The burden of the increase in international oil prices is being passed on to Indian consumers.
This has naturally given rise to the concern of a consequent increase in food prices in the following days.
What is the global food prices scenario?
Global prices of major agricultural commodities are ruling way above than their levels a year ago.
The UN Food and Agriculture Organization’s (FAO) world food price index (FPI) touched 127.1 points in May 2021.
This is its highest value since September 2011.
What is the case with India?
Unlike fuel, the increase in global food prices is not getting reflected in India.
Annual consumer food price index (CFPI) inflation in India was 5% in May 2021.
This was far lower than the 39.7% year-on-year rise in the FAO-FPI for the same month.
Notably, the CFPI and FAO-FPI inflation rates moved more or less in tandem till about February 2020.
But, the period thereafter has seen a marked divergence.
Why is the divergence?
The spike in international food prices from September-October 2020 has been due to demand resuming with economies unlocking.
The demand rise has been further aided by Chinese stockpiling (for building strategic reserves, and in anticipation of fresh corona outbreaks.)
There are also dry weather-induced production shortfalls in Brazil, Argentina, Ukraine, Thailand and even in the US.
India, by contrast, has had good monsoons in 2019 and 2020.
Food inflation started falling from December 2020 with a bumper post-monsoon kharif crop being harvested and arriving in the markets.
Also, there is collapse of demand from successive Covid-triggered lockdowns.
So, there is relatively low domestic inflation in food items other than edible oils and pulses that are imported.
How does the future look?
International food prices will be one of the determinants for food inflation in India in the coming months.
It is not clear if the current surge in global food prices is a result of temporary supply-side disruptions or a sign of a larger “commodity super-cycle.”
[A commodity super cycle is a sustained period of abnormally strong demand growth that producers struggle to match.
This sparks an increase in prices that can last years or in some cases a decade or more. It was witnessed during 2007-2013.]
Another important determinant is the monsoon’s progress.
The rainfall so far and the future predictions are encouraging for the current year.
This should encourage plantings by farmers and, moreover, expand acreages under oilseeds and pulses.
A third successive good monsoon should effectively control food inflation.
The third determinant is the extent of fuel cost increases being passed-through to consumers.
The scope for it is, perhaps, limited in today’s demand-constrained environment.
But when demand revives, there is a likelihood of processors, transporters and even farmers passing on the increase in fuel costs to consumers, which in turn may lead to inflation.
