Context: A sharp increase in the retail prices of several crucial food items over the past one month — from the essential vegetables of tomato, onion and potato to the basic cereals of rice and wheat, tur dal, the commonest protein source in vegetarian households, and even loose tea — has left households and small eatery operators scrambling to juggle their budgets.
Trends in Food Prices
Data from the Ministry of Consumer Affairs, Food and Public Distribution’s Price Monitoring Division show that prices of 9 of the 10 key food items — rice, wheat, tur dal, sugar, milk, tea (loose), salt (iodised, packed), potato, onion and tomato — had increased from a month earlier. The price of salt alone was unchanged.
While the 0.5% month-on-month increase in milk price was the least, the prices of all three essential vegetables had risen, with potato up 8.8%, onion 11.1% higher and tomato almost twice as high as in the last week of May.
The national average retail price of tomato on June 29 was ₹53.59 per kilogram, 95% higher than ₹24.37 a month earlier.
The price of tur dal, a key protein source in the diets of vegetarian households, continues to keep rising; it had climbed 7.8% month-on-month to ₹130.75 a kilogram on June 29.
Factors affecting the supply of vegetables this year
Demand-Supply Gap: Across the country, tomatoes are grown and harvested at different points of year. This results in demand-supply gaps.
Weather Disturbances: Further, this shortage gets compounded by weather disturbances.
Perishable nature of vegetables: Non-availability of cold chain infrastructure.
Logistical challenges: When it rains, transportation becomes an issue,
Higher temperatures & Rainfall: high temperatures this year as well as unusually sharper rain spells more recently, especially in northern States
Uncertainty of Monsoon: With the monsoon rains 13% in deficit so far this year, and the outlook for spatial and temporal distribution in the coming months clouded with uncertainty by the El Niño.
Conclusion
Due to El-nino, there is a real risk that food prices could cause retail inflation to accelerate again. Hence, the policymakers need to retain laser focus on taming inflation.
Within the last year, the Gujarat Cooperative Milk Marketing Federation has raised the maximum retail price (MRP) of its Amul brand full-cream milk (containing 6% fat and 9% SNF or solids-not-fat) in Delhi from Rs 58 to Rs 64 per litre.
The National Dairy Development Board (NDDB)-owned Mother Dairy went further — from Rs 57 to Rs 66 per litre — between March 5 and December 27, 2022.
Reasons for the price rise:
Crash in prices following the Covid-induced lockdowns as a result of demand destruction led dairies to slash procurement prices of milk and its products. Farmers responded by:
Shrinking (or at least not expanding) the size of their herds, as milk prices would not cover the cost of feeding and maintaining the animals
Underfeeding the calves and the pregnant/ dry cattle who did not give milk. The calves that were underfed during the lockdown are today’s cows. Most of them, even if they have survived, are poor milkers. This is evidenced by dairies across India reporting lower milk procurement
Supply side issues - Increase in cost of animal feed:
The cattle feeding cost alone has increased by around 20% compared to last year, on the back of more expensive ingredients such as cotton-seed, rapeseed and groundnut extractions, soybean meal, maize, de-oiled rice bran and molasses.
Availability of straw (particularly wheat, due to a poor 2021-22 crop) and fodder (because of near-incessant rains, especially in the South, from October-December 2021 through 2022, which did not allow the grass to fully come out) has also been an issue.
Zoonotic Diseases: Some major milk-producing states have seen a rise in cases of disease among cattle. Lumpy Skin Disease, which leads to fall in milk output, has been reported in Gujarat, Punjab and Haryana.
There has also been a rise in transport, logistics, manpower, and energy costs.
Demand side issues - the lifting of lockdown restrictions and revival of economic activity from late-2021 coincided precisely with the building up of supply pressures.
This was exacerbated by India exporting more than 46,000 tonnes of milk fat between April 2021-November 2022, against a mere 15,600 tonnes in 2020-21.
Higher exports of butter, ghee, and anhydrous milk fat, enabled by soaring international prices, have added to the domestic shortage.
Way Forward:
Allow duty-free imports of butter oil and SMP. Butter fat imports currently attract 40% duty. For SMP imports, it is 15% up to 10,000 tonnes per year and 60% for quantities more than that.
The government can permit NDDB to import fat and SMP at zero duty for building up a buffer stock necessary for the summer, when milk supplies will dry up in the normal course.
Inflation based on the Wholesale Price Index (WPI) moderated to a two-year low of 3.85% in February from 4.73% in January, with manufactured products’ inflation cooling from 3% to a little under 2%, and primary articles, food and fuel and power recording milder downturns in the pace of inflation from a month earlier. The base effect also contributed as February 2022 saw a 13.4% pace.
Office of Economic Advisor, Ministry of Commerce, and Industry
National Statistical Office, Ministry of Statistics and programme Implementation
Base year
2011-12
2012
Categories
Primary Articles Manufactured products Fuel and Power
Food and beverages Pan, Tobacco, and Intoxicants Clothing and Footwear Housing Fuel and Light Miscellaneous- Education, Healthcare, Transportation etc.
Highest Weightage
Manufactured products
Food and Beverages
Impact of increase in Food items
Less impact on WPI as compared to CPI since WPI provides higher weightage to manufactured products and lower weightage to Food items.
Larger impact on CPI as compared to WPI since it gives more weightage to food products.
Services included
No
Yes
Indirect Taxes Included?
No
Yes
Targeted by RBI?
No
Yes. The RBI is required to maintain CPI rate of inflation of 4% with a deviation of 2%.
Headline and Core Inflation
The headline inflation simply refers to the inflation in the CPI (or WPI) covering all the categories of goods and services. On the other hand, the core inflation excludes the volatile categories such as food and fuel in order to measure the increase in the prices of goods and services. Hence, a drastic fall in the food and fuel prices can bring down the headline inflation by a to a large extent. However, the core inflation may remain unaffected.
Note: Presently, the RBI is targeting the CPI headline rate of inflation (and not Core Inflation)
Base Effect: To calculate the rate of Inflation, the prices of Goods and services in the current month are compared with the prices in the corresponding month of the previous year.
The rate of inflation in the current month is calculated as
(Prices of Goods in Current Month- Prices of Goods in Corresponding month of Previous year)/ Prices of Goods in Corresponding month of Previous year * 100
As can be seen in the above formula, the denominator (base) is the prices of Goods in the corresponding month of previous year. So, the if the denominator (base) value is lower, the rate of inflation in the current year would be higher. Similarly, if the denominator (base) value is higher, the rate of inflation in the current year would be lower. This can be understood as seen below:
Reasons for the rising Inflation in India
Imported Inflation: Increase in global commodity prices such as Crude oil, Edible oil etc.
Increase in certain food items such as Egg , Edible oils, Fruits, Pulses.
Increase in services such as Health, Transport and Communication etc.
Low Base effect as the prices of some of the Goods had declined last year due to the pandemic.
What to Target: Headline or Core Inflation?
Presently, the RBI targets CPI headline rate of inflation and not the Core Inflation. In this regard, the Economic Survey 2020-21 has highlighted that sole focus on CPI headline rate of Inflation may not be appropriate on account of number of reasons. Accordingly, it has recommended that a greater focus on core inflation is warranted.
Reasons:
Firstly, Headline inflation may take place due to volatility in prices of Crude oil and Food commodities, over which RBI has no control. For example, failure of monsoons, lack of cold chain infrastructure, supply side bottlenecks etc. usually lead to increase in Food prices.
Secondly, most of the time inflation in Food commodities is transitory and may not require any policy action by the RBI
Thirdly, if the RBI tries to control inflation due to volatility in prices of food commodities, it can prove to be counter productive. For example, to control inflation, rate of interest would increase--> Decline in Investment and Consumption Expenditure--> Economic Slowdown.
Fourthly, to measure inflation correctly, weightage must be assigned to different categories of commodities depending upon their share in the household expenditure. Higher the share, higher should be weightage. The share of food commodities in the household expenditure has declined since 2011-12, yet the CPI gives a weightage of almost 45% to the food commodities.
Any inflation rate essentially tells us the rate at which prices have been rising in an economy. As such, an inflation rate is expressed as a percentage. If the prices of onions rose from Rs 10 a kg last year to Rs 15 a kg this year, the inflation rate will be 50%. That’s because a kg of onion is Rs 5 — that is, 50% — more than the base price (Rs 10) in this example.
For every month, inflation rates are calculated both on a year-on-year basis — how prices have changed over the past year — as well as on a month-on-month basis — how prices have changed over the past month.
The two most-often used inflation rates in the country are the year-on-year
Wholesale Price Index (WPI) based inflation rate
Consumer Price Index (CPI) based inflation rate
The former is called the wholesale inflation rate and the latter is called the retail inflation rate. These are two different baskets of goods and services.
The government assigns different weights to different goods and services based on what is relevant for those two types of consumers.
Difference between WPI and CPI
Criteria
Wholesale Price Index
Consumer Price Index (CPI)
Level
Measures Inflation at Wholesale level
Measures Inflation at Retail level
Who Calculates?
Office of Economic Advisor, Ministry of Commerce and Industry
National Statistical Office, MoSPI
Base year
2011-12
2012
Released on
14th of Every Month
12th of Every Month
Number of Items covered
697
299
Categories and their respective weightages
Primary Articles: (22.6%)Manufactured products (64.2%)Fuel and Power (13.2%)
Food and beverages (45.86%)Pan, Tobacco and Intoxicants (2.38%) Clothing and Footwear (6.53%)Housing (10%)Fuel and Light (6.84%): Electricity, LPG, Kerosene etc. (Does not include Petrol and Diesel)Miscellaneous- Education, Healthcare, Transportation and Communication etc. (28.32%)
Weightage given to Food Articles
WPI-Food Index (24%): Food articles from "Primary Articles" and "Manufactured Food Product".
Consumer Food Price Index (CFPI):(39%): Out of 12 sub-groups contained in 'Food and Beverages' group, CFPI is based on ten sub-groups, excluding 'Non-alcoholic beverages' and 'Prepared meals, snacks, sweets etc. (For Details, refer to Rau’s Economic Survey Video)
Impact of increase in Food items
Less impact on WPI as compared to CPI
Larger impact on CPI
Weightage of Fuel and Power
Included in separate category of Fuel and Power (13.2%)
Weightage (~8%): Included in (a) category of Fuel and light and (b) Category of Transportation and Communication (Fuel for Transportation)
Highest Weightage
Manufactured products (64.2%)
Food and Beverages (45.9%)
Services included
No
Yes
Indirect Taxes Included?
No
Yes
Targeted by RBI?
No
Yes. The RBI is required to maintain CPI rate of inflation of 4% with a deviation of 2%.
Recent Developments:
The RBI’s target inflation rate is 4% with a leeway of two percentage points either side. But as the chart shows, since November 2019, inflation rate has rarely touched 4% — it has never fallen below 4% — and has often stayed outside the 6% mark.
Ordinarily a single month’s inflation data would not be any more (or any less) important that any other month but, given the fact that India’s monetary policy is balanced on a knife-edge at present, February’s data has gained significance.
Retail inflation inched lower to 6.44% in February from 6.52% in January, even as it remained above the upper band of the 6% medium-term target of the Reserve Bank of India (RBI) for the second consecutive month.
While food inflation eased marginally to 5.95% in February from the revised level of 6% in January (earlier 5.94%), inflation for cereals, milk and fruits picked up.
Among the sub-groups, while vegetables continued to remain in deflationary mode for the fourth consecutive month at (-)11.61% in February, cereals inflation increased to 16.73% in February, the sixth consecutive month of double-digit inflation. Inflation rate for milk and products increased to 9.65% in February from 8.79% a month ago, while that for fruits rose to 6.38% from 2.93% a month ago.
Measures taken by RBI to control Retail Inflation:
Since May 2022, however, the RBI has been rapidly raising interest rates in a bid to contain high inflation. As a result, the repo rate — or the interest rate that the RBI charges banks when it lends money to them — has gone up by 250 basis points since May. It was 4% in May and stands at 6.5% today. Since repo is the rate at which banks get money, a hike in repo implies higher interest rates for all concerned in the Indian economy.
While on paper the RBI’s central responsibility is to maintain price stability, it often also concerns itself with boosting economic growth. It can be argued that over the past four years, the RBI has been more concerned about growth than inflation.
These two concerns pull the RBI in opposite directions. Boosting economic growth requires maintaining low interest rates while containing inflation demands high interest rates.
However, after retail inflation hit an eight-year high in April 2022, however, the RBI has prioritised containing inflation. But doing this is starting to hurt growth.
Way Forward:
Though the government’s measures to cool off wheat inflation through open market sales in February and reduction in reserve price is likely to show an impact on inflation with a lag, sticky core inflation and onset of summer may push perishable products prices higher. Also, higher prices of milk and prepared meals are a cause of concern.
As the core inflation (non-food, non-fuel component) has continued to remain above 6% for the fourth consecutive month, it has prompted expectations of another rate hike of 25 basis points by the RBI in its upcoming policy review in April.
However, excessive front-loading of rate hikes carries the risk of over-shooting because raising real policy rates to reduce demand has a stronger effect on growth than it does on inflation.
Also, Inflation print above 6% level for the second straight month indicates a lag in the impact of monetary policy, under which the RBI has increased the repo rate by a cumulative 250 basis points to 6.50% since May last year. That is to say that it takes a few months, sometimes quarters, before a hike in repo rate results in higher interest rates across the board in the economy and in denting consumption and investment demand.
As the headline inflation print is expected to ease March onwards due to a significant base effect, the MPC should wait for a while to let past repo rate hikes take effect.
Measures the quantum of changes in the industrial production in an economy.
The current base year for the IIP series in India is 2011-12.
It is compiled and published every month by the National Statistical Office (NSO) under the Ministry of Statistics and Program Implementation (MoSPI).
The Quick Estimates of Index of Industrial Production (IIP) are released on 12th of every month (or previous working day if 12th is a holiday) with a six weeks lag and compiled with data received from source agencies, which in turn receive the data from the producing factories/ establishments.
Categorization Of IIP:
Sectoral Classification: Mining, Manufacturing and Electricity. Highest weightage has been assigned to Manufacturing. The sectoral composition of the IIP is as follows:
Use-Based Classification:
Primary goods: Goods directly obtained from natural sources and used for further processing and consumption E.g.: Ores and Minerals and Electricity.Capital goods: Plants, machinery and goods used for further investments. E.g.: Boilers, Air & Gas Compressors, Engines including Internal Combustion and Diesel Engine.Infrastructure/ construction goods: Finished goods which are primarily used in the infrastructure industry or construction industry as an input. E.g.: paints, cement, cables, bricksIntermediate goods: Any good/product produced as an incomplete product, or which goes as input in production for further finishing or forming a part of a product. E.g.: Cotton yarn, Plywood etc.Consumer durables: Products directly used by consumers and having a longer durability (more than 2/3 years). E.g.: Pressure Cooker, Air Conditioners, Tyres etc.
Consumer non-durables: Products that are directly used by consumers and can’t be preserved for long periods. E.g.: Soybean Oil, Full cream/ Toned/ Skimmed milk etc.
Index Of Eight Core Industries:
In India there are eight core sectors comprising coal, crude oil, natural gas, petroleum refinery products, fertilisers, steel, cement and electricity.
The eight core industries constitute 40.27% of the total IIP.
This index is prepared by the Office of the Economic Advisor, Ministry of Commerce and Industry and is published monthly with the base year as 2011-12.
Weightage of different sectors in the Index:
Sector
Weight (in %)
Coal
10.33
Crude Oil
8.98
Natural Gas
6.88
Refinery Products
28.04
Fertilisers
2.63
Steel
17.92
Cement
5.37
Electricity
19.85
Note: It is noted that IIP is published by CSO, MoSPI while Index of Eight core Industries is published by Office of Economic Advisor, Ministry of Commerce and Industry.
Revision of base year
The IIP is an index which shows the growth rates in different industry groups of the economy in a stipulated period of time. The IIP index is computed and published by the Central Statistical Organisation (CSO) on a monthly basis.
The Central Statistics Office (CSO) revises the base year of the macroeconomic indicators, as a regular exercise, to capture structural changes in the economy and improve the quality and representativeness of the indices. The base year of the all-India Index of Industrial Production (IIP) was revised from 2004-05 to 2011-12 to not only reflect the changes in the industrial sector but to also align it with the base year of other macroeconomic indicators like the Gross Domestic Product (GDP), Wholesale Price Index (WPI).
Revisions in the IIP are necessitated to maintain representativeness of the items and producing entities and also address issues relating to continuous flow of production data.
With the release of the new series of IIP (base 2011-12), an institutional mechanism has been established for facilitating dynamic revision of the item list of products and the panel of factories, through a Technical Review Committee, chaired by Secretary, MoSPI. This Committee will meet at least once a year for identifying new items that need to be included in the item basket and removing those that have lost their relevance in the industrial sector or are no longer being produced.
IIP in the revised series will continue to represent the Mining, Manufacturing and Electricity sectors. The revised series uses the National Industrial Classification (NIC) 2008 for the purpose of classification of industrial production. The unit coverage of IIP will, as before, cover entities in the organised sector units registered under the Factories Act, 1948.
At the broad level, the new series has a total of 809 items occurring in the manufacturing sector in the item basket (405 item groups), where 149 new items like Steroids and hormonal preparations, Cement clinkers, Medical/ surgical accessories, Prefabricated concrete blocks, refined Palm Oil have been added and 124 items such as Biaxially Oriented Polypropylene (BOPP) Films, Calculators, Colour TV picture tubes, Gutka have been deleted from the 2004-05 series which had 620 items (397 item groups) in the manufacturing sector.
To reflect the increasing significance of electricity generation from renewable sources, it has been decided to include data on electricity generation figures from these sources in the new series.
The number of source agencies reporting data for compilation of IIP in the new series will be 14 as compared to 15 in the outgoing series.
