To taste the effects of inflation in India, one only needs to visit a fast-food restaurant. Subway sandwiches no longer come with a free cheese slice, and burgers at McDonald’s and Burger King are tomato-free. Restaurants across the country are cutting costs due to soaring food prices. The price of tomatoes, a staple in Indian cuisine, has surged by 1,400% over the past three months, while vegetable prices have seen a 37% year-on-year increase. In July, the annual food inflation rate reached 11.5%, the highest in over three years, contributing to an overall inflation rate of 7.4%, the highest in 15 months.
The primary driver of the surge in food prices is erratic weather. Heavy rains have submerged farmland and disrupted supply chains, while heat has withered crops. By the end of July, farmers in India had sown 40% less than in a typical year at that time. The situation is further exacerbated by an exceptionally dry August, with rainfall expected to be the lowest in over a century.
The Reserve Bank of India has maintained its interest rates for the third consecutive meeting since April, believing the rise in food costs to be temporary. Governor Shaktikanta Das expects prices to start falling from September. However, some economists disagree, suggesting that the current rise may last longer than usual. The government, on the other hand, has taken a more proactive approach. It imposed a 40% tax on onion exports on August 19th to increase domestic supply and decrease prices. This move followed a ban on rice exports and the removal of import restrictions on tomatoes from Nepal. Additionally, the food ministry plans to release grain stocks into the market to control prices. Subsidised tomatoes and onions will also be provided to low-income households. The government is expected to spend a total of 1 trillion rupees ($12 billion) on these measures to rein in food prices.
The proactive measures can be understood in the context of upcoming state elections and a general election next year. The ruling Bharatiya Janata Party is aware that expensive food prices are not favorable for voter support. A recent national survey showed a decline in perceptions of the central government’s performance, partly due to inflation. The percentage of people rating the government’s performance positively decreased from 67% in January to 59%. As a result, the government aims to maintain political support by controlling the cost of living.
While India’s policy responses may help contain the cost of living domestically, they can have unintended consequences elsewhere. The restriction on rice exports, for example, has caused global rice prices to rise. This increase in food prices will impact the billions of people living in countries that are net importers of food, which account for approximately 80% of the world’s population. However, with climate change, similar policies to India’s are likely to become more common across the globe.
