Food Inflation To Remain High In FY23: Crisil
Food occupies 39% share in the average consumer’s basket, making it the top contributor to CPI inflation in this fiscal.
Food inflation will remain elevated in the current fiscal year due to supply shortages driven by geopolitical conflicts and impact of heatwave in India.
The supply shortages is likely to push food inflation to 7% in fiscal 2022-23, bumping consumer-price-index-based inflation to 6.8%, according to Crisil Ratings Ltd.
Annual consumer price index inflation for FY22 stood at 5.5% and the Reserve Bank of India forecasts inflation at 6.7% for FY23.
Food occupies 39% share in the average consumer’s basket, making it the top contributor to CPI inflation in this fiscal. In fiscals 2016-2020, core inflation was “predominant.”
Global factors like the Russia-Ukraine conflict along with impact of heatwave across India is driving the supply shortages.
However, "a well distributed monsoon", according to the report, can help slow down the accelerating food inflation. “But other factors such as rising input costs and global prices, and government interventions have gained importance in shaping the inflation outlook this fiscal.”
Rise in input cost increases like price of fertilisers, pesticides, animal feed and diesel will continue to put pressure on food inflation through the financial year.
"Despite recent softening in international prices of several food items, they remain higher than last year so far and the rupee has weakened offsetting some of the impact of falling international prices for imported food items, according to the report," Crisil noted.
Furthermore, the government’s response to inflation including restrictions on wheat exports and import duty cuts on edible oils and pulses may help reduce the global price pressure on imported goods.
While this isn’t the first time that India is experiencing high food inflation, but this time it is accompanied by high fuel and core inflation, Crisil said.
“In five of the past 10 fiscal years, food inflation hovered between 6% and 12%. In several of these instances, government intervention through release of buffer stocks, opening up of imports, or restrictions on exports were deployed to bring food inflation under control.”
Impact Of ‘Climateflation’
Extreme weather events are also contributing to food inflation, according to Crisil.
The extreme heatwave from April to June destroyed the prospects of a bumper wheat crop this year, making it the key domestic factor pushing food prices across the country, the report said.
Increasing frequency of volatile weather events like excessive rains or floods, droughts, dry spells, erratic rainfall patterns during the southwest monsoon season, heat waves, dry spells, and droughts is extending large volatility to food prices as well.
The central banks fighting inflation should consider the impact of climate change on inflation while formulating monitory policy, the ratings agency said.
Factors Capping Food Price Rise
Low Pulses Inflation: Prices of pulses has seen the sharpest fall. Import of pulses increased, driven by trade agreements and cuts in import duties. India remains the largest producer and consumer of pulses.
Government Intervention: Cuts in import duties on edible oil and pulses, new trade agreements for importation of pulses and restrictions on export of wheat and sugar has slowed down rise in prices. Government subsidy on fertilisers for farmers has also helped.
Base Effect: High inflation in first quarter of FY21-22 has relatively lowered inflation numbers for some food commodities like pulses, edible oils, fruits, and eggs in the the first quarter of current fiscal. However, in many of these, such as edible oils, inflation remains high.
