Weather Shocks and Global Supply Issues Push India’s Food Inflation to New Highs in Recent Years: Crisil Report

Food inflation in India has emerged as a persistent economic challenge, with rates escalating sharply for major crops during fiscals 2021 to 2024. The latest CRISIL Insight report sheds light on the multifaceted causes behind this alarming trend and underscores the need for robust, structural reforms to ensure long-term stability in food prices.

The average food inflation during fiscals 2021 to 2024 was double that of fiscals 2017 to 2020, coinciding with a slowdown in food production growth. Weather shocks, global supply disruptions, and rising domestic demand have collectively exacerbated the problem, placing immense pressure on consumers and policymakers alike.

Inflation Trends: A Broad-Based Problem
The contribution of food inflation to overall Consumer Price Index (CPI) inflation has risen significantly in recent years. From accounting for 27% of headline inflation in fiscal 2022, food inflation surged to contribute 55% in fiscal 2023 and a staggering 67% in the current fiscal year.

The rise in food prices has been broad-based, impacting various crop categories. Vegetable inflation, in particular, has reached record highs, with rates averaging 42.2% in October 2024. Over the past three fiscals, vegetable inflation has been marked by extreme volatility, including double-digit spikes in seven out of twelve months last year. Such trends not only strain household budgets but also hinder the Reserve Bank of India’s (RBI) ability to maintain inflation within its 4-6% tolerance band.

Key crops like wheat, pulses, and oilseeds have also seen slower production growth, further tightening supply chains. Even sugarcane and rice, which showed relatively better production figures, could not escape the ripple effects of higher global prices and changing domestic demand patterns.

Causes of Elevated Inflation
1. Domestic Production Challenges
India’s foodgrain production growth slowed to an average of 2.8% during the agricultural years (AY) 2021-2024, down from 4.3% in AY 2017-2020. Horticulture production fared slightly better but still recorded slower growth compared to the previous decade.

The decline in production growth is largely attributed to reduced crop yields, which have been negatively impacted by climate change. For instance, wheat yields have suffered from recurring heatwaves, with reports of a 15-25% decline during the critical harvest period in 2022. Pulses and vegetables, particularly vulnerable due to limited irrigation coverage, have also faced setbacks.

2. Global Supply Disruptions
The global food price index rose by 9.5% between fiscals 2021 and 2024, compared to a modest 0.7% increase during fiscals 2017 to 2020. The Russia-Ukraine conflict, adverse weather events, and logistical challenges, such as shipping delays, have disrupted global food supply chains.

Key commodities like grains, edible oils, and sugar have seen sharp price increases. For example, global edible oil prices surged due to labor shortages and weather-related disruptions in Southeast Asia. These international trends have placed upward pressure on domestic prices, particularly for widely traded crops like rice, maize, and oilseeds.

3. Demand-Supply Gaps
Rising domestic demand, driven by population growth and changing consumption patterns, has exacerbated supply-side weaknesses. Demand for ethanol production, which relies heavily on sugarcane, rice, and maize, has also contributed to tighter supply conditions. While government policies have incentivised increased acreage for these crops, production growth has not been sufficient to offset rising demand.

The Role of Climate Change
Climate change has emerged as a critical factor behind India’s agricultural challenges. Erratic monsoon patterns, rising temperatures, and extreme weather events have disrupted crop yields and production cycles. For instance, the monsoon season in 2023 saw significant variability, with a large deficit in August followed by excess rainfall in September. Such fluctuations not only reduce yields but also affect the quality of harvests.

The vulnerability of certain crops to climate change is particularly concerning. Pulses, with only 5% of cultivated area under irrigation, are highly susceptible to rainfall variability. In contrast, sugarcane, with nearly 99% irrigation coverage, has fared better. However, the increasing frequency of extreme weather events poses risks across all crop categories, highlighting the urgent need for climate-resilient agricultural practices.

Policy Interventions: Short-Term Measures and Long-Term Needs
The Indian government has implemented various fiscal measures to manage short-term fluctuations in food prices. These include releasing food stocks through open market sales, restricting exports, and imposing stock limits to curb hoarding. Schemes like the Pradhan Mantri Garib Kalyan Anna Yojana have also played a crucial role in ensuring food security during periods of high inflation.

While these interventions have provided temporary relief, CRISIL emphasises the need for long-term structural reforms to address the root causes of food inflation.

1. Boosting Productivity Through Climate-Resilient Crops
The adoption of high-yielding, climate-resilient seed varieties is critical to sustaining agricultural production amid changing weather patterns. The government has taken initial steps in this direction, such as releasing 109 seed varieties of climate-resilient crops. However, large-scale promotion and adoption of these seeds are essential to make a meaningful impact.

2. Optimising Resource Use
Overuse of water and fertilizers remains a significant concern, with long-term implications for soil health and sustainability. Training farmers in the optimal use of resources can help mitigate these risks.

3. Improving Forecasting and Risk Management
Providing farmers with accessible and accurate forecasts of extreme weather events can enable better planning and risk mitigation. Additionally, strengthening crop insurance schemes can protect farmers from the financial impact of weather-related disruptions.

4. Strengthening Infrastructure
Investing in logistics and transportation infrastructure is vital to reduce post-harvest losses. Initiatives like the Agriculture Infrastructure Fund and the PM Kisan Sampada Yojana need to be expanded to build robust supply chains and minimise wastage.

Lessons from Ethanol Production
The report highlights the success of India’s ethanol production policy as an example of how targeted interventions can drive agricultural growth. The government’s push for ethanol blending has increased demand for sugarcane, rice, and maize, incentivising farmers to expand acreage.

However, the growing demand for ethanol poses new challenges. Meeting the 20% blending target by 2025 will require significant increases in production, potentially leading to further strain on land and water resources. Balancing ethanol production with food security will require careful planning and innovative solutions.

India’s agriculture sector faces unique challenges that demand a comprehensive and multi-pronged approach. As CRISIL notes, achieving sustained food inflation rates below 3% - a critical target for maintaining overall CPI inflation at 4% - requires transformative changes in agricultural practices and policies.

Key Recommendations:

• Enhancing Private Sector Participation: Encouraging private investment in agriculture can drive innovation and efficiency.
• Reducing Price Distortions: Establishing efficient price discovery mechanisms can ensure fair remuneration for farmers while stabilizing consumer prices.
• Building Resilience to Climate Change: Investing in research and development for climate-resilient crops, irrigation systems, and sustainable farming practices is essential.
• Encouraging Diversification: Promoting crop diversification can reduce dependence on a few staples and enhance overall agricultural resilience.
• The challenges posed by rising food inflation, climate change, and global supply disruptions are daunting. However, with the right mix of fiscal policies, structural reforms, and technological interventions, India can pave the way for a more stable and sustainable agricultural ecosystem.

The report says that by addressing both domestic inefficiencies and global challenges, India has the opportunity to not only tame food inflation but also ensure long-term food security and economic stability.