Hanna Luchnikava, Senior Economist, Asia Pacific, IHS Markit Economics tells Sarika Malhotra how India's food inflation has become a major driver of both WPI (Wholesale Price Index ) and CPI (consumer price index) inflation.
What is the role of food prices in driving up inflation?
Food prices make up almost a quarter of the entire WPI price basket (14.3 per cent within the primary articles group and 10 per cent within the manufactured products group). Food prices traditionally have a high impact on the overall WPI inflation, although it is less significant than on the retail inflation, where food prices make up close to a half of the overall CPI basket.
Which food items have been witnessing maximum food inflation and why?
As typical for India, vegetable prices have been once again showing the fastest price rise since April 2016. Vegetable prices shot up by 16.9 per cent year-on-year in June with prices of some vegetables like potatoes and tomatoes are up as much as 65 per cent and 52 per cent, respectively, in comparison to the same month last year. Besides vegetables, pulses and sugar have also witnessed high inflation. But, on the other hand, onions, which have been historically an important driver of the overall inflation, became cheaper this year, as compared to June 2015. High vegetable and pulses inflation is a result of a short supply in some parts of the country, where crop supplies were damaged by severe drought conditions. Vegetable prices are particularly volatile and prone to supply shocks, given the existing distribution and storage deficiencies.
How do you see food inflation impacting WPI in the coming months?
The food prices are likely to remain elevated for a couple more months but are seen moderating after August, easing some pressures on the WPI headline inflation. Yet, one should not expect the WPI to slid back into deflation, since non-food price pressures will also gradually rise, while base effects will push the headline growth figures upwards. We expect the headline WPI inflation to average around 2.6 per cent for the fiscal year ending March 2017.
With the onset of monsoons, do you see the situation improve for food inflation?
The rains this year so far have been above long-term average. The Indian Meteorological Department expects the rains to pick up in the rest of July and August so the current spikes in food prices are likely to be temporary. One caveat to this is the actual amount of cereals and pulses sown. So far, despite the above-average rains, the sowing of cereals has been behind the last year's figure. Although it is expected to catch up in coming months, it is worth paying attention to this metric and not just the amount of rains alone.