Understanding Food Inflation in India

Persistently high food inflation has been one of the major concerns facing India over the last few years. With nearly a quarter of the population living below the poverty line, the persistence of food inflation at high levels is extremely undesirable. In this paper, we analyse the behaviour and determinants of food inflation over the recent past. We introduce structural breaks to identify the different phases of food inflation during the last three decades, and evaluate the persistence of food and core inflation across these phases. There is increase in persistence in food inflation over the periods implying it has become more persistent, and any positive shock will have a longer impact on it. Various components of food inflation including cereals, pulses, fruits, vegetables, meat and fish, have been significant contributors to food inflation at different points in time, indicating a broad nature of the problem. In analysing the key drivers of food inflation, we find limited role of international prices, with the co-movements between domestic and international prices being lower for cereals and dairy products, and higher for tradables like edible oils and meat. Using household consumer expenditure data we empirically estimate aggregate demand for key food products, and find demand has consistently outstripped supply in the case of cereals, pulses, meat and fish, and the extent of mismatch has widened in recent years. The rise in food prices is also a reaction of the rise in price of various inputs, including price of fuel and agricultural wages. We also find certain policy decisions such as large increases in minimum support prices have been associated with much higher increase in wholesale prices of these commodities in the corresponding period. Finally, we find significant evidence of transmission of food inflation to non-food inflation and aggregate inflation.