For a very long time, the Brent Crude oil price has been increasing internationally. Its direct effect can be seen in India as the fuel prices have escalated. Petrol prices have crossed Rs. 100 in many Indian cities. The Crude oil price might exceed $100 per barrel soon. It has already crossed $75 which is the highest in two years.
A year ago, Brent Crude oil price was just around $41 per barrel. The last highest price before this year was seen on 29th October 2018.
The global economy is heading towards improvement due to vaccinations which are increasing the demand for oil. The expected impact on crude oil price can exceed $100 per barrel. This can also lead to an increment in food prices but none can be observed in India currently.
Prices of food items like pulses, edible oil have increased but there is no remarkable rise in other food commodities prices. Globally, the prices of food items have risen compared to a year ago but the situation is different in India.
The UN Food and Agriculture Organization (FAO) released the World Food Price Index (FPI) which reached its highest value in 10 years after September 2011. The FPI in May was 127.1.
On the other hand, the Consumer Food Price Index in India was at 5% in May which is way lower than the FPI (39%) released by the UN. The values of FPI and CFPI were quite similar in the month of February followed by a huge jump.
When the pandemic was announced last year in March, the global food prices had fallen drastically but the retail food inflation in India hovered double digits till November.
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Why the big difference?
Internationally, the main reason for the spike in food prices is due to the sudden increase in demand with the unlocking of countries and economies.
Another reason is, China had started stockpiling huge amounts to build strategic reserves and to avoid future negative outcomes of COVID-19.
In some countries like Brazil, Argentina, Ukraine and the US, agricultural production had reduced due to dry weather
By contrast, India experienced a good monsoon in the last two years which could not hamper our agricultural production. Countries like Australia and Canada could also produce food without any weather-related issues.
After December 2020, as soon as the harvested Kharif crop entered the market, food prices decreased.
Why is domestic inflation low?
Domestic inflation is low due to two reasons:
- The generous monsoon did not affect production from the supply side.
- The COVID-19 pandemic had lowered demand in India comparatively. All food eateries were operating at limited capacity. Public functions took place rarely. The food market was only confined to households but many people lost their jobs leading to reduced food demand.
According to many Stock Advisory Company experts, all these reasons were collectively responsible for the absence of domestic inflation.
Can high prices be expected in the country anytime soon?
India’s food inflation will be dependent on four major factors:
- As seen already, international prices tend to affect the price of edible oil and pulses. The stakes of it affecting other food commodities are also high as a sudden decrease and the increase was observed after the Global Financial Crisis of 2007-2008.
- The country’s monsoon is another important determinant. India experienced 74% surplus rainfall in May. 18% above average precipitation is also recorded till now. A good monsoon will help promote farming. The third successful monsoon will contribute to avoiding food inflation.
- The third factor is an increment in fuel prices. If the prices keep increasing, food inflation can be expected. Transport of food commodities is dependent on fuel. With increasing demand, the amount will either be charged from customers or slashed from the farmers’ income. Since the livelihood of producers, transporters, etc. is also a matter of concern, their income cannot be hampered with.
- The last factor is the government’s involvement in the matter. During the government’s 2014-19 term, CFPI was only about 3.3% but currently, in the second term, the inflation is around 7.4%. The government had also increased the Minimum Support Prices (MSP) as a result of the protest against farm laws.
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