Is inflation cooling down in India?

Food inflation has always been a wild card. In October, food and beverages component of Consumer Price Index (CPI) increased by 7 per cent yoy. It had averaged 7.6 per cent during April-October vs. headline CPI of 7.1 per cent.

From early this year, various food components have been volatile. Starting with concerns of a spike in edible oil and wheat prices (and in general from higher fertiliser prices) after the onset of the Russia-Ukraine war, this was followed by heatwave like conditions in March-April impacting wheat output, lower Kharif crop season (June-September) sowing in rice and pulses, and now the crop damage from very heavy October rainfall in some states.

Several government measures taken include higher fertiliser subsidy, cut of import duties on edible oils, ban on wheat and broken rice exports, export duty on non-basmati rice and compensation to farmers for crop damage from recent rains (announced by some states).

A repeat of 2019?

In 2019, food inflation had risen strongly to 12.2 per cent yoy in December. Its total sequential momentum during July-October then was 4.8 per cent vs. 2.6 per cent this year.

It was a case of very high vegetable inflation then, driven by a spike in onion prices which had increased 171 per cent during July to December. Inflation in other components like rice and pulses was not a major driver.

This year, cereals have relatively been a bigger driver due to impact of geopolitical events on global prices, reduced domestic output, etc. but overall food inflation didn't pick up the way it did in 2019. This is also likely because government intervention this year has been much stronger, given the nature of food inflation drivers has controllable aspects unlike inflation in perishables (in 2019) which is more difficult to tackle in the near-term.

Respite ahead?

Wheat: After procurement of 43 million tonnes in FY22 Rabi Marketing Season, 19 million tonnes procured in FY23 was 57 per cent lower year-on-year and vs. the FY23 government target.

Wheat price has risen by 11.6 per cent during April-October this year vs. 3.2 per cent in 2019. Stock with the Food Corporation of India (FCI) has ranged from 0.9-1.1 times the mandated level during July-November this year vs. 1.5-1.9 in 2019 (Figure 2).

Although this potentially restrains the quantity of wheat FCI can sell in the open market to control prices, if it rises beyond comfort, FCI estimates wheat stock as on April 1, 2023 (after meeting all requirements under various government welfare schemes) to be 50 per cent higher than the mandated level.

Rabi season wheat sowing too, as per data on November 11, is up 10 per cent y/y. This could be further aided by the current healthy soil moisture and reservoir water levels (latter 9 per cent above last year and 19 per cent above normal with all regions reporting a higher y/y level as on November 10). Thus, FCI expects procurement which begins in April to be normal.

Rice: Kharif season sowing of rice was 4.8 per cent below 2021 but 1.5 per cent above the normal area. Latest official kharif production estimate is for a 6 per cent y/y drop. Thus, rice price has risen by 8.3 per cent during April-October this year (lesser than wheat) vs. 2.4 per cent in 2019, also because rice export is still permitted (only broken rice export has been banned unlike the complete ban on wheat export).

However, rice and paddy stocks are still very comfortable and has ranged from 2.6-3.5 times the mandated levels during July-November this year vs. 2.2-3.5 in 2019.

Procurement of kharif output has started and there could be some hit from excess rainfall in the major producer states like Uttar Pradesh in early October but the extent of damage caused, specifically to paddy across states, is not fully clear. However, FCI estimates rice stock alone, as on April 1, 2023, to be 74 per cent higher than the mandated level. Further, real-time data suggests average price till date in November has fallen slightly below the October level, the first m/m drop in seven months.

Pulses: Kharif sowing of pulses was 4 per cent down y/y but the government estimate of production is flat from 2021, although the hit from last month's excess rain is to be ascertained. Although rabi sowing of pulses is down y/y, that too only marginally by 1.4 per cent as on November 11, sowing for the main sub-categories of gram and lentil is in fact up. Again, current healthy soil moisture and reservoir level should help here. Prices have risen only by 3.6 per cent during April-October this year (vs. 8.5 per cent in 2019) and price growth in the latest CPI print for October has moderated.

Oils and fats: The import duty cut by the government has benefited this category and prices of edible oils have sequentially fallen from June to October. The import duty cut has now been extended till March 2023.

Vegetables: Tomato price has been very volatile but data suggests it has been falling in November after rising sharply in the previous two months. Growth in potato price, already moderate, has been easing a bit in November and the new crop harvest could hit the market by next month. Onion price has picked up (13.3 per cent in November at the time of writing) but this is nowhere close to that in 2019.

Vegetable prices are typically volatile but if moderation in sequential growth from the start of this month is followed by the seasonal winter deflation, or even if it happens after a consolidation phase in prices, it could help drive food inflation lower.

Other food items: Price growth in protein food sources such as meat and fish, eggs and milk have remained moderate. In recent months, price momentum has been below that suggested by historical seasonal trends. Prices of fruits have also fallen in the last three months and in five out of the last six months.

Growth in farm input cost has begun to moderate in line with oil price growth. This, as calculated by RBI, is a weighted average of yoy growth in five relevant WPI components. Among these, high speed diesel and electricity are two major inputs and both have moderated. This augurs well, ceteris paribus, for softer incremental food price growth.

Food prices have been volatile this year due to geopolitical developments and domestic production issues. However, this is totally different from 2019 when spike in onion prices had dominated food inflation for several months.

Government intervention is also much stronger this time. Prices of cereals, particularly of wheat, have been of concern in 2022 but there is potential for some incremental moderation in growth. Rice stocks remain quite comfortable too.

Prices of certain pulses, vegetables, etc. have also eased a bit from early November, although it remains above October levels. Farm input cost growth has been falling since July. Excess rainfall in October will have its impact but the above early signs are encouraging and needs to be watched closely.

(Sreejith Balasubramanian is an economist (fund management) at IDFC AMC)