What are the causes of persistent high food inflation in India? Comment on the effectiveness of the monetary policy of the RBI to control this type of inflation.

GS 3
Economy
2024
10 Marks

Subject: Economy

India’s persistent high food inflation has been a recurring macroeconomic challenge, significantly impacting the Consumer Price Index (CPI) and household budgets. Although food inflation eased sharply from over 9% in June 2024 to below 2% in April 2025, the underlying causes and policy responses remain crucial for long-term stability.

Key Causes of Persistent Food Inflation

1. Supply-Side Factors

  • Weather Shocks: Extreme events like the prolonged El Niño in 2023-24 led to deficient rainfall, poor harvests, and supply shortfalls. Even with above-normal monsoons in 2025, regional imbalances and crop-specific failures can persist.

  • Supply Chain Disruptions: Floods and heavy rains often disrupt transport and logistics, causing wastage and temporary price spikes. Weak storage infrastructure further exacerbates post-harvest losses, especially for perishables.

  • Rising Input Costs: Increased prices of fertilizers, seeds, and fuel push up production costs, which are passed on to consumers.

2. Demand-Side and Structural Factors

  • Income Growth and Urbanization: Rising incomes and changing dietary patterns, particularly higher demand for protein-rich foods, outpace supply adjustments.

  • Market Inefficiencies: Multiple intermediaries and inefficiencies in APMC markets inflate retail prices.

  • Import Dependency: India’s reliance on imports for items like edible oils and pulses exposes domestic prices to global volatility.

Effectiveness of RBI’s Monetary Policy

Strengths:

  • The RBI’s inflation-targeting framework and timely repo rate adjustments have helped anchor inflation expectations and contributed to the recent moderation in food inflation.

  • Lower retail and wholesale inflation rates in early 2025 reflect the combined impact of improved harvests and supportive monetary policy.

Limitations:

  • Monetary policy is primarily effective against demand-driven inflation; it has limited influence over supply shocks from weather, logistics, or global price surges.

  • Transmission lags and the structural nature of food inflation mean that rate hikes alone cannot address core supply-side issues.

  • Higher interest rates may inadvertently raise costs for producers, further aggravating food price pressures.

While the RBI’s monetary policy has played a role in stabilizing overall inflation, persistent food inflation in India is fundamentally rooted in supply-side and structural challenges. Sustainable control requires coordinated efforts - strengthening logistics, promoting agri-tech, reforming market structures, and enhancing climate resilience - beyond the scope of monetary policy alone.

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