Shazi Shafiq (35) spends Rs 4,000 on groceries each week for her family of three, twice the amount she spent in 2012, when she first got married.
"The birth of our daughter of course added to the expenses, and work from home has skewed the calculations a bit, but all in all, we are spending twice as much as we did 10 years ago," she told IndiaSpend.
We did the maths: The cost of basic groceries for a week for her family of three (5 litres of milk, 2 kg of rice, 2 kg of wheat flour, 1 litre oil, pulses, a dozen bananas, 1 kg apples and 2 kg each of onions, potatoes and tomatoes) increased by 68 percent between March 2012 and March 2022, as per price data released by the Wholesale and Retail Price Information System.
Comparative data for the Consumer Food Price Index (CPI) – a measure of the change in the price of foods consumed by a typical family in India – available from January 2014, produces similar results: prices have increased by 70 percent between January 2014 and March 2022.
"Inflation happened because of global factors like commodities (such as agricultural produce) price rise, energy price rise, and interest rate hikes by the United States Federal Reserve, as well as supply side factors caused by COVID-induced lockdowns," explained Lekha Chakroborty, professor of economics at the National Institute of Public Finance and Policy.
How Is Inflation Calculated?
Inflation is simply the rate of increase in prices of goods and services. In India, it is measured year-on-year, meaning prices for a month are compared with prices from the same month in the previous year. From this rate, we can gauge the increase in the cost of living in a place over a period of time.
Food prices were 7.68 percent higher in March 2022 compared to March 2021, as per data released by the Ministry of Statistics and Programme Implementation. This is the second highest food inflation since November 2020, when the Consumer Food Price Index (CPI) – a measure of the change in the price of foods consumed by a typical family in India – was 9.5 percent higher than the same period in 2019.
On average, food prices increased at 4.483 percent every month between January 2014 and March 2022. This means that the price of a food product that cost Rs 100 in January 2013 is now almost Rs 170. Comparable data for food inflation from the CPI are available from January 2014.
Higher prices may be in store, according to Rajeshwari Sengupta, an economist at the Indira Gandhi Institute of Rural Development in Mumbai. The Wholesale Price Index (WPI) – a measure of change in the average wholesale price of goods in the economy over a period of time – is at a 10-year high. When the price of inputs for producers of goods and services increases, they pass it on to the consumers in the form of higher prices.
While the demand for goods and services has been low since the pandemic, the supply has been even tighter, because of the rise in fuel prices and the Russia-Ukraine war, said Sengupta.
Oils and Fats, Meat and Fish, Ready-Made Food Cost More: MOSPI Data
Shazi's family has not made any changes to their eating habits yet, but she is wary of the increase in prices of mutton and imported fruits that her seven-year-old daughter loves.
"I have been thinking about ways to save, about what foods I can limit to keep up with rising prices, but as of now there have been no changes to our diet," she said.
While inflation has consumers rethinking the number of times they can eat out in a week, restaurant owners are concerned about dwindling profits.
"The pandemic was a big blow to the food and restaurant business," said Shazi's husband Saim Zafar, who is part owner of a fast food joint in Gurgaon and also works as a business development and marketing head at a facility management company in Gurgaon. Oil, chicken and vegetables are indispensable to his restaurant that specialises in burgers.
"Now, along with the unstable supply chain for inputs (due to COVID-induced lockdowns in India and across the world), we also have to deal with rising prices of raw ingredients, fuels, water, and electricity," said Zafar. "In addition, the staff we hired had gone back during the lockdown and we cannot replace them without offering a steep hike in salaries, which is understandable because they too have to face these prices."
Of all food groups, the price of edible oils increased the most – 18.8 percent compared to March last year – followed by meat and fish (9.62 percent).
Shazi's family buys locally sourced meat, so the supply chain is not disrupted by international events. However, India imported more than 55.78 percent of the oil available in 2019-20 in the country. In 2020-21, India imported 1.7 million tonnes of edible oil from Ukraine, and its price is impacted by the war in Ukraine, by the increase in the price of petroleum and diesel, and supply chain disruptions like lockdowns.
High Inflation May Dampen Economic Recovery: Experts
India will recover from the effects of the pandemic only in 2034-35, if it grows at 7.2-7.5 percent every year from 2022-23, said a Reserve Bank of India (RBI) report released on 29 April. In 2020-21, India's gross domestic product (GDP) was 7.3 percent lower than that in 2019-20. All the components of the Index of Industrial Production (IIP), an index that measures the growth in different sectors of the economy, were lower in February 2022 (the last month for which data are available) than they were in 2021.
Unemployment, which reached a high of 11.84 percent in May 2021, decreased to 7.83 percent in April 2022, as per data released by the Centre for Monitoring Indian Economy, but that could partly be because the workforce shrank by 3.8 million between February and March 2022.
The Russia-Ukraine war and the lockdown in China have resulted in shortages of coal for power, shortages of semiconductor chips for industry (especially cars) and international shortages (food, oil, edible oil, construction materials), said Sengupta. This creates a situation where demand exceeds supply, resulting in prices rising.
It has happened before too, more than 10 years ago, when at first, during the 2004-2007 period, wholesale inflation started to rise in 2006 because of an increase in demand. In 2007, prices of agricultural products began increasing globally and peaked in 2008, causing a further increase in wholesale prices, which also showed up in consumer prices soon after, Sengupata said. In addition, food prices increased in India because of a deficient monsoon in 2009, causing an increase in demand, she added.
RBI Is an 'Inflation-Targeting' Central Bank
The RBI has to keep inflation at 4 percent, and not below 2 percent or above 6 percent, until March 2026, according to the Monetary Policy Report for April 2021. For the last three months, inflation has been above 6 percent, and it would be dangerous for the RBI to boost demand further, according to Sengupta.
Ordinarily, to boost demand, the RBI can lower the repo rate, the rate at which it lends to commercial banks (who lend to businesses and households) when they need funds. When the repo rate is high, banks decrease their lending, thus reducing available money in the economy and demand. The RBI increased the repo rate to 4.4 percent on 4 May 2022 from 4 percent, the first time it was changed since May 2020. Price stability is necessary for strong sustainable growth, said a 2022 RBI report.
The RBI "decided to remain accommodative while focusing on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth", said the announcement at Mumbai.
The RBI could have acted sooner and been more clear about its intentions, according to Sengupta. "The wording of their statement was puzzling: they cannot hold on to an "accommodative stance" (meaning that there will be money available to borrow) and also raise the repo rate (which makes it more costly to borrow)," she added.
The RBI can also curb inflation by allowing banks to keep their excess funds with the RBI at a rate lower than the repo rate. "The standing deposit facility rate is used to absorb the excess liquidity in the economy," explained Chakraborty. This means that the money for which there is no demand in the economy finds its way back to the RBI, meaning that there is less cash for the same amount of goods and services which will restore prices to normal.
Prices Likely to Rise in the Future
WPI inflation was at 14.55 percent in March 2022. This is the second highest (after November 2021 when it was 14.87 percent) since April 2012. About a quarter of the index is made up of food and food products.
The rising cost of inputs and raw materials for industries like fast moving consumer goods, cement, garments, etc. is being passed on to consumers, according to Sengupta. This will affect food inflation too.
"When inflation is not a monetary phenomenon [as it is also dependent on global phenomena like the Russia-Ukraine war and the lockdown in China], repo rate changes cannot control inflation pressures. We have to wait and see how effective this announcement is," and whether people believe that this step of the RBI will reduce inflation, added Chakraborty.
While Shazi does not expect things to get worse, she also does not see relief from inflation in the near future. If prices remain high or increase further, she will have to make changes in the way her family spends. "I am considering cutting back on meat and fruits. There is no way we can live the way we used to if this continues," she said.
(The article was first published in IndiaSpend. It has been republished here with permission.)