Higher food inflation gives many States a stomach ache

A benign headline CPI inflation may have given the Reserve Bank of India the much-needed comfort and confidence to go ahead with its fifth consecutive cut in the benchmark rate, but the numbers from some of the States indicate that all is not well.

Kerala, for instance, has reported an average inflation of 5.19 per cent for the period January to August this year, against the national average of 2.87 per cent. The figures for States such as Karnataka (5.14 per cent), Assam (5.13 per cent), Uttrakhand (4.04 per cent) and Tamil Nadu (3.77 per cent) were also well above the national average.

This disparity is mainly due to food inflation that has been slowly increasing since the beginning of the year across these States, led by significant rise in prices of pulses, vegetables and cereals. Also, above-normal rainfall, resulting in severe floods in States, including Uttar Pradesh and Karnataka, resulted in crop damages, spiking inflation.

Joseph Thomas, Head of Research, Emkay Wealth Management, says: “The rise in food prices generally results from factors like fall in the supply of fruits and vegetables. Uneven rain patterns, excessive rain in some areas and lack of sufficient rain in some others affect the supply of such products and impact prices.”

On the other hand, core inflation on clothing, housing, health, transport and education are under check mainly due to weak domestic demand.

Food inflation, the culprit

The food component with the highest weight of 45.86 in the CPI basket is mainly responsible for higher inflation in many States. Inflation in Karnataka, Uttar Pradesh, Tamil Nadu and Rajasthan that contributes around 30 per cent to the country’s inflation, was mainly led by food price increase.

Inflation in pulses in Karnataka was negative up to January 2019, but moved into the positive zone from January 2019, lifting the food inflation. Vegetable inflation, too, followed a similar trend, turning positive from this February.

The average CPI food inflation in Karnataka was 3.88 per cent between January and August 2019 compared to the national average food inflation of 1.3 per cent.

Uttar Pradesh, a State with one of the highest weight of 12.37, also witnessed a similar trend. The average overall inflation in the State was at 3.28 per cent between January and August this year, higher than the national average by 0.41 percentage points. The rise in the prices of key components of food, including pulses, cereals and milk and milk products, led to the increase.

Tamil Nadu (average food inflation 2.88 per cent) and Rajasthan (average food inflation 2.7 per cent) have also witnessed higher food inflation this year.

Says Vipula Sharma, Director — Ratings, Brickwork Ratings: “The rainfall in Karnataka, Maharashtra and Uttar Pradesh could have had an impact on the food inflation. Rajasthan, too, received excess rains this year.”

Low-inflation States

The average inflation between January and August 2019 in West Bengal (2.23 per cent), Gujarat (2.35 per cent), Bihar (0.86 per cent) and Andhra Pradesh (0.60 per cent) were, however, lower than the national average inflation rate (2.87 per cent). These States contribute to over 20 per cent of the country’s inflation.

In West Bengal, prices of other components of food inflation such as cereals, milk and milk products and vegetables are down, which may have moderated the overall inflation.

Similarly, in Bihar, prices of cereals and products have been declining since November 2018 along with that of vegetables since January last year.

“The regional peculiarities in supply-related factors may account for disparities in the price level between States,” says Joseph.

Jammu and Kashmir witnessed deflation in food prices at (-) 0.32 per cent this year. This could be due to political upheavals disrupting movement of food articles from the producing areas to consumption areas, leading to excess supply in many regions.