UPSC Issue at a Glance is an initiative of UPSC Essentials to focus your prelims and mains exam preparation on an issue that has been in the news. Every Thursday, cover a new topic in Q&A format and don’t miss MCQs towards the end of the article. This week’s topic is the Food Inflation. Let’s get started!

If you missed last week’s UPSC Issue at a Glance | Census and Delimitation from the Indian Express, read it here.

Food inflation has risen to double digits for the first time in 14 months, according to a statement from the National Statistical Office (NSO). Based on the Combined Food Price Index (CFPI), food inflation increased to 10.87 percent in October. This rise is significant compared to 9.24 percent in September and 6.61 percent in the same month a year ago.

The issue of food inflation is highly significant for the UPSC CSE, as it relates not only to the economic aspects of the syllabus but also to topics such as governance and infrastructure. Additionally, the UPSC has asked questions on this subject. For example, in the UPSC CSE Mains 2024, a question was asked about the causes of persistent high food inflation in India and the effectiveness of the Reserve Bank of India’s monetary policy in controlling this type of inflation. Aspirants will also find it relevant for essays and in their current affairs for their personality test.

UPSC Syllabus: 

Preliminary Examination: Current events of national importance, Economic and Social Development

Mains Examination: GS-II, GS-III: Government policies and interventions, Indian Economy and issues, transport and marketing of agricultural produce and issues and related constraints; e-technology in the aid of farmers, supply chain management.

Food inflation refers to the increase in prices of food items. Understanding the factors that contribute to this phenomenon is crucial, especially in the context of increasing food inflation. In India, both supply and demand factors influence food inflation; however, it is primarily driven by supply-side issues. Some key causes of food inflation in India include:

1. Climate Change and Extreme Weather Events: Historically, the monsoon has been a key determinant of food inflation in India. However, climate change has increased the uncertainty surrounding rainfall and has introduced additional weather shocks that directly impact crop yields. This results in shortages and drives prices up.

“The surge in vegetable prices, particularly tomatoes and onions, can be attributed to unseasonal rains and extended monsoons in certain parts of the country…” Rajani Sinha, Chief Economist, CareEdge Ratings said.

Events like heatwaves and unseasonal rains have added complexity to food production and price forecasts, raising the risk of high food inflation. The frequency and severity of these shocks have been increasing due to climate change. 

Dharmakirti Joshi, Pankhuri Tandon, Sharvari Rajadhyaksha write- “In 2022-23, heatwaves and unseasonal rains contributed to a surge in inflation, even as the monsoon turned out normal. In 2023-24, El Niño was aggravated by global warming, leading to the driest August India had seen in recorded history.

While the shocks have been varied in nature, they have kept overall food inflation stubbornly high. Heatwaves have affected crop production by depleting groundwater levels, shrivelling wheat grains and pest infestations. They also affected dairy and poultry output. On the other side, unseasonal rains hit crops during harvesting and transportation stages.”

2. Global Price Volatility: India’s reliance on various food imports makes it vulnerable to global market fluctuations, contributing to food inflation.

“ The rise in global edible oil prices and the recent hike in the basic customs duty of various edible oils have resulted in higher inflation in the basket, given their import dependence. It is crucial to manage food inflation, as it directly impacts household inflation expectations. This situation also underscores the need for the government to implement additional supply-side measures to stabilise food prices,” Rajani Sinha, Chief Economist, CareEdge Ratings said.

3. Global Supply Disruptions: Factors such as the COVID-19 pandemic and geopolitical conflicts, like the Russia-Ukraine conflict, cause global supply disruptions that contribute to food inflation. Notably, high global prices also fuel inflation by making exports attractive and worsening domestic shortages.

4. Structural weaknesses in supply chains: In addition to global factors, domestic issues like logistical problems also contribute to high inflation.

Ashok Gulati, Bidisha Chanda, Ranjana Roy write– “The recent surge in vegetable inflation, particularly driven by tomatoes, onions, and potatoes (TOP), is a direct manifestation of structural weaknesses in India’s agricultural supply chains, compounded by adverse climatic conditions. In September 2024, vegetable inflation contributed a staggering 63 per cent to the food inflation (CFPI), with year-on-year price increases of 42.4 per cent for tomatoes, 66.2 per cent for onions, and 65.3 per cent for potatoes. These figures are not merely anomalies, they are symptomatic of deeper inefficiencies and vulnerabilities in their value chains that demand urgent policy attention.

Tomatoes follow the classic “cobweb model” of price cycles, where short supply quickly pushes up prices due to their perishable nature….Onion retail prices, currently between Rs 50-60/kg, highlight severe supply disruptions….”

5. Other Factors: Factors such as minimum support prices (MSP), import/export policies, and buffer stock management also significantly influence food inflation.

Food inflation remains a significant concern for the economy, affecting household incomes, limiting spending in other areas, and influencing different segments of society in various ways.

1. Impact on inflation and household: Food plays a crucial role in controlling overall inflation, as it has a significant weight in the consumer price index and is purchased frequently. It is known to influence inflation expectations and can also exert pressure on wages. Additionally, high food inflation strains household budgets further.

Research (Are food prices the ‘true’ core of India’s inflation?, RBI Bulletin January 2024) shows that large and persistent food shocks spill over into non-food inflation. 

Given the high share of food in the average Indian’s consumption basket, “the public at large understands inflation more in terms of food inflation…[which also] adversely affects household inflation expectations,” the RBI governor Shaktikanta Das said.

2. Impact on food security and the poor: Food inflation undermines food security and the livelihoods of the most vulnerable section of society. Furthermore, it adversely impacts the nutrition, health, and education of the nation’s poor population.

Dharmakirti Joshi, Pankhuri Tandon, Sharvari Rajadhyaksha write- “High food inflation hits the poor more since it has a higher weight in their consumption basket. Our assessment shows that the bottom 20 per cent of the population in rural and urban areas currently face nearly 50 basis points higher inflation than the top 20 per cent.”

3. Impact on rural population: The impact of high food inflation is evident in both urban and rural areas, but it has been observed that the rural population is affected more severely.

Udit misra writes– “In rural areas, food inflation tends to have a much higher bearing on overall inflation while it accounts for a smaller bit in the urban areas. 

“Vegetable inflation contributed the most to overall headline inflation. In rural and urban areas vegetable inflation was almost the same at 36 per cent and 35.9 per cent, respectively. But, the sting is different. Vegetables have a weight of 7.5 per cent in rural CPI and 4.4 per cent in urban CPI. Due to the relatively larger importance of vegetables in rural consumption, it contributed to 45.8 per cent of the headline rural inflation. In contrast, vegetable inflation only contributed 31.3 per cent to headline urban inflation,” explains the CMIE note.

Similarly when on September 14 the Union government raised the import duty hike on edible oils, it led to a rise in prices but the negative effect was more in rural areas. In urban areas, the price index increased by 2.4 per cent in September in comparison to August. But it increased by a higher 3.2 per cent in rural areas.”

To address the issue of high food inflation, the government has implemented several measures, which include the following:

1. Minimum Support Price: To address the supply-side problem of insufficient production of specific crops, the government also announces a higher minimum support price (MSP) to encourage their cultivation and increase the availability of these food items, potentially helping to stabilize prices.

2. Price Stabilization Fund: A scheme called the Price Stabilization Fund (PSF) is being implemented to control the price volatility of agricultural commodities.

3. Advisories against hoarding and black marketing: From time to time, the Central Government issues advisories to State Governments, to take strict action against hoarding and black marketing.

States are also advised to effectively enforce the Essential Commodities Act of 1955 and the Prevention of Black Marketing and Maintenance of Supplies of Essential Commodities Act of 1980.

4. Imposing stocking limits and export duty: The government imposes stock limits on certain commodities for traders and retailers to control food inflation. It also imposes bans or restricts exports of certain commodities to ensure an adequate supply of these commodities in domestic markets.

Although the government has implemented various measures to control food inflation, these efforts have not been effective in reducing the persistently high rates of food inflation, which have likely contributed significantly to elevated retail inflation. In this context, some additional measures can be considered, such as:

1. Resilient agricultural policy: Policymakers need to consider the effects of climate change, as failing to implement mitigating measures could lead to a long-term rise in the risks associated with food inflation.

Ashok Gulati, Bidisha Chanda, Ranjana Roy write– “India’s recurring price volatility in TOP crops demands a more resilient agricultural policy. While Operation Greens launched in 2018 aimed to stabilise prices by streamlining value chains, its expansion to cover all fruits and vegetables diluted its original focus. As a result, supply disruptions and significant post-harvest losses continue to drive up retail prices.”

2. Improved infrastructure: Agricultural infrastructure should be upgraded, encompassing production, transportation, and storage to address the logistical issues associated with food inflation.

Dharmakirti Joshi, Pankhuri Tandon, Sharvari Rajadhyaksha write- “Irrigation infrastructure needs to be stepped up amid heatwave-linked risks to water availability. Despite government efforts, only 57 per cent of agriculture is covered by irrigation so far. Cold storage and food processing should be further encouraged. This will help reduce food wastage amid increasing risks to food supply. Until these structural issues are addressed, risks for food inflation are likely to stay elevated.”

According to the economic survey 2023-24, given the continuing seasonal surges in the prices of vegetables like tomato and onion, it is important to assess the progress in developing modern storage facilities conducive to such specific crops and evaluate the viability of such facilities whose services have highly seasonal demand.

3. Promoting R&D in Agriculture: Agricultural research requires greater incentives. Currently, R&D investments account for only around 0.5 percent of agricultural GDP, as noted in a 2023 paper by ICRIER. By promoting R&D in agriculture, we can develop more climate-resilient crop varieties.

4. Focused efforts to increase the production of major oilseeds:  The economic survey 2023-24 has emphasized the need for targeted efforts to increase the production of major oilseeds, such as sunflower and rapeseed/mustard. Additionally, it suggested exploring the potential of non-conventional oils, like rice bran oil and corn oil. This is particularly important as domestic consumption of edible oils has been rising faster than production, resulting in growing dependence on imports.

Prelims

(1) Consider the following statements: (UPSC CSE 2020)

1. The weightage of food in Consumer Price Index (CPI) is higher than that in Wholesale Price Index (WPI).

2. The WPI does not capture changes in the prices of services, which CPI does.

3. The Reserve Bank of India has now adopted WPI as its key measure of inflation and to decide on changing the key policy rates.

Which of the statements given above is/are correct?

(a) 1 and 2 only

(b) 2 only

(c) 3 only

(d) 1, 2 and 3

(2) With reference to the headline inflation, consider the following statements:

1. It is calculated using the Wholesale Price Index.

2. Food items are more responsible in higher headline inflation than fuel and other items.

Which of the statement(s) given above is/are correct?

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor 2

(3) Consider the following statements:

1. Core inflation is a measure of inflation calculated by adding the prices of food and fuel.

2. Super core inflation is calculated by adding gold and silver price inflation to core inflation.

Which of the statement(s) given above is/are correct?

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor 2

Mains

(1) What are the causes of persistent high food inflation in India? Comment on the effectiveness of the monetary policy of the RBI to control this type of inflation. (UPSC CSE 2024)

(2) There is also a point of view that Agricultural Produce Market Committees (APMCs) set up under the State Acts have not only impeded the development of agriculture but also have been the cause of food inflation in India. Critically examine. (UPSC CSE 2014)

(Sources: Retail inflation at 14-month high on costlier fruits, What are WPI and CPI?, Why inflation on prices of TOP remains a pain point for RBI, The stubborn food inflation problem, How food inflation hits rural India, Economic Survey signal)

For your queries and suggestions write at roshni.yadav@indianexpress.com

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