Food Price Inflation in India: Causes and Cures

Abstract

Inflation in general and food price inflation in particular has been a persistent problem in India over the past few years. Price stability is crucial for sustainable growth as persistent inflation implies higher demand relative to supply. Therefore, we analyse here demand and supply of food in India to understand the domestic policies needed to control food inflation.First, we estimate food demand in India by categories (cereals, vegetables, fruits, dairy products, meats, etc.) using the ARDL co-integration procedure using consumption data from the Food and Agricultural Organization (FAO) for 1967 onwards. We then project food demand in India until 2022 using our estimated relations. Our analysis shows that the structure of demand by food category is in the process of undergoing significant changes with rising income levels, and that the demand for fruits, vegetable, cooking oils, dairy products, and meat will increase by 60–75 per cent over the next 10 years, while demand for cereals will increase only 10 per cent, and that for pulses will decline slightly.We then consider supply side policies needed to ensure that this rising demand can be met and food inflation controlled. Concerted action will be needed to increase agricultural yields, given that cropped land will be hard to increase. These include improving irrigation facilities, better seeds and other technological measures to improve productivity, improved cold storage and transportation facilities to reduce waste (currently 30 per cent for perishable crops), reallocation of land from cereals and pulses to vegetables and fruits, etc. Thus, if good policies are followed, food inflation can be managed, possibly with limited imports when needed.