Improved outlook: Higher food grain output will help in managing inflation

After persistently remaining elevated for a prolonged period, pressures of food inflation in India have eased significantly on account of increased agricultural output. The data released on Wednesday showed that the consumer price index-based inflation rate declined to 3.61 per cent in February, the lowest since July last year. Meanwhile, the food inflation rate softened to 3.75 per cent, the lowest since May 2023. The food inflation rate has been softening since October last year, when it rose sharply to 10.87 per cent. A higher food inflation rate was driving the headline inflation rate for quite some time, creating policy complications for the Reserve Bank of India (RBI). The rate will likely remain moderate for some time. The recently released second advance estimates of production of major crops for 2024-25 present an optimistic outlook. Food grain production in the kharif season is estimated to have increased by 7.9 per cent relative to the previous year, while estimated rabi production is set to increase by 6 per cent. Record production has been estimated for rice, wheat, and maize. Other food crops have also registered an increase in output. These include millet, tur, and gram.

 

Growth in oilseeds production is estimated at nearly 21 per cent and 2 per cent in the kharif and rabi season, respectively. India is also the world’s second-largest producer of fruit and vegetables. The production of horticultural crops is expected at around 362.09 million tonnes in 2024-25, according to the first advance estimates. That is about 2.07 per cent higher than in 2023-24. Record high production could be achieved on the back of a favourable monsoon last year, followed by normal winter conditions. In fact, the second advance estimates of gross domestic product, released by the National Statistics Office, project growth in agriculture and allied activities to 4.6 per cent in 2024-25, as against 2.7 per cent in the previous year.

 

Higher agricultural output naturally bodes well for food prices. The RBI projects the retail inflation rate to average 4.2 per cent in 2025-26, down from 4.8 per cent this financial year. In 2024, the average food inflation rate stood at 8.4 per cent while the average retail inflation rate was 5.3 per cent. Higher food inflation kept the headline rate above the central bank’s target and affected households’ ability to spend on discretionary items, dampening consumption. Of the monthly per capita consumption expenditure, the proportion spent on food items was 47.04 per cent in rural areas and 39.7 per cent in urban areas in 2023-24. Low-income households spend an even larger share of their monthly income on food. Thus, an improvement in agricultural output will push overall growth through higher output and increased demand.

 

While a steep correction in food prices and a subdued core inflation rate open up the possibility of policy-rate cuts, declining inflation rates and improved agricultural production should not distract policymakers from long-term challenges plaguing the agricultural sector. Extreme weather events and climate change can further exacerbate problems. High price dispersion between what farmers receive and what consumers pay, crop spoilage due to inadequate storage and warehousing infrastructure, distance between farms and wholesale markets or mandis, and poor road infrastructure are some of the bottlenecks that need to be addressed. India needs sustained efforts to build agricultural supply chains. This will help contain long-term volatility in food prices.