Equally significant is that the increase is not due to monsoon failure or drought, but crop damage from excess and unseasonal rains.
Consumer food price inflation has touched 10.01 per cent year-on-year in November, the first time it has crossed single digits since December 2013.
What is striking is how quickly it has risen — from just 2.99 per cent in August to 5.11 per cent in September, 7.89 per cent in October to 10.01 per cent last month. Equally significant is that the increase is not due to monsoon failure or drought, but crop damage from excess and unseasonal rains.
The Narendra Modi government’s tenure has been marked by benign food prices. Annual consumer food inflation during its first term from June 2014 to May 2019 averaged 3.26 per cent, below the corresponding 4.31 per cent general retail inflation during the period. Moreover, there was an extended 36-month period between September 2016 and August 2019, when retail food inflation ruled consistently below overall consumer price index (CPI) inflation, averaging a mere 1.38 per cent.
That has, however, now reversed.
The 10.01 per cent food inflation rate for November not only exceeded the general CPI inflation of 5.54 per cent, but was also the highest since the 13.16 per cent recorded way back in December 2013.
Transient, not generalised
If the rise in food prices is transient in nature, as is widely expected, then the risk of it getting generalised is minimal. The RBI did not reduce key policy rates in its review this month, even though it retained its accommodative stance. It is waiting for more clarity pending the Budget to see if interest rates could be cut to boost growth.
For the government and the Reserve Bank of India (RBI), the surge in food inflation presents a dilemma. The 10.01 per cent number comes on the same day the National Statistical Office released data showing industrial production falling 3.84 per cent year-on-year in October, making it a third consecutive month of negative growth. With most other indicators - from electricity demand to car and two-wheeler sales - also pointing to a protracted economic slowdown, there is an obvious case for further interest rate cuts and monetary loosening by the RBI.
But this is not easy for two reasons.
First, food and non-alcoholic beverages have a combined 45.86 per cent weight in the overall CPI. Secondly, food prices play a major role in inflationary expectations of Indian households. The RBI’s own November survey showed these to have increased by 1.20 percentage points over a three-month ahead horizon, and by 1.80 percentage points over a one-year ahead horizon, as households “adapted to the spike in food prices in recent months”. While there’s little that the RBI can do to control onion or dal prices - these are influenced more by supply-side factors, whereas repo rate and other monetary policy actions primarily address demand - it cannot simply “look through” food inflation.
A key source of uncertainty is whether the current food price pressures - the main contributors to inflation in November are vegetables (35.99 per cent) and pulses (13.94 per cent) - are transient. The immediate cause of rising prices has been the setback to kharif production from an unusual combination of delayed onset of the southwest monsoon (leading to reduced sowings) and prolonged unseasonal rains in October-November (damaging the standing crop at the time of harvesting).
On the positive side, though, the surplus monsoon and post-monsoon rainfall has helped substantially recharge groundwater aquifers, apart from filling the country’s 120 major dams to 83.76 per cent of their aggregate reservoir capacity as on December 12. Last year, these reservoirs were only 57.39 per cent full at this time, while the last 10-years-average for the same date was 61.29 per cent.
The prospect of a bumper rabi production, thanks to the vastly improved soil moisture conditions, offers some hope that food inflation will ease in the coming months. But that will be known only when the crop gets harvested after April.