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Fuel Price Influence on Food Price

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June 29, 2021

What is the issue?

  • The burden of the increase in international oil prices is being passed on to Indian consumers.
  • This has naturally given rise to the concern of a consequent increase in food prices in the following days.

What is the global food prices scenario?

  • Global prices of major agricultural commodities are ruling way above than their levels a year ago.
  • The UN Food and Agriculture Organization’s (FAO) world food price index (FPI) touched 127.1 points in May 2021.
  • This is its highest value since September 2011.

What is the case with India?

  • Unlike fuel, the increase in global food prices is not getting reflected in India.
  • Annual consumer food price index (CFPI) inflation in India was 5% in May 2021.
  • This was far lower than the 39.7% year-on-year rise in the FAO-FPI for the same month.
  • Notably, the CFPI and FAO-FPI inflation rates moved more or less in tandem till about February 2020.
  • But, the period thereafter has seen a marked divergence.

Why is the divergence?

  • The spike in international food prices from September-October 2020 has been due to demand resuming with economies unlocking.
  • The demand rise has been further aided by Chinese stockpiling (for building strategic reserves, and in anticipation of fresh corona outbreaks.)
  • There are also dry weather-induced production shortfalls in Brazil, Argentina, Ukraine, Thailand and even in the US.
  • India, by contrast, has had good monsoons in 2019 and 2020.
  • Food inflation started falling from December 2020 with a bumper post-monsoon kharif crop being harvested and arriving in the markets.
  • Also, there is collapse of demand from successive Covid-triggered lockdowns.
  • So, there is relatively low domestic inflation in food items other than edible oils and pulses that are imported.

How does the future look?

  • International food prices will be one of the determinants for food inflation in India in the coming months.
  • It is not clear if the current surge in global food prices is a result of temporary supply-side disruptions or a sign of a larger “commodity super-cycle.”
  • [A commodity super cycle is a sustained period of abnormally strong demand growth that producers struggle to match.
  • This sparks an increase in prices that can last years or in some cases a decade or more. It was witnessed during 2007-2013.]
  • Another important determinant is the monsoon’s progress.
  • The rainfall so far and the future predictions are encouraging for the current year.
  • This should encourage plantings by farmers and, moreover, expand acreages under oilseeds and pulses.
  • A third successive good monsoon should effectively control food inflation.
  • The third determinant is the extent of fuel cost increases being passed-through to consumers.
  • The scope for it is, perhaps, limited in today’s demand-constrained environment.
  • But when demand revives, there is a likelihood of processors, transporters and even farmers passing on the increase in fuel costs to consumers, which in turn may lead to inflation.

 

Source: The Indian Express

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