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Taking a single unit of a good, input costs and taxes are the only major factors which raise
the final price the consumer has to pay. However from a macro-lens there exist many factors that can lead to higher prices of goods and services. An example of this is war which can disrupt global supply chains leading to a cost push inflation. Prices would be dislocated and the same would dictate the global scenario in the impending future. For instance, the current war with Ukraine have raised energy costs, the impact of which can be felt in all corners of the world. Though the prospering sectors are somewhat well equipped to absorb the inflation, agriculture sector is the worst hit. Farmers in India now face higher farming costs due to increased energy costs reducing their profit margins and consequently adversely impacting their quality of life.
Disruptions in global supply chains shrinks the process of procuring and supplying materials. These disruptions first began with the onslaught of the COVID Pandemic where limited supply led to higher prices due to constant demand. Prices of basic commodities such as vegetables and edible oils shot up the Indian Consumer Price Index (CPI) in the year 2020. Whereas market optimism driven by vaccination had given space for adaptive expectations and thus added to the inflation in the year 2021.
Another reason for the flaring prices is Russia’s invasion of Ukraine that had a direct impact on the prices of fertilizers and fuels required to run the farm based machinery. It has also casted ripple effects onto the global production and supply of food and energy, with both the participatory nations being few of the largest manufacturers of these commodities. As the fuel and fertilizer prices inflated, it had a direct impact on the cost of producing all types of food grains ranging from cereals to fruits and vegetables.
The restrictions in supply can be briefly categorized as under four main components with
sunflower oil, fertilizers, wheat and maize constantly reflecting the inflationary trends in near future too. The increase in prices at a global level is simultaneously echoed in the domestic markets through these three ways, with a small lag. Initially the increased value at global markets would provide a profitable environment for export opportunities. However, this would cut down the stock of goods available for the domestic market and hence will pull up domestic prices. As the goods produced for domestic consumption exhaust, the dependency on imports would increase even for simple commodities such as edible oils irrespective of the cost. These expensive imported inputs when employed into the process of production would shoot up the prices of crop in domestic markets.
In near future, the Indian agricultural prices will be facing with two main challenges-one is the continued rising global inflation and the other is monsoon rains. But the country’s chief economic advisor V. Anantha Nageswaran predicted that India is well prepared to tackle the rise in global food prices. As of the current estimates, there is enough food grains locally produced for domestic consumption and to further extend support to the farmers, the government plans to provide subsidies for food and cooking gas. On the production end, the country holds an edge over in the cultivation and supply of rice and wheat with an abundant inventory already stocked up with the Food Corporation of India (FCI). This places India in a position where it can supply food security to those who are currently falling short of basic edibles due to global conflict like scenario. It is estimated that 7 million tones of wheat was exported in the year 2021-2022 and the figure is yet to upswing to almost 10 million tones in the financial year 2022-2023. Complimenting this, excise duty that was levied on petrol and diesel was also cut in the month of May.
Even though the adverse effects of war are mirrored in the domestic market, the overall
impact of inflation is somewhat tricky to evaluate. The reason being that not all crop rates
took a jump, few such as sugar, pulses, summer vegetables, are being priced at value almost same as previous year’s. To push the economy from plunging further into inflation,
government abolished import duty on crude edible oil and is also planning to cut agricultural infrastructure and development cess on oil imports. To reduce the burden of debt by subsidies, the cultivators can be compensated with cash deposits instead of payment in kind (grains). Government is also likely to switch to edible soy and sunflower oil to compensate for the loss in imports of palm oil. Thereby, employing a combination of both monetary and fiscal policies until the agitation in east cools down.
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