Despite early monsoon rains and forecasts of above-normal precipitation, India’s food prices, which constitute nearly half of the consumer price basket, continue to soar, keeping headline inflation above the Reserve Bank of India’s 4% target. This persistent inflationary pressure has stymied the potential for interest rate cuts. The delayed summer crop planting, attributed to a weakened monsoon, suggests that while vegetable prices might ease from August, other staples such as milk, cereals, and pulses are unlikely to see any significant relief soon.
Food inflation in India, driven predominantly by supply-side disruptions like adverse weather impacting crop yields, has hovered around 8% year-on-year since November 2023. This trend shows little sign of abating, despite early monsoon rains and predictions of above-normal rainfall.
Factors Driving Elevated Food Inflation
The previous year’s drought and an ongoing heat wave have drastically reduced the supply of essential food items like pulses, vegetables, and cereals. Attempts to curb food inflation through export restrictions and import tariff reductions have yielded minimal results. This year’s vegetable supply shortage is particularly severe, with temperatures in nearly half the country exceeding normal levels by 4-9 degrees Celsius. This extreme heat has damaged harvested and stored vegetables and hindered the planting of critical crops such as onions, tomatoes, eggplant, and spinach.
Typically, farmers prepare vegetable seedlings before the onset of the June-September monsoon rains, transplanting them to main fields afterward. However, excessive heat and water scarcity this year have disrupted both seedling planting and replanting, exacerbating the vegetable shortage.
The Monsoon’s Limited Impact
India’s agricultural output is heavily dependent on the annual monsoon. Although the monsoon arrived early in the southern part of the country and quickly advanced to cover the western state of Maharashtra, this initial momentum was not sustained. Consequently, the monsoon has resulted in an 18% rainfall deficit so far this season. This shortfall has not only triggered a heat wave but also delayed the planting of summer-sown crops, which rely on adequate rainfall to proceed at full pace.
Despite the sporadic rains in June, India’s weather office forecasts above-average rainfall for the rest of the monsoon season.
Outlook on Price Relief
Vegetable prices are expected to decline from August onwards, assuming the monsoon revives and covers the entire country as per its usual schedule. However, potential disruptions like floods or a prolonged dry spell in July and August could impede this expected production cycle.
Conversely, prices of milk, cereals, and pulses are unlikely to decrease soon due to tight supplies. Wheat supplies are diminishing, and without government plans to import grain, wheat prices are poised to rise further. Additionally, rice prices are likely to increase following the government’s recent 5.4% hike in the minimum support price for paddy rice. Supplies of pulses, such as pigeon peas, black matpe, and chickpeas, which were severely affected by last year’s drought, will not improve until the new season crops are harvested. Sugar prices are expected to remain high as well, due to lower planting impacting next season’s production.
Government Intervention: Limited Impact
While government interventions, such as restricting exports and easing imports, can help lower the prices of some food commodities, they have limited effect on perishable items like vegetables, which are difficult to import. The government’s measures to control food prices by restricting exports of sugar, rice, onions, and wheat have been unpopular among farmers, contributing to electoral losses for the ruling Bharatiya Janata Party in rural areas.
With state elections approaching in Maharashtra and Haryana, where the farmer population is significant, the central government is striving to regain farmers’ support. This political context may lead to a cautious approach, allowing some crop prices to rise rather than implementing aggressive measures before the elections scheduled for October.