According to the Economic Survey, food inflation spiked due to disruptions in supply chains and adverse climate conditions, such as heatwaves and unseasonal rainfall. These issues significantly contributed to higher prices for key commodities like tomatoes and onions.
BY PC bureau
The Economic Survey 2024-25, released on January 31, reveals that food inflation, as tracked by the Consumer Food Price Index (CFPI), rose from 7.5% in FY24 to 8.4% in FY25 (April-December). This surge was primarily driven by price hikes in vegetables and pulses.
Retail inflation in India, measured by the Consumer Price Index (CPI), averaged 5.4% during FY25 (April-December). While this figure remained within the Reserve Bank of India’s (RBI) upper tolerance level, it exceeded the central bank’s comfort zone of 4%. Food inflation, in particular, crossed the 8% threshold several times due to supply disruptions affecting key commodities, such as onions, tomatoes, and pulses.
Impact of Climate Events on Agriculture
Extreme weather events significantly impacted agricultural output, according to the survey. Tomato prices soared by 37% during peak summer due to heatwaves, while onion prices stayed 20% above their five-year average after unseasonal rainfall in major growing regions. The survey noted that erratic weather patterns caused a 15% increase in crop area damage over the past three years, further exacerbating food price pressures.
Service-Related Inflation Trends
While core inflation (excluding food and fuel) eased to 4.1%, service-related inflation in housing, healthcare, and education continued to rise. Housing rents saw a 12% increase, while healthcare expenses grew by 6.5%. The survey attributed these rising costs to strong urban demand, wage growth, and disruptions in the supply of essential medical goods.
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Vegetables and Pulses: Major Contributors to Inflation
Vegetables and pulses, which together account for 8.42% of the CPI basket, contributed 32.3% to overall inflation during FY25 (April-December). Without these items, the average food inflation rate would have been 4.3%, a significant 4.1 percentage points lower than the reported figure. Similarly, excluding vegetables and pulses from the overall inflation calculation would have resulted in a rate of 3.2%, 1.7 percentage points below the actual headline inflation.
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Global Inflation Trends
The survey highlighted that global inflation has eased from post-pandemic peaks. In the US, inflation declined to 3.4% by the end of 2024, down from 6.5% in 2023. The Eurozone’s inflation rate fell to 2.9%, driven by lower energy prices and weak demand.
Despite this moderation, global risks persist. The US Federal Reserve’s cautious approach to rate cuts, the European Union’s carbon border tax affecting trade costs, and China’s deflationary concerns have added complexities to the external economic environment.
For India, declining global commodity prices—especially crude oil, which averaged $82 per barrel in 2024 compared to $95 in 2023—have provided some relief. However, sectors reliant on imports continue to face cost challenges due to a weaker rupee, which depreciated by 4.5% against the US dollar over the year.
RBI Policies to Manage Inflationary Pressures
To control inflation, the RBI maintained a steady repo rate of 6.5% throughout most of 2024, aiming to anchor inflation expectations. The government also intervened with supply-side measures, such as releasing 5 lakh tonnes of wheat and rice from buffer stocks to stabilize staple food prices.
Investments in cold storage and logistics infrastructure, along with a Rs 10,000 crore incentive for the food processing sector, were introduced to strengthen long-term food supply chains. Discussions on revising Minimum Support Prices (MSP) for select crops are ongoing. However, the survey cautioned that these measures must be implemented carefully to avoid undue fiscal strain.
Outlook for FY26
The Economic Survey presents a mixed outlook for India’s inflation trajectory. While overall CPI inflation is expected to ease to 4.5% in FY26, food prices remain a key variable due to climate-related uncertainties and global supply chain disruptions.
The survey suggested that if global oil prices remain stable and domestic food supply chains strengthen, inflationary pressures could further subside. Investments in the food processing sector and improved logistics infrastructure are expected to play a crucial role in stabilizing prices and ensuring long-term resilience against supply shocks.
