Explainer: Why food prices will remain high in India. Why has the monsoon not helped?

Food inflation in India, driven primarily by supply-side factors such as adverse weather conditions affecting crops, has remained persistently high at around 8% year-on-year since November 2023. Despite the early arrival of monsoon rains and forecasts predicting above-normal rainfall, there is little optimism that food prices will ease soon. The elevated food prices, which account for nearly half of the overall consumer price basket, have kept headline inflation above the central bank's target of 4%, thereby preventing any cuts in interest rates.
Here are FAQs in food prices in India:
What is driving food inflation higher?
Adverse weather conditions: The drought last year and an ongoing heat wave have significantly reduced the supplies of key food items such as pulses, vegetables, and cereals.
Supply chain disruptions: High temperatures in nearly half of the country, soaring 4-9 degrees Celsius above normal, have spoiled harvested and stored vegetables and hindered the planting of crops like onions, tomatoes, eggplant, and spinach.
Seasonal planting challenges: Farmers usually prepare vegetable seedlings before the June-September monsoon rains, but this year, excessive heat and water scarcity have disrupted both seedling planting and replanting, exacerbating the shortage.
Why has the monsoon not helped?
Although the annual monsoon arrived early and advanced swiftly to cover the western state of Maharashtra ahead of schedule, this initial momentum soon waned, resulting in an 18% rainfall deficit so far this season. The weakened monsoon has delayed the planting of summer-sown crops, which rely on sufficient rainfall. Despite June's patchy rains, India's weather office has forecast above-average rainfall for the rest of the monsoon season, providing some hope for agricultural output.
When will prices come down?
Vegetable prices are expected to fall from August onwards if the monsoon revives and covers the entire country as per the usual schedule. However, potential floods or a prolonged dry spell in July and August could disrupt the production cycle. Prices of milk, cereals, and pulses are unlikely to decrease soon due to tight supplies. Wheat supplies are dwindling, with no plans from the government to import grain, which will likely allow wheat prices to rise further. Rice prices may also increase as the government has raised the minimum support price of paddy rice by 5.4%.
Can government intervention help?
Government interventions, such as restricting exports and easing imports, can help bring down the prices of some food commodities. However, "the government can do little when it comes to prices of vegetables, which are highly perishable and difficult to import." While measures like restricting exports of sugar, rice, onions, and wheat have been implemented, these have proved unpopular among farmers and have led to electoral losses for the ruling party in rural areas. With state elections approaching in key agricultural states, the central government may allow some crop prices to rise instead of taking aggressive measures.
Why are food prices still a concern despite easing retail inflation?
Retail inflation, measured by the Consumer Price Index (CPI), has been gradually easing, reaching a 12-month low of 4.8% in May 2024. However, "this positive trend faces potential reversals due to persistent food price pressures," especially in vegetables and pulses, with overall food inflation remaining steady at 7.9%. The central bank has consistently cautioned about volatile food prices, which are particularly affected by weather-related shocks like the recent heat wave. These fluctuations have kept food inflation elevated, complicating the Reserve Bank of India's (RBI) goal of maintaining inflation at its 4% target.
Economic outlook and monetary policy implications
Due to stubborn food price pressures, the RBI has maintained its policy rate at 6.5%, emphasizing a focus on withdrawing accommodation to align inflation with its target while supporting growth. Prospects of interest rate cuts are on hold as the RBI evaluates inflationary pressures amid volatile weather conditions. Despite these challenges, India's real GDP growth in the first quarter of 2024-25 is largely maintaining momentum, with global economic growth prompting many central banks worldwide to adopt a less restrictive monetary policy stance.
(With inputs from agencies)