Mint ·
Economy, business and finance
Worsening food inflation warrants policy moves before household hardship reaches far and wide
Inflation is within its acceptable limits, but it’s the upward trend that policymakers need to worry about. Food prices especially. With farms hit by patchy rains amid new oil shockwaves, the Centre must protect Indian households that see food eating up almost half their domestic budget.
Earlier this week, estimates of inflation for August based on the consumer price index (CPI) and wholesale price index (WPI) were released. Both indices showed a rise in overall inflation driven by food prices, a trend which has been building up for quite some time now.
CPI inflation accelerated from 2.7% in January to 4.8% in August while WPI inflation accelerated from 1.2% to 9.9% during that period. However, retail food inflation accelerated faster from 2.1% to almost 6%, with faster price increases in rural areas.
This was also true for WPI, which showed food inflation swinging sharply from -0.4% to 7%. In both cases, food inflation has exceeded the overall inflation pace. The rise in inflation is not surprising, given pressures globally due to the war in West Asia along with worries over the impact of a deficient monsoon on agricultural production.
To be sure, the rate of CPI inflation is still within the Reserve Bank of India’s (RBI) tolerance band of 2-6%, but worries revolve around its expected trajectory over the coming months, food prices especially.
The impact of the ongoing troubles is unlikely to be limited to food items. A spillover is likely to other commodities and services, which is already starting to show by way of India’s hardening core inflation. Also, high WPI inflation will sooner or later get transmitted to retail inflation in food items, but also other goods and services across the country.
The worry is real, given that the situation in West Asia is volatile, having just driven up global fuel prices again. While there is not much that can be done about this, supply shocks from the monsoon deficiency and a strengthening El Niño phenomenon call for proactive government intervention.
As of 15 September, our overall monsoon deficiency stood at 15% of the rainfall norm for the season, but it was unevenly distributed, with more than half of the country reporting deficient rains. This not only affects crop sowing, but also yields.
The US Department of Agriculture (USDA) in a recent report projected a 9% decline in maize production and 4.6% decline in paddy production this year. According to WPI data, paddy inflation was in negative territory from May 2025 to April 2026 but has sharply accelerated to 4.2% in the four months since.
The trend in rice prices mirrors the global acceleration in cereal prices. The Food and Agriculture Organisation (FAO), which tracks global food prices, reported its fastest rise in global cereal prices in August; cereal inflation was at 10% last month after staying negative for 36 months until February 2026.
The FAO index also shows a sharp rise in inflation for edible oils and sugar. Edible-oil inflation, according to WPI data, has been above 10% since November 2025. Sugar prices have also spiked in the last two months.
The government has limited space to deal with international factors or the domestic supply shortfalls caused by a weak monsoon. Monetary policy too is unlikely to be of help in containing food inflation. However, there are a few policy choices that the government may have to make.
The most important is picking between ensuring food security in times of supply shocks and its bio-fuel push as a priority. This choice is no longer academic. It requires a decision that will impact the future trajectory of food inflation.
With sugar prices already at a high and production likely to fall short even this year, any further ethanol blending will require larger diversions from paddy and maize. Both these crops are already showing high inflationary trends domestically and globally.
Maize is also a large ingredient in livestock feed, particularly poultry. Given the USDA’s forecast of a decline in production, any diversion towards ethanol blending will also elevate egg and meat prices, which are already rising at double-digit clips, according to August WPI data. The government’s choice is between food security and the diversion of precious grains to fuel blending.
Further, any ad hoc policy measures such as stock limits and excessive controls on agricultural trading, including international trade, would be counterproductive and should be avoided. The current episode of sugar inflation is as much a result of a decline in production as one of unpredictable policy.
More importantly, any rise in food inflation will squeeze the disposable incomes of a majority of India’s rural and urban households for whom food still accounts for almost half their household budget. With agriculture unlikely to perform remuneratively and rural wages stagnant, the country needs to protect the lives of its rural and urban poor through greater public spending and public employment.
The author is associate professor at Jawaharlal Nehru University and visiting fellow at the Centre de Sciences Humaines, New Delhi.