Lower agriculture input costs to contain food inflation

The government’s annual budget for fiscal year 2019 provides for support prices for agricultural produce to be increased to 50% mark-up over costs. That’s made the Reserve Bank of India and other market participants wary about the risks to food inflation. Bloomberg Economics’ agriculture input cost index shows that these concerns might be overdone.

• The latest value for the month of April shows that agriculture input cost inflation was a negative -0.25%, marginally higher than -0.71% in March. Click here for details on Bloomberg Economics agriculture input cost index.

• The average agriculture input cost inflation over the past year has been -1.4%. This has helped bring down food inflation. Food inflation that has a 46% weight in the CPI basket averaged 2.4% over the last year.

Low Agriculture Input Prices Keep Food Inflation Muted

India’s agricultural produce is divided into two main seasons -- the winter crop known as “rabi” and the summer one known as “kharif.”

• Among summer crops, procurement at government announced support prices is mainly restricted to rice and pulses. Last year, the average support price for pulses already had a 50%+ mark-up over cost. The support price for rice was 39% over cost. We estimate that a roughly 8% increase in the support price for rice this summer will raise the mark-up to 50% over cost.

• The support price for almost all winter crops already enjoys a greater than 50% mark up. For wheat -- an Indian staple and the key winter crop procured by government agencies -- support price is 112% over cost.

Barring rice, we expect the increase in support prices for all other crops to be muted. Additionally, a forecast for good rains this year suggests another year of a bumper harvest. That should put a downward pressure on the market price of crops. We expect good rains, lower agriculture input cost inflation and a muted increase in support prices for crops to keep average food inflation in the 2-3% range in the year ahead.

Disclaimer: Abhishek Gupta covers India for Bloomberg Economics in Mumbai. He previously worked as an economist at DSP Merrill Lynch and as a research analyst at the National Institute of Public Finance and Policy, India's premier macro/finance think tank. Views expressed are his own