Why surging inflation could hamper India’s economic recovery

Central bank is under pressure to raise interest rates and rein in rising living costs, economists say

Communist Party of India supporters protest in Hyderabad against rising inflation and the higher cost of fuel and other essential commodities. AP

Food inflation poses a growing challenge to India’s economic recovery, economists say, with businesses and households feeling the pinch from higher prices amid the global supply-chain crunch and Russia-Ukraine crisis.

“Rising food inflation has become a cause of concern,” says Pradeep Multani, president of New Delhi-based trade and industry body PHD Chamber of Commerce and Industry.

“Food prices account for nearly half the inflation basket in India, making them an important factor impacting households, businesses and, hence, the Indian economy.”

In March, retail inflation surged to a 17-month high to reach 6.95 per cent on the year, driven by a spike in food prices, government data showed. This is beyond the upper threshold of the Reserve Bank of India’s 6 per cent inflation target.

The rising cost of living comes amid India’s economic recovery from the Covid-19 pandemic and movement restrictions, which plunged the country into a historic recession in 2020.

India’s economy is consumption-driven and experts say that food inflation is hitting people’s spending power.

Food price inflation in India increased to 7.68 per cent in March, up from 5.85 per cent in the previous month, the government data showed. Meat and fish prices rose 9.63 per cent, year on year, last month, while vegetables rose 11.64 per cent, and cooking oils and fats surged 18.79 per cent.

“With higher food prices, consumers’ demand for consumer-durable goods and other non-essential commodities will be negatively impacted, since a higher proportion of household’s disposable income is spent on food and essential commodities,” says Mr Multani.

One factor driving up food prices is the rise in the cost fuel due to Russia’s invasion of Ukraine, which has squeezed crude oil supplies globally.

Steeper fuel costs are also adding to household expenses in India, where many people live below the poverty line. The number of citizens living on $2 or less a day in the country increased to 134 million from 78 million during the Covid-19 pandemic, according to a March 2021 study by Washington-based think tank Pew Research Centre.

“It is a concern as due to the pandemic, the per capita earnings have gone down in many low-income families,” says Suseelendra Desai, dean of the School of Agricultural Sciences and Technology at NMIMS University in Shirpur.

“Though total food grain productivity has been at a record high, the increasing fuel prices have dampened the supply chain due to high transportation costs.”

Russia and Ukraine are major global suppliers of wheat, sunflower oil and fertilisers, and disruptions to these products have pushed up prices. In India, which sources most of its sunflower oil from Ukraine, the price of the commodity has doubled since the start of the war in February.

“The Ukraine-Russia war … has significantly contributed to the food price rise,” says Mr Desai. “Often, the markets also take advantage of the situation by rising the prices. Unforeseen damage in some crops has resulted in a sharp increase in commodity prices such as chillies, resulting in lifetime-high prices.”

Inflation risks due to the crisis in Ukraine prompted the World Bank on Wednesday to cut its economic growth forecast for India to 8 per cent in the current financial year, which began this month, down from an earlier projection of 8.7 per cent.

“High oil and food prices caused by the war in Ukraine will have a strong negative impact on people’s real incomes,” says Hartwig Schafer, vice president for South Asia at the World Bank.

“Governments need to carefully plan monetary and fiscal policies to counter external shocks and protect the vulnerable.”

Businesses in India are also feeling the impact.

“Rising inflation has taken a bigger bite in the food and beverage sector,” says Satvir Singh, co-founder of New Delhi-based tea franchise Chaiops. “High prices are a particular worry for India’s hundreds of millions of common people, who have already been affected by the Covid-19 pandemic and its impact on an economy.”

Chaiops has not passed on all price rises to its customers as it is still trying to recover from the financial impact of the pandemic, Mr Singh says.

SOARING PRICES

“This is a challenge to manage the right price with the customer and we have to take care of the food margin to grow the business as well,” he says.

Chai Point, another Indian tea and coffee beverage chain, is also feeling the pinch from high food prices, says Nikunj Gupta, the company’s chief financial officer.

“Inflation is evident in most items but more pronounced in global commodity-led items like coffee, sugar, cooking oil,” says Mr Gupta. Chai Point is absorbing a large part of the price increases, he said.

The surge in food prices is adding to pressure on the RBI to raise interest rates to tame inflation, economists say.

“With inflation likely to exceed 6 per cent for three consecutive quarters, especially if energy prices remain elevated, the RBI is likely to get quite perturbed,” says Madhavi Arora, lead economist at Mumbai-based Emkay Global Financial Services.

Food prices are likely to remain elevated “in the near term [due to the] summer effect, international prices, higher transport cost, supply chains and persistent input costs”, Ms Arora says.

At its monetary policy meeting this month, the RBI decided to keep interest rates on hold despite rising inflation to avoid potentially derailing the country’s economic recovery by increasing borrowing costs.

As rising prices become a bigger concern, this “could pressure the RBI to act sooner than later” when it comes to raising interest rates, Ms Arora says.

While the RBI avoided hiking interest rates at its last meeting, it did shift its stance for the first time since the outbreak of the pandemic more than two years ago to acknowledge that price stability now requires a sharper focus than economic growth.

Shaktikanta Das, governor of the Reserve Bank of India speaks after the central bank's monetary policy meeting this month. Bloomberg

“Global supply chain disruptions and input cost pressures are now expected to linger even longer,” RBI governor Shaktikanta Das said after this month’s monetary policy meeting.

“The resurgence of Covid-19 infections in some major economies in March and the associated lockdowns run the risk of further aggravating the global supply bottlenecks and input cost pressures.”

Meanwhile, Mr Multani remains hopeful that food inflation will “eventually” ease.

“Though inflation is high in the short term, we expect it will soften in the medium term with improved suppliers,” he says.

However, risks remain and food prices will remain high over the coming months, experts say.

“Definitely, if the war situation continues, the movement of essential food items would be hampered leading to rise in prices,” says Mr Desai.

“Even if the Ukraine-Russia war ends, its impact will be there for some more period before recovery starts.”

DRE Reddy, chief executive and managing partner at Chennai-based food services company CRCL, agrees. “Food prices will continue to face high prices due to the supply chain problems, hike in crude oil and geopolitical tensions,” he says.