Understanding India's Food Inflation: The Role of Demand and Supply Factors

Abstract

Over the past decade, India has seen a prolonged period of high inflation, to a large extent driven by persistently-high food inflation. This paper investigates the demand and supply factors behind the contribution of relative food inflation to headline CPI inflation. It concludes that in the absence of a stronger food supply growth response, food inflation may exceed non-food inflation by 2 1/2-3 percentage points per year. The sustainability of along-term inflation target of 4 percent under India's recently-adopted flexible inflation targeting framework will depend on enhancing food supply, agricultural market-based pricing, and reducing price distortions. A well-designed cereal buffer stock liquidation policy could also help mitigate food inflation volatility.

Keywords: food inflation, cereal buffer stocks, food, cereals, rice, wheat, food supply, Forecasting and Simulation, Monetary Policy (Targets, Instruments, and Effects), Fiscal and Monetary Policy in Development

JEL Classification: E37, E52, E58, O23, Q18, E64