The pressure on food prices is likely to increase as economic growth finds durable traction once again

RBI Working Paper titled "Analytics of Food Inflation in India"

Food inflation in India has remained stubborn in recent years. Various factors, such as, increasing demand - particularly that arising from higher rural wages, rising agricultural cost of production, changing consumption pattern favouring protein items, increase in minimum support prices (MSPs) and droughts in certain years are believed to have led to higher food inflation, stated the new Working Paper titled Analytics of Food Inflation in India under the Reserve Bank of India Working Paper Series.

In this backdrop, the study attempts to elicit the statistical significance of these factors in determining food inflation. The authors use standard co-integration and error correction methodology based on Johansen's multivariate co-integration framework for this purpose.

The empirical evidence shows that increasing real rural wages have played the most dominant role in determination of overall food inflation in India in the long-run. Though statistically significant, the long-run impact of hikes in MSP of food crops, namely, rice and wheat and input cost inflation (except wages) on food inflation were not as over-bearing as was generally perceived. Similarly, the long-run impact of protein expenditure on food inflation, though significant statistically, was found to be weak. In the short-run, the impact on food inflation stems from the same factors that are important in the long-run, namely, increases in rural real wages, MSP and input price pressures. Empirical results also indicate that the introduction of Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGA) does not seem to have caused any significant increase in food inflation as is generally perceived.

The paper, written by Thangzason Sonna, Dr. Himanshu Joshi, Alice Sebastian and Upasana Sharma, concludes that the persistence of food inflation in recent years can largely be ascribed to higher wages, particularly, in the rural sector pushed further by hikes in MSP of rice and wheat and input cost inflation. These very factors also explained the movement of food price in the short-run. The long-term impact of protein expenditure, though large in magnitude, was found to be weakly significant. The vagaries of monsoon have contributed to food price pressures occasionally, but they may not have long-term impact on food prices. Empirical results indicate that the introduction of MGNREGA does not seem to have caused any significant increase in food inflation as generally perceived.

The pressure on food prices is likely to increase as economic growth finds durable traction once again. It is therefore necessary to turn agriculture growth into a 'mission mode' so as to increase productivity through enhanced investments and improved technology. Needless to state, reducing the supply-demand gap in agriculture production in the long-run and improving supply logistics will be of utmost importance for assuaging food price pressures and for sustaining the pace of economic activity by securing adequate food availability at reasonable prices.

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