[Burning Issue] Russian conflict and the impact on food, farming

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Russia’s invasion of Ukraine has put global commodity markets in a tizzy. It is now threatening to push up farming costs and send food prices soaring. Food inflation in India may thus soon enter doubledigit territory. Let’s takes a look at the impact and other aspects of the issue.

Household budget hit

If the conflict in Ukraine worsens, India could end up exporting more wheat, thereby pushing retail prices higher.

Back to basics: How is inflation measured?

  1. In India, inflation is primarily measured by two main indices — WPI and CPI, which measure wholesale and retail-level price changes, respectively.
  2. The CPI calculates the difference in the price of commodities and services such as food, medical care, education, electronics etc. which Indian consumers buy for use.
  3. On the other hand, the goods or services sold by businesses to smaller businesses for selling further is captured by the WPI.
  4. In India, both WPI and CPI are used to measure inflation.

Current Trend of Inflation in India

  • The average headline Consumer Price Index-Combined (CPI-C) inflation in India moderated to 5.2 per cent in 2021-22 (April-December) from 6.6 per cent in the period of 2020-21.
  • The CPI inflation remained range bound as food prices eased considerably due to the supply management response by the Government.

(1) Food Inflation

  • Food inflation remained benign this span.
  • While seasonality plays a significant role in the case of vegetables, random shocks like untimely rains also have an impact on their availability and prices.
  • Proactive measures were taken to contain the price rise in pulses and edible oils that reported high inflation reflecting the impact of imported inflation in these commodities.
  • Reduction in central excise and subsequent cuts in VAT by most States has also helped ease petrol and diesel prices.

(2) Wholesale Inflation

  • Wholesale inflation based on Wholesale Price Index (WPI), after remaining very benign during the previous financial year on account of pandemic induced weakening of economic activity.
  • This was attributable to the pick-up in economic activity, sharp increase in international prices of crude oil and other imported inputs, and high freight costs.

Issues: Divergence if figures

  • The consequent divergence between CPI-C and WPI inflation during the year remained a subject of debate.
  • This divergence can be explained by factors such as variations due to base effect, difference in scope and coverage of the two indices, their price collections, items covered and difference in commodity weights.
  • Further, WPI is more sensitive to cost-push inflation led by imported inputs.
  • With the gradual waning of base effect in WPI, the divergence in CPI-C inflation and WPI inflation is also expected to narrow down.

Global Inflation

  • In 2021, inflation picked up globally as economic activity revived with opening-up of economies.
  • The surge in energy, food, non-food commodities, and input prices, supply constraints, disruption of global supply chains, and rising freight costs across the globe stoked global inflation during the year.
  • Crude oil prices also witnessed an upswing due to increased demand from recovering economies and supply cuts by the Organization of the Petroleum Exporting Countries and its allies (OPEC+).

A global comparison

  • Advanced Economies include 40 economies and Emerging Markets and Developing Economies (EMDEs) include 156 economies as per IMF classification.
  • In comparison to many EMDEs and advanced economies, consumer price inflation in India remained normal range bound in the recent months.
  • As against this, inflation in USA touched 7.0 per cent in December 2021, the highest since 1982, driven largely by second hand vehicles and energy.
  • While in the UK it hit a nearly 30 years high of 5.4 per cent in December 2021 mainly on account of rising food prices.

What is the Conflict?

  • Contestation about post-Cold War central European territoriality and resurrecting a burnished Russian past is at the core of the Ukraine crisis.
  • Ukraine and Russia share hundreds of years of cultural, linguistic and familial links.
  • For many in Russia and in the ethnically Russian parts of Ukraine, the shared heritage of the countries is an emotional issue that has been exploited for electoral and military purposes.
  • As part of the Soviet Union, Ukraine was the second-most powerful Soviet republic after Russia, and was crucial strategically, economically and culturally.
  • The balance of power in the region, Ukraine being a crucial buffer between Russia and the West, Ukraine’s bid for NATO membership and Russian interests in the Black Sea accompanied by the protests in the Ukraine are the major causes of the ongoing conflict.

How will the Russia-Ukraine conflict impact India?

  • The war in the Black Sea region, which is both a production and trade hub, has pushed prices of crude oil, wheat, corn, cooking oil, and fertilizers to new highs.
  • Recently, crude prices touched a high of $139 per barrel, the highest since 2008.
  • Global wheat prices have shot up 91% year-on-year (y-o-y), while corn prices rose by 33% y-o-y.
  • As India is acutely dependent on imports of edible oil and fertilizers, consumers may see prices of these soaring to painful levels.
  • Besides, an impending shortage of fertilizers in the country ahead of the Kharif planting season can lead to unrest in rural areas.

Can government grain stocks shield consumers?

  • As on mid-February, the central stock of grains comprising rice and wheat was a staggering 54 million tonnes (mt), a surplus of more than 30 mt.
  • It is more than what is required for the country’s public distribution system (PDS).
  • With a record harvest of wheat set to hit the markets later this month, the government can liquidate its wheat stocks to keep prices in check.
  • However, if global prices rise further and the conflict in Ukraine worsens, India could end up exporting more wheat, thereby pushing retail prices higher.
  • Together with higher edible oil and fuel prices, food inflation could touch double-digit highs.

How will the price rise affect the farming community?

  • Farmers can now expect prices at a premium to the minimum support prices (MSPs) announced by the government.
  • Wholesale wheat prices are now higher than the MSP, while mustard prices, at ₹7,000 per quintal, are already 40% higher than the MSP and may cross the ₹10,000 mark.
  • However, steep prices of inputs will add to the cost.

What is the impact of high crude prices?

  • Historic data show a close correlation between a rise in crude oil and food prices.
  • Crude prices impact food prices more than even food production. Crude prices are hovering in the $120-130 per barrel range.
  • Even if this were to cool down to the $100-110 level, it would impact fertilizer prices and shipping costs significantly.
  • High crude prices also lead to diversion of food crops to produce biofuels, thus pushing up crop prices.
  • India has not raised fuel prices since November and a significant hike is expected soon.

What measures can the government take?

  • Other than liquidating its public stock of grain, the government can restrict exports to keep cereal price inflation in check.
  • As for edible oil, import duties have already been reduced significantly.
  • Retail food inflation, which rose to a 13-month high of 5.4% in January, is likely to rise further.
  • To ensure that the hunger situation does not get worse, it can expand PDS and enrol many more households.
  • On the fertilizer front, the government may have to secure supplies from Canada, Israel, and China.

The overall impact of the Conflict?

  • The Russia-Ukraine crisis will send cooking gas, petrol and other fuel bills soaring for Indian households and businesses. Higher oil prices add to freight/transportation costs.
  • Depending on how long global oil prices remain elevated, the tensions could raise questions on the RBI’s credibility in making inflation projections and upset the government’s budget calculations, particularly fiscal deficit.
  • The surge in crude oil prices will lead to an increase in India’s oil import bills, and gold imports could jump back up, keeping the rupee under pressure.
  • India’s imports of petroleum products from Russia are only a fraction of its total oil import bill and, thus, replaceable.
  • However, getting alternative sources for fertilisers and sunflower oil may not be as easy.
  • Exports to Russia account for less than 1% of India’s total exports, but exports of pharmaceuticals and tea could face some challenges, as will shipments to CIS countries. 
  • Freight rate hikes could make overall exports less competitive, too.

Way Forward

  • It is important to reform the grain-management-cum-food-subsidy system to release precious resources for growth of agriculture.
  • This should be combined with taking giant strides to raise productivity and producing more nutritious food while protecting the environment.
  • The paradox of Indian policy making can be judged by looking at the Union budget for the 2022-23 which provides more than Rs 2 lakh crore for food subsidy while agri-research and development gets a paltry Rs 8,500 crore.
    • It is well-known that agri-R&D gives a much higher return in terms of promoting growth with competitiveness, and reduces poverty by making food cheaper and controlling food inflation.
    • Hence India should focus more on agri-research and development.
  • On the fiscal side, the Government, which has been conservative in its revenue assumptions in the Budget, has the room to pre-emptively cut domestic fuel taxes to nip inflationary expectations, stoke faltering consumption levels and sustain India’s fragile post-Covid-19 recovery through this global churn.
  • Buffer stock of pulses have been used to tackle price volatility of these commodities. Pulses from the buffer were used very effectively during the COVID-19 pandemic for supplying @ 1 kg per household per month free of cost to approx.

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