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It should be noted that food price inflation has been a long-drawn-out problem globally. The ongoing war in Europe has intensified the matter. According to the Food and Agricultural Organization (FAO) of the United Nations, prices of many items had reached their all-time high points even before the start of the ongoing Russia- Ukraine war. This was mainly due to market conditions and the high prices of energy, fertilizers and other agricultural services.

 The FAO food price index reached its all-time high in the last two quarters of the last FY. In India during the same period, that is, between September 2021 and April 2022, consumer food price inflation rose from 0.68% to 8.38% year-on- year. A research study pointed out (Indian Express, 23 May) that the present food price inflation reminds of the same situation that prevailed in India during the mid-2000s and around 2012-13.

But one should also notice the dissimilarity between the two situations. The earlier case was a structural one driven by rising income of the people where inflation was observed in protein items (meat, fish, milk, egg, pulses, etc.) and micronutrients (fruits and vegetables, etc). But the present case involves the rising prices of calorie items due to supply bottlenecks of cereals and sugar.

Problem with wheat in India and some other countries

The Indian government has banned wheat exports. The immediate cause of taking this decision has been the lower-than-expected production of wheat which has been compounded by the soaring inflation due to Russia-Ukraine hostility. There has been a fear of a six-year low production of wheat this year. This is lowest since 2016 - when wheat production was 92.29 million tonnes (MT).

The war has disrupted global food supply. The Food Corporation of India (FCI) has lowered the procurement of wheat for buffer stocks this year. At the same time, retail inflation has peaked at 7.79% and wheat prices rose both in domestic and international markets.

As a result, wheat prices in the retail market in India rose to `29.70/kg as of May 12. This was `28.10/kg three months ago. In the APMC yards of the wheat growing states, prices were over `2,100/ quintal. That is, wheat prices were above this year’s MSP price of `2,015/quintal. The sellers preferred to sell wheat at the market and not to the FCI. It is also reported that the FCI procured only 17.9 MT as of April 1. This was about 50% lower than that of a year ago. It is also reported (Business Line May 15) that the central government has targeted to procure 44 MT this year. But Sudhanshu Pandey, Secretary, Department of Food, had told reporters that it could procure only 19.5 MT. Farmers have also opposed the ban of wheat exports.  

Many analysts think that the government had nothing to do in the situation when even the US Department of Agriculture reported a shortage of wheat, maize and soybeans. So, food availability may be disrupted in the world market.

Food supply-demand mismatch is the main reason for high inflation

There have been a lot of studies regarding why the price inflation of India is a concern. A prominent view is that demand-supply mismatch is the main trigger behind this. At present, the common people think that rising petroleum prices is the main reason for high price inflation. But petroleum products have an inflation weightage of around 7% and are substantially lower than the weightage of food and beverages. That means if prices of petroleum increase by say 10%, its impact will be about one-seventh of that of a 10% increase in prices of food items. So, inflation in India may be thought of as a structural problem related to food availability in the country.   

Conclusion

The problem of wheat supply has been an example in the present situation. But to control inflation, the agriculture economy and rural economy should be strengthened. But this may not be all. At times, inflation may be due to problems created in the international economy. This is called inflation due to imported factors. But if the income of the common people is at a better level, it is easy to control the impact of inflation.