How does Supply Chain Distortion affect Food Inflation in India?

During the recent episode of persistently high food inflation in India, the role of rent seeking activities of food suppliers emerged as the centre of debate in the country. The rent seeking activities of agents in both wholesale and retail marketing of food, catered by the lack of a competitive food market and required infrastructure, often causes large positive shocks to mark ups. This paper estimates the contribution of these mark-up shocks at both wholesale and retail level, in food inflation, an issue unexplored in the literature till date. The study finds moderate but significant pass through of mark-up shocks in food inflation after controlling for other factors. The duration of the transmission effect depends on the origin of the shock in wholesale market, while the effect seems to last for five months in retail food inflation. In the backdrop of advocated competitive national market for food commodities to promote greater competition and stabilise large shocks to mark ups, this paper contributes towards understanding the extent to which stabilisation of mark-up shocks can lower wholesale and retail food inflation in the country.