A monster on the loose
Food inflation has made headlines for nearly a decade now and barring a year or two when ample monsoons helped abate inflationary pressures, food inflation has been on a steady uptrend. Surging prices of fruits and vegetables, rice and animal protein (eggs/meat/fish) have been the primary drivers of inflation this year. With a weight of 79% in the food index, they have contributed 84% to food inflation so far this fiscal. Indeed, whereas food inflation has averaged over 13% so far this year, inflation in these three commodity categories has ruled over 15%.
As the accompanying table shows, prior to 2009-10, inflation was relatively low and mostly driven by higher prices of cereals (rice and wheat). But since then, there seems to be a clear shift in favour of protein-rich itemspulses, milk and animal protein. In fact, in three of the last four years that saw food inflation in double digits, protein inflation soared.
It is often argued that the big boost to protein inflation came during the period of consumption lift when a huge consumption-oriented stimulus (accompanied by the Sixth Pay Commission doles) was pumped into the economy. This led to rising incomes and greater affluence, which triggered a shift in the food consumption pattern from one heavy on cereals to one with more of proteins. The sudden surge in demand could not immediately be met, leading to a spurt in prices.
Since 2009-10, therefore, protein items have seen a steady and steep increase in prices, keeping their inflation mostly in double digits. In fact, long-term data suggests that protein inflation has structurally moved up. Protein inflation, which averaged around 5% in the 10 years ending 2008-09, jumped to over 15% between 2009-10 and 2012-13.
In recent months, though, prices have started softening again. Overall protein inflation has fallen from a peak of 13.6% in July 2012 to around 8.2% in October 2013.
Pulses fall off the cliff, milk too heads lower
Prices of pulses have fallen 12% on-year in the last four monthsof which 11.2% was in October alone. Inflation in pulses, after staying in the 11-35% range for the larger part of 2012-13, has started falling since August 2012, when it touched the 35% mark.
As such, inflation in milk, too, has fallen sharply. It is now around 5% compared with double-digit inflation in the past few years. These two together comprise 40% of protein inflation.
But the decline in pulses has been sharperprices of the commodity have fallen 4.8% this year compared with a 20% run-up recorded last year, while in milk, inflation has fallen to 4.7% from 7.2% last year.
The sharp decline in pulses inflation, though, is a bigger relief as consumption spending on pulses has seen a huge lift in the past few years, rising almost 12% per year between 2004-05 and 2011-12. In contrast, consumption of milk and animal protein rose 8% per year.
At a time when food inflation is high and rising, declining prices of pulses afford huge benefit to Indian households where pulses form a dominant source of protein in the diet.
The most important factor driving down pulses inflation is an increase in production due to (1) an increase in acreage, (2) abundant and well-distributed monsoon, and (3) a marked improvement in yields. The other factor contributing to lower inflation is the slowing income growth, lower increase in minimum support prices and a likely moderation in demand for pulses.
The extent of fall is also in part due to the high base of last year. Pulses inflation in April-October this year fell 4.8%, while it was as high as 23% in the same period of 2012.
But inflation rages in animal proteins
Animal protein inflation has averaged over 18% in the past 4 years, compared with 14% for milk and 12% for pulses. Milk and pulses together account for 60% of the protein index; animal proteins account for the rest. In line with the reduction in overall protein inflation, animal protein inflation, too, has come off in recent months, albeit in a much smaller proportion than for other protein categories. For October, animal protein inflation printed at 17.5%, up from 13.4% in September.
Within animal proteins, inflation in fish was the highest, at 23.4% in October, followed by mutton at 12%. Barring poultry chicken, all other animal proteineggs, beef and porkhave seen an uptick in inflation in the past 2-3 months. Inflation in eggs, for instance, has gone up from 0.6% in August to 3.8% in October.
Most of this increase in inflation is, in turn, due to high inflation in animal feeds such as maize and soybean where prices have risen an average 24% in the past 3 years. Sharp hikes in minimum support prices, or MSPs, for farm produce are to blame for much of the rise in the prices of animal proteins. Indeed, almost 80% of the total feed comprises maize and soybean where MSPs have increased by 15% in the past 3 years.
Through the looking glass
Going forward, we feel pulses prices will continue to remain low for a few more quarters. By the time the positive impact of the high base wears off, the rabi cropwhich is expected to be bumperwould have entered the market, keeping a fresh tab on prices. Beyond that, inflation in pulses will depend on demand revival and on whether farmers continue to increase production. As for animal proteins, there could be some decline in inflation because of lower MSP hikes this year, but there could be limited downside as prices are mostly governed by demand conditions which remain largely unchanged.
Overall, some decline in food inflation is forthcoming this year. High food inflation has a huge concern for Indias economy, especially since more than 40% of the total spending of an average Indian household is still on food. This year, however, there seems to be some respite due to timely and well-distributed monsoons. The coming months, therefore, could see some decline in overall food inflation, with some categories seeing sharper declines. However, unless structural issues facing the agriculture sectorpoor investments, low level of mechanisation, faulty markets for agriculture product pricing as effected by the archaic APMC Act and leakages in storage and supply chain management are addressed, high food inflation will continue to haunt the economy at large.
The author is economist, CRISIL. Views are personal