Union Budget 2024: When hot food prices burn

Food inflation in India surged to 9.4% in June, from an already high 8.7% in May. Despite the high base of last year, which would otherwise have brought some relief, the month saw higher inflation due to a steep monthly climb in prices.  The monthly rise in the food index was nearly 3.1% higher than the average monthly rise seen over the last three-to-five years. 

A benefit to food inflation from the high base should ideally have set in this month, and statistically, continued for another two to three months. But June data reminds us yet again how weather can play spoilsport.  The food inflation surge in June was led by vegetables although there was some hardening of inflation in cereals, milk, fruits and sugar products.

June rains were unsupportive with recording both, deficient rains and intense heatwaves. While this is not a concern for the kharif crop, which is mostly sown in July and August and harvested in September and October, erratic weather — rains and heatwaves — has damaged vegetables, which are particularly susceptible to fluctuating climate conditions. 

Vegetables have been a major pain point for over a year now. Last fiscal, food inflation, after touching a peak of 11.5% in July started moderating. But the relief was short-lived as inflation started escalating from November led by rising vegetable inflation. Since then, vegetable inflation has been in double-digits, averaging 26.9% during November 2023 to June 2024 and has contributed to almost 50% of the rise in food inflation.

The summer incline in vegetable inflation

 

Our October 2023 report titled, ‘Not on TOP of it’ highlighted how climate shocks apart, structural gaps in the demand and supply of tomato, onion and potato (TOP items) are behind the now frequent spikes in vegetable inflation.
This keeps prices on the edge causing them to spike as soon as weather shocks hit. Later in an April report titled ‘Dicing vegetables inflation in India’ we highlighted how consequent to the weather shocks the vegetable index not only outran its summer incline in 2023 but also missed its typical seasonal winter decline keeping inflation elevated. 

The summer of 2024 appears to be no different so far and invites some concern (see chart). 

Some of last year’s weather shocks (on onions especially) and the recent summer and June heatwaves have kept vegetable inflation high. The June data shows uncomfortably high inflation rates of~58% in potato and in onion, 26.4% in tomato, 78% in garlic and double-digit inflation in most other vegetables. 

Interestingly, within vegetables the TOP category and the non-TOP category seem to be see-sawing with non-TOP category inflation rising faster than TOP in the initial period. From March 2024 though,TOP inflation has been rising faster while non-TOP is on a decline. The June data recorded vegetable inflation at 29.3%, with TOP at 48.4% and non-TOP at 19.7%. 

Vegetable inflation is prone to cycles, but the frequency of price spikes has increased. In the last 100 months, CPI vegetable inflation was above its period average of 5.9% in 46 months. It was above 10% in 38 months and above 20% in 20 months.With the peaks being high and the touchdown to the troughs being short-lived, there is an overall rise in the vegetable inflation trend. 

In tomatoes for instance, the peaks have been high — at Rs 52 per kg in June 2022, Rs 109in July 2023 and Rs 60in July 2024 as per data from the Department of Consumer Affairs. But the troughs have seldom gone below ~Rs20. And even after touching that lower threshold have quickly started to ascent again.

The inflation data for June with the headline inflation rising to 5.1% from 4.8% in May, corroborates the Mint Road position that the last mile of disinflation remains a challenge. The last mile in case of India is constrained by vegetables and foodgrain inflation— both in double digit for more than a year now. 

Unlike other economies, given the nature of inflation in India — that is it, being food inflation-led — fiscal policy will have to continue do the heavy lifting to bring down inflation. Monetary measures can support, but more so by taming inflation expectations arising out of the risk of persistently high food inflation. 

In the short term, fiscal measures similar to those employed in the past — releasing food stocks, facilitating imports, restricting exports, and discouraging hoarding among others may continue. Medium-term measures like extension of free food programme to lower-income segments could be other fiscal measures to cushion the impact of price surges. 

But these entail a cost. The central government’s food subsidy bill, which broadly covers the cost of interventions above, stood at Rs 2.1 lakh crore as per the fiscal 2025 interim budget. The size of this subsidy has doubled over the past decade.Over time the government will need to watch the increase in these expenses.

The repeated, frequent and intensefood price shocks in India over the last 4-5 years are a clear climate change casualty. And studies suggest that these will only increase in the coming years. Therefore, beyond these short-term measures, specific steps to reduce the vulnerability of food supplies to climate shocks are needed urgently.

Taking steps to enhance yields, to promoteweather resistant agriculture production processes including use of hybrid technology, to improve agriculture supply chains, transport, cold storage and food processing to reduce post-harvest lossesare some commonly discussed measures that can improve the resilience of the sector against shocks and enhance incomes of those engaged.

Backed by government incentives, there is scope for private sector investment, research and development in areas such as improving weather forecasting and creating high-yielding, climate and disease-resistant crops/seeds. 

The upcoming budget provides an opportunity to commit to taking actions on some of these but is not restricted to this platform.

Meanwhile, for the ongoing fiscal, with the base effect providing little relief, all hopes are pinned on the monsoon.
Going by the Indian Metrological Division’s prediction, we expect healthy monsoons and pick up in kharif sowing to improve agricultural output, soften food price pressures and guide the disinflationary path this fiscal. Some cyclical downtrend in pulses inflation should also aid lower food inflation. 

Non-food inflation at a record low of 2.3% has been easing for seventeen months. But the coming months could see an upside due to the recent firming up in international freight costs, crude prices and hikes in domestic telecom tariffs. Yet, the uptick is expected to be benign. 

For the fiscal 2025, CRISIL expects consumer price inflation to ease to 4.5% average from 5.4% in fiscal 2024 led by a lower food inflation. 

(The author is the Principal Economist, CRISIL Limited. Views are personal.)