consumption basket. Addressing supply-side factors, such as production, will be important in reducing inflation for these commodities; in addition, timely liquidation of cereal stocks and more careful cereal procurement policies may help slow the increase in cereal prices.