Currently both the CPI and WPI food inflation are hovering at 4.8% and 3.8% (in May 2015) and are expected to remain below 6% (average) by December 2015.
According to PHD Research Bureau, research arm of PHD Chamber, the time series analysis of last 25 years (1990-2015) explains that among the various demand and supply side factors, it is the increasing income that explains the food inflation in India.
The analysis shows that monsoon behavior is not much correlated with rising or declining food inflation. The poor correlation between the two highlights that even in years of good monsoon, inflation can rise and vice versa.
On the other hand, the major food-grains producing states are not much dependent on monsoon behaviour as they have proper irrigation facilities.
The analysis shows that there is a high degree of correlation between per capita income and growth of food inflation with around 40% of the food inflation explained by rising income levels of people.
The association between food inflation and foodgrain production is weak which reiterates that even in years of lower production of foodgrains, the inflation can remain at low level.
However, it is the increase in per capita income that has caused a dietary shift in the consumption pattern of the households which is found to be a major contributor to higher food inflation in the economy.
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Rising per capita income during the last many years and diversification of diet towards high-value food products like milk, eggs, meat, fish, pulses, vegetables and fruits is one of the reasons for rising inflation.
The significant rise in demand for perishables, the supply has not picked up in the same pace; the rate of increase in the production of these perishables has been modest viz. around 5-6% against their demand which has risen exponentially.
Going ahead, the trend of build up in WPI and CPI Food Index suggests that inflation will remain subdued in the coming times. This can be attributed to the rural demand scenario been registered at low level in the recent times and substantial decline in international crude oil prices with oil prices declining from around $110 per barrel to around $60 per barrel.
Another reason of food inflation to remain subdued is the deceleration in the price of pulses during the recent months on expectations of good acreage vis-vis revival of monsoon.
Though the per capita income has been rising; its growth rate has declined in FY2015. All these factors taken together reiterate that inflation will remain subdued in the coming months.
Nonetheless, the issue of inefficient supply chain management in the agriculture sector needs to be taken care of so as to serve the food demand in the country. Poor infrastructure in terms of inadequate road, railway and port network is India's biggest supply chain challenge, said Mr. Alok B Shriram, President, PHD Chamber of Commerce and Industry.
Absence of sheltered warehouses and cold storage facility to store food grains and fruits & vegetables which leaves agricultural produce rotten and spoiled is another issue which needs to addressed at the earliest, he said
Further, lack of organized logistics leads to delay in transportation of food produces from farm gate to the end consumer; thus increasing the time taken for the produce to reach the general public which results in food wastage and price hike, said Mr. shriram
Government must address the problem of inefficient supply chain management in the agricultural sector and improve the cold storage and warehousing facilities. One of the ways to overcome these barriers is providing incentives to private sector to set up warehouses.
Further, there is a need to upscale public sector investments in agriculture infrastructure to improve the supply chain and timely delivery of food products to general public to avoid any sudden escalation in the prices of food items.
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