Extreme weather, lower reservoir levels and crop damage have affected farm output and led to higher food prices over the past two years, the Economic Survey 2023-24 said on July 22.
Unfavourable weather conditions particularly impacted the production prospects of vegetables and pulses, it said.
"In FY23 and FY24, the agriculture sector was affected by extreme weather events, lower reservoir levels, and damaged crops that adversely affected farm output and food prices. So, food inflation based on the Consumer Food Price Index (CFPI) increased from 3.8% in FY22 to 6.6% in FY23 and further to 7.5% in FY24," read the consolidated report on the state of the economy in the previous year.
Food inflation has been a global phenomenon in the last two years. Research, the government said, indicates the rising vulnerability of food prices to climate change –heat waves, uneven monsoon distribution, unseasonal rainfall, hailstorms, torrential rainfall, and historic dry conditions.
According to the Economic Survey, tomato prices surged in July 2023 due to seasonal changes, region-specific crop diseases such as white fly infestation, the early arrival of monsoonal rain in the northern part of the country, and logistics disruptions in isolated areas due to heavy rainfall.
The spike in onion prices was attributed to several factors, including rainfall during the last harvesting season affecting the quality of rabi onions, delays in sowing during the kharif season, prolonged dry spells impacting kharif production, and trade-related measures taken by other countries.
"The prices of pulses, particularly of tur, increased due to low production over the past two years, caused by adverse weather conditions. Urad production was affected by slow sowing progress in the rabi season coupled with climatic disturbances in the southern states," the government said.
Economic Survey 2023-24 updates
The area and output of gram was also lower compared to the previous rabi season, it said.
The government also said the Indian economy has consolidated its post-Covid recovery and is on a strong wicket and stable footing, demonstrating resilience in the face of geopolitical challenges.
For the recovery to be sustained, it stressed, there has to be heavy lifting on the domestic front because the environment has become extraordinarily difficult for reaching agreements on key global issues such as trade, investment and climate.
Removal of food from Inflation-targeting framework
The Reserve Bank should stop looking at food inflation in deciding interest rates and the Government should explore giving coupons or direct cash transfers to the poor to deal with higher food prices, the survey said.
While the inflation rate has moderated in recent months, the RBI has refrained from cutting benchmark interest rates — which determine the rate at which home, personal and corporate loans are given by bank — citing elevated food inflation.
The benchmark policy rates are decided bi-monthly by the RBI on the basis of movement in consumer price index, which includes food, fuel, manufactured goods and select services.
“India’s inflation targeting framework should consider targeting inflation, excluding food. Higher food prices are, more often, not demand-induced but supply-induced,” the Economic Survey 2023-24 said.
Read here the full Economic Survey 2023-24
While retail inflation, measured by the movement in the consumer price index, was at 5.08% in June, food inflation was 9.36%.
The RBI has kept interest rates unchanged since February 2023 on inflationary concerns.
Stating that monetary policy only helps in containing demand-side price pressure, the Survey said deploying them to deal with inflation caused by supply constraints may be counterproductive.
“Therefore, it is worth exploring whether India’s inflation targeting framework should target the inflation rate excluding food. Hardships caused by higher food prices for poor and low-income consumers can be handled through direct benefit transfers or coupons for specified purchases valid for appropriate durations,” the Survey said.
The core or manufactured inflation fell to a four-year low in 2023-24, while appropriate administrative actions, including dynamic stock management, open market operations, subsidised provision of essential food items and trade policy measures, helped mitigate food inflation to a great extent.
The expectation of a normal monsoon and moderating global prices of key imported items give credence to the benign and range-bound inflation projections for India made by the Reserve Bank of India and the International Monetary Fund.
“Beyond this, the medium to long-term inflation outlook will be shaped by the strengthening of price monitoring mechanisms and market intelligence as well as focussed efforts to increase the domestic production of essential food items like pulses and edible oils for which India has a great degree of import dependence,” the Survey said.
The RBI projects retail inflation for 2024-25 at 4.5%, lower than 5.4% in the last fiscal.
