With the Russia-Ukraine war entering its 44th day and China imposing strict lockdowns amidst fears of the fourth wave of Covid, many economists and trade experts are already predicting supply and demand disruptions and tacitly embracing times of high inflation, particularly in food in the coming months of 2022.
In early March, when the Government of India released the official estimates on the state of inflation in the economy during February 2022, the uptick didn’t surprise many. Both the Wholesale Price Index (WPI) and the Consumer Price Index (CPI) showed high and rising annual inflation rates of 13.11 per cent and 6.07 per cent, respectively (Figure 1). The inflation at the food level was also high at 8.5 per cent and 5.9 per cent, respectively. India’s central bank, the RBI, has been given the mandate to maintain annual inflation at 4 per cent until 31 March 2026 with an upper tolerance limit of 6 per cent. Nearly all the four inflation rates are either higher or closer to RBI’s upper limit. With high inflation and even higher prediction of inflation rates already stirring the markets, the RBI’s task on the mandate becomes unenviable in current times.
What are the key factors that will keep the pressure high on the overall and particularly, food retail prices?
High inflation ‘in the pipeline’
With wholesale being a step before retail in a commodity value-chain, there is an expectation of a lag before inflation at the wholesale level (or ‘inflation in the pipeline’) gets reflected at the retail level. The retail inflation rate (6.07 per cent) is still less than half of that at the wholesale level of 13.11 per cent. The gap in food, however, is smaller (Figure 1). The contagion of this wholesale inflation into retail is likely to happen in the coming months, and so, the prediction of higher retail level inflation is well-grounded.
Likely supply disruptions in global markets
The CFPI, or consumer food price index, stood at 5.9 per cent in February 2022 and was driven up mainly by inflation in edible oils, vegetables, cereals and livestock products, including milk, meat and fish (Figure 2). Apart from the seasonality effect where, generally, the prices tend to rise in the summer months, mainly for vegetables and dairy, the global contagion of high edible oil prices is behind most of the inflation we are observing in domestic markets of these oils. Higher feed costs, mainly from maize and soymeal, are also pulling up inflation in the livestock sector. Globally, crop condition concerns of the maize and soybean crops in South America have lent support to their global prices, inter alia, pushing up export opportunities for domestic suppliers putting pressures on the domestic availability of the crop.
With supply disruptions from the Ukraine-Russia war on mainly four accounts — including wheat, sunflower oil, fertilisers, and maize — continued price pressures are likely to stay at least for these crops. High global prices reflect in domestic markets, generally with a lag and mostly via three routes. One, high global prices offer lucrative export opportunities that reduce the domestic availability of a crop, thereby pulling up its prices in domestic markets. Two, dependency on expensive imports, like in the case of edible oils, facilitates the domestic contagion of high global prices, and three, inter alia, the high cost of imported inputs like fertilisers increases the cost of cultivation, leading to the pulling up of crop prices in domestic markets.
Growing concerns over fourth wave
China imposed a strict lockdown in Shanghai in March 2022 amid fears of the fourth wave of Covid. As per the media, it is the biggest city-wide lockdown imposed by the Chinese government since the Covid outbreak two years back. Globally, this is sending shock waves as economies are still grappling with the fallouts of the past pandemic years. This would not just trigger a global fear of the spread of the virus, likely to disrupt the already low levels of domestic demand, but also the closing of operations at key Chinese ports, which would further push up container shipping costs that are already exceptionally high.
Uncertainty over crude
Globally, Brent crude was trading at $103 per barrel on 4 April 2022, according to Bloomberg. This reflects a 72 per cent annual inflation rate for March 2022, mentioned the World Bank. Expensive crude makes almost everything else costlier. Despite huge import dependence on crude oil, the Indian government did not pass on the global price hikes into the domestic markets till 22 March 2022, after which it has been sequentially hiking retail prices of both petrol and diesel practically every day. As of 7 April 2022, petrol and diesel prices in Delhi were Rs.105.41 per litre and Rs.96.67 per litre, respectively. These prices were Rs. 90.56 and Rs. 80.87, respectively, in April 2021.
Base effect on India’s retail food inflation
Retail level food inflation in India in 2021 was relatively lower and averaged about 3.1 per cent. In 2020, it had averaged about 9.6 per cent. Having benefited from low levels of food inflation last year, in 2022, food inflation is likely to look more pronounced on the higher side.
With growing uncertainties across the globe, this year is expected to witness high global food inflation. However, India is in a unique spot in the case of wheat and rice, in particular. With burgeoning stocks of rice and wheat with the Food Corporation of India (FCI) and a robust domestic crop (though there are news about yield losses in wheat due to the unprecedentedly high temperatures in March 2022), India is uniquely positioned to supply food security to the global markets that are scrambling for staple supplies due to the worldwide conflict situation. In Financial Year 2021-22, India exported about 7 million tonnes (MT) of wheat and this is expected to rise to about 10 MTs during FY 2022-23.
India has to embrace the fact that food is likely to be dearer this year. With the consumers of the economy still reeling under the post-pandemic crisis, the growth momentum that the economy has picked, albeit slowly, needs to be nurtured. However, the tradeoff between high growth and high inflation is tricky at this point, and the RBI has an unenviable task of balancing both. Enough alarms about the upcoming uncertainty have been raised in the economy; how the government rises up to the occasion of protecting its vulnerable consumer while ensuring the incentive to invest and grow stays can be witnessed only with time.
Shweta Saini is an independent researcher on agricultural policies. Views are personal.
(Edited by Humra Laeeq)