Is India Exporting Food Inflation to the World?

tendata blogTrade Trends News

ten data blog31-08-2023

india agricultral trade,india export,india food price

India is a major player in the global agricultural trade, and erratic weather conditions - including the driest August in more than a century - have caused Indian food prices to soar by more than 11 percent.

Just as tomato prices have begun to cool, onion prices in the domestic market have risen by a quarter since June. Pulses used to make the humble lentil soup are now about 20 percent more expensive than they were at the start of the year.

Some economists say India has a "curry problem", with the price of a regular vegetarian meal rising by a third in July alone.

With elections in a number of key states this year and general elections coming up next summer, the Indian government has moved to curb food inflation with a series of measures.

Following a ban on wheat imposed in May 2022, India last month announced an abrupt halt to non-basmati white rice exports. More recently, the finance ministry imposed a 40% tariff on onions to curb exports and improve domestic supply.

Rajni Sinha, chief economist at CareEdge Group, said that "the possibility of a ban on sugar exports has also increased" as sugar production is expected to fall this year.

Analysts say the government may take further steps to step up its response. For example, global brokerage Nomura Securities said in a recent report that "the government may seek a more comprehensive ban" as successive export restrictions on rice have yet to reduce domestic rice price inflation.

So is India, which aggressively defends domestic prices, at risk of exporting food inflation to the world?

The International Food Policy Research Institute (IFPRI) thinks it does, especially for rice, sugar and onions. Over the past decade, India has become the world's largest exporter of rice (with a 40% market share) and the second largest exporter of sugar and onions.

The Food and Agriculture Organization of the United Nations (FAO) rice price index rose 2.8 percent in July to its highest level since September 2011, mainly due to higher prices for indica varieties, which India bans from export. This amplified "upward pressure" on rice prices elsewhere, FAO said.

Joseph W Glauber, a senior researcher at IFPRI, told the BBC, "Thai rice prices have risen by 20% since the ban was announced late last month."

Food insecurity is worsening in the 18 "hunger hotspots" identified by the FAO and the UN World Food Program, and the impact, especially on the world's poor, could be devastating.

Rice is part of the staple diet and accounts for a significant portion of the calorie consumption of millions of people in Asia and Africa. India is a major supplier to these markets.

According to IFPRI, 42 countries in Asia and sub-Saharan Africa derive 50% of their total imports from India, up to 80% in some cases, and its share "cannot be easily replaced by imports from other large exporters, such as Vietnam, Thailand or Pakistan".

Higher global food prices could also have other impacts on these countries, such as high food import bills, leading to the use of valuable foreign exchange, "thereby exacerbating balance-of-payments problems and fueling inflation," said senior economist Upali Galketi.

But the rise in global food prices cannot be blamed entirely on India's behavior. The termination of the Black Sea food program after Russia's invasion of Ukraine and extreme weather conditions around the world are other major factors.

However, Mr. Galketi told the BBC that the combination of these market dynamics "reversed the downward trend in international food prices observed since the middle of last year."

Global food prices remain at historically high levels despite the economic slowdown in many parts of the world, including China. This has put pressure on international food prices due to weak demand in these regions.

The World Bank expects the food price index to be lower on average in 2023 than in 2022, driven by lower oil and grain prices. However, analysts say that future price trends will depend on the impact of the El Niño weather phenomenon, which could have far-reaching effects and put further pressure on food markets.

Amidst the uncertainty, various parties, including the International Monetary Fund, have called on India to lift the export ban on key commodities.

In addition to contributing to global food inflation, "the export ban has other negative externalities, such as weakening India's reputation as a reliable supplier and preventing farmers from benefiting from high global prices," analysts at Nomura Securities said.

"Trade restrictions can also exacerbate boom-bust cycles in prices. For example, rising inflation in pulses in 2015-16 led India to sharply increase imports, but a normal monsoon and strong domestic production in subsequent years led to oversupply and prices fell into deflation. "

Others, such as Mr. Glauber, have warned that "if the benefits of supplier diversification outweigh price considerations, importers may choose to look for other, more reliable partners."

But the FAO said the most significant threat came from the possibility of more countries adopting export restrictions, which would "undermine trust in the global trading system".

However, some say that in India, realpolitik and a determination to increase food self-sufficiency will outweigh other considerations, especially in politically sensitive times.

In the past, high prices for crops such as onions have led to electoral defeats in India, coupled with an already shaky consumer recovery. Rising food prices, which account for a significant portion of the average Indian's spending, could erode discretionary income and further undermine the economic recovery ahead of the upcoming festive season.

The RBI, which has already hiked interest rates six times, can do nothing to control food inflation given that it is a supply-side issue.

As a result, the government has little ammunition left, other than imposing trade restrictions.

"All countries are now focused on controlling inflation in their economies. I would say India has to look after its own interests as well before it starts worrying about global inflation," Ms. Sinha said.

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