Climate change induced Food Inflation

Climate change induced Food Inflation

Context:

Recently, RBI’s Bulletin highlighted a concerning trend where  climate change has become the dominant reason for food price rise. Traditional demand-supply dynamics are being overshadowed by these climate-related disruptions, leading to what the study terms as“endemic” food inflation.

About climate change induced food inflation:

• In the period 2016-2020, the average food inflation was 2.9 percent. This has more than doubled in the 2020s to an average of 6.3 percent. 
• According to the Economic Survey 2023-24, food inflation rose from 6.6% in 2022-23 to 7.5% in 2023-24. This increase is attributed to several factors, including the ongoing effects of the Russia-Ukraine war and adverse domestic weather conditions.
• According to the European Central Bank Climate change is projected to cause food prices to increase by 0.9% per year by 2035 globally, with larger impacts in lower-latitude regions like India where the food inflation will increase by 2 percent and overall inflation by 1 percent by 2035.

• Factors Driving High food inflation

• • Rainfall Variability:The southwest monsoon, crucial for India’s annual rainfall, has fluctuated, with particularly strong monsoons in 2020 and 2021. 

• • • However, 2022 and 2023 experienced below-normal rainfall, suggesting potential climate change impacts.
      • ENSO Events:
        • El Niño: Contrary to expectations, median food inflation during El Niño periods has been relatively low. However, El Niño years can still experience extreme inflation due to severe weather conditions like droughts (e.g., 2009).
        • La Niña: Generally associated with higher food inflation volatility, with some extreme inflation observations during La Niña years.

• IOD (Indian Ocean Dipole):

• • Negative IOD: Linked with higher average food inflation. Periods of negative IOD often see very high food inflation, due to extreme weather conditions.
  • Positive IOD: Also associated with higher food inflation than neutral IOD periods, although the impact can vary.

• • Extreme weather events,including droughts and heat waves, have severely impacted agricultural output, particularly for staples like pulses, vegetables, and cereals. 
  • Supply chain disruptions, including logistics issues and crop spoilage due to high temperatures, have intensified food inflation by tightening supply. 
  • Government policies like curbing exports and adjusting import tariffs have had limited success, as they fail to address the core supply-side constraints.

• • • The government’s measures like restricting exports of sugar, rice, onions, and wheat have proved unpopular among farmers

Impact of Food Inflation:

• Increased Cost of Living:
  • Household Budgets: Food inflation strains household budgets, especially for lower-income families, forcing them to allocate more income to basic food needs.
  • Food inflation also plays an important role in the inflation expectation of households2, which is a key factor in the New Keynesian Phillips (supply) curve.

Impact of Food Inflation on Inflation Expectations and Monetary Policy: Food Inflation and Inflation Expectations: Disproportionate Influence: Food inflation significantly impacts household inflation expectations, more so than other Consumer Price Index (CPI) components. Consumers often base their inflation outlook on observable price changes in groceries. New Keynesian Phillips Curve: This model illustrates the relationship between inflation, inflation expectations, and economic slack. Inflation expectations are critical in determining current inflation rates. Second-Round Effects: Core Inflation: Food inflation can affect core inflation (excluding food and energy) through its influence on overall inflation expectations. Wage-Setting Behaviour: Persistent food inflation may lead to higher wage demands as workers seek to offset increased living costs, further influencing inflation dynamics. Central Bank Challenges: Forecasting: Accurate forecasting of food inflation and its secondary effects is crucial for central banks, such as the Reserve Bank of India, to implement effective monetary policy.

Disproportionate Impact on the Poor: The poor, spending over 50% of their income on food, may face nutritional deficiencies as they compromise on food quality and quantity.

• Nutritional and Health Consequences:
  • Dietary Changes: High prices push families towards cheaper, less nutritious options, leading to malnutrition and higher healthcare costs.
  • Increased Food Insecurity: Rising food costs heighten food insecurity, causing long-term health issues like stunted growth in children.

• • • According to a world bank report Acute food insecurity affects 345 million people in 82 countries (up from 135 million in 2019).

• Economic Impact:
  • Inflationary Pressure: Food inflation drives overall inflation, raising costs across the economy and affecting stability and growth.
  • Consumer Confidence: Persistent inflation reduces consumer confidence, slowing economic growth and impacting businesses.

• Socioeconomic Disparities:
  • Widening Inequality: Food inflation worsens inequality, disproportionately affecting lower-income households and increasing social tensions.
  • Migration and Displacement: Severe food inflation can trigger migration, leading to urban overcrowding and infrastructure strain.

Steps taken by Indian Government to curb Climate change induced Food inflation:

• Enhancing Agricultural Resilience
  • Climate-Resistant Crops: Pradhan Mantri Krishi Sinchai Yojana (PMKSY) focuses on Investment in developing climate-resistant crop varieties and improving irrigation to combat erratic weather.
  • Sustainable Practices: Paramparagat Krishi Vikas Yojana (PKVY) promotes sustainable farming practices like agroecology to improve soil health and productivity.
  • World Bank Actions:
    • Climate-Smart Agriculture: Support for improved agricultural practices, resilience, and reduced emissions.
    • Projects: Examples include improving drought tolerance and sustainable practices in Niger, benefiting hundreds of thousands of farmers.

• Improving Supply Chain Management
  • Infrastructure: Gramin Bhandaran Yojana supports the development of storage infrastructure to reduce post-harvest losses.
  • Logistics:Kisan Rail enhances logistics by providing refrigerated transport for perishable goods, ensuring a consistent food supply.

• Financial Support Mechanisms

• • Crop Insurance: Pradhan Mantri Fasal Bima Yojana (PMFBY) Provides crop insurance to support farmers affected by extreme weather.Subsidies and Price Controls: National Food Security Act (NFSA) Includes provisions for subsidies and price controls on essential food items to protect vulnerable populations.

• Monitoring and Early Warning Systems
  • ClimateMonitoring:Agro-Meteorological Advisory Service (AAS) provides climate monitoring and early warnings to help predict agricultural disruptions.
  • Early Warning: National Disaster Management Authority (NDMA) implements early warning systems for extreme weather events, aiding farmers in adaptation.

• Strengthening Social Safety Nets
  • Social Programs: Expansion of programs like Pradhan Mantri Garib Kalyan Yojana to assist low-income households.Nutritional Support:Mid-Day Meal Scheme and Integrated Child Development Services (ICDS) focuses on nutritional support for vulnerable populations, ensuring food security amidst price fluctuations.

Recommendation in Economic Survey 2023-24 to curb Food Inflation:

• Enhancing Agricultural Production: Expand pulse cultivation and improve oilseed production to reduce import dependency and stabilise prices.
• Modern Storage Facilities: Develop storage for perishables to minimise post-harvest losses and ensure consistent supply.
• Price Monitoring Mechanisms: Link price monitoring data across departments for better tracking of price changes from farm to consumer.
• Revising Inflation Indices: Expedite the creation of a producer price index and revise the consumer price index with updated weights for more accurate inflation measurement.