Analytics of food inflation in India

Food inflation in India has remained stubborn in recent years. A number of proximate factors such as increasing demand particularly arising from higher rural wages, rising agricultural cost of production, changing consumption pattern favoring protein items, increases in minimum support prices (MSPs) and droughts in certain years are believed to have led to higher food inflation. This paper examines the relevance of these factors and finds that increasing real rural wages have played the most dominant role in the 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 were 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 viz., increases in rural real wages, MSP and input price pressures. Empirical results indicate that the introduction of MGNREGA does not seem to have caused any significant increase in food inflation as generally perceived. Since the increase in real wages have the largest influence in driving food inflation, it bears to reason that there is a need to raise agricultural productivity in line with the increase in real wages to assuage food price pressures.

Related Content