No water to sow, no respite at the grocery store: India's prolonged food inflation worry

Amarsingh Gushinge, an Indian farmer, aspires to plant wheat and chickpeas soon, but water scarcity due to below-average monsoon rains hinders his plans. Across southern and western India, millions of farmers confront similar water shortages as they prepare for winter crops. Gushinge, 78, lamented the lack of moisture in the soil, coupled with depleted finances, at Rajewadi village, roughly 250 miles east of Mumbai.

The Jalna district, encompassing his village, experienced approximately 48% less rainfall than average this year, according to the local weather office. A weak monsoon situation forces farmers to contend with less favorable conditions, heightening the risks of stunted growth and diminished yields.

The repercussions of lower crop yields may exacerbate food inflation, with prices of staples like sugar, pulses, wheat, and rice already surging amidst a severe El Nino event. Onions, ubiquitous in Indian households and commonly used in curries, alongside milk and poultry products, are also experiencing price increases. A rise in staple food prices can irk millions of Indians, as previous price hikes of onions have unseated state governments in elections.

Higher food prices could further diminish discretionary consumption across the economy, with the weakest monsoon rains in over a decade already dampening rural demand and impacting sales of tractors and farm equipment.

Devendra Pant, chief economist at India Ratings and Research, anticipates food inflation to reach around 10% in the October-December quarter, attributing the surge to weak rains, higher global prices, and a weakened currency. In September, annual retail food inflation surged to 7.74%, pushing headline inflation to 5.54%, nearing the Reserve Bank of India's upper tolerance limit of 6%.

Higher food prices are likely to prompt the central bank to raise interest rates further by 50-75 basis points, as a second consecutive rate hike at the December meeting remains a possibility, according to Pant. He expects the central bank to maintain this trajectory for a second consecutive time, following the first hike in October.

Protein prices have been a major catalyst for food inflation and may prove challenging to curb. Meat inflation eased slightly in September to 8.7% from 12.0% in August, largely attributable to a high base, while milk, other dairy products, and egg prices rose to 5.1% from 4.8%. Animal feed, primarily corn and soybean, constitutes 60%-70% of poultry production costs, says Uday Singh Bayas, president of poultry equipment manufacturers' body IPEMA-Poultry India.

Poultry producers have yet to fully pass on higher feed costs, and broiler prices may climb in January as higher costs and restricted supplies intensify market pressure. Pulses, poultry, and dairy are crucial protein sources in India, and sustained protein inflation could adversely affect low-income households, compelling them to modify their diets and potentially impacting long-term health, warns Madan Sabnavis, chief economist at Bank of Baroda.

India is projected to fall short of domestic sugar production for the second consecutive year and may not regain last year's levels until late 2028 if rains are favorable in 2027, according to Rahil Shaikh, managing director of Mumbai-based trader MEIR Commodities India. Sugar prices have risen by nearly 30% over the past year, prompting the government to permit duty-free imports of 1 million metric tons to mitigate a shortfall, with consumption surpassing 29 million tons this year against a production of less than 27.5 million tons.

However, global prices remain higher than domestic rates, limiting the impact of imports and making it improbable to revert to previous price levels, Shaikh explains.

While India possesses surplus stocks of rice and wheat, prices persistently rise as supplies of premium-quality grain favored by consumers remain limited. Preferences differ across regions, and the dry weather has reduced supplies of rice varieties popular in southern India, driving up prices. Wheat, India's primary winter crop, has ascended to a near two-year high due to El Nino-induced concerns of warmer winter conditions and potential production curtailment early next year.

Food inflation hinges partly on the outcome of the winter crop season, with limited soil moisture and the possibility of warmer temperatures further restricting supplies. Amidst elevated crude oil prices, the intertwined challenges of higher food inflation and an uncertain outlook for the kharif (winter) crop will be the primary focus for policymakers in the latter half of the financial year, the government stated in its monthly economic report for October.