Climate Change, Crop Losses, and Rising Food Prices Introduction

• Recent research by Climate Trends, a Delhi-based environmental think tank, highlights the growing link between climate change, agricultural production, and food inflation in India. For instance, consumer food price inflation reached 11.5% in July 2023 and 10.87% in October 2024, while vegetable inflation rose to 37% in July 2023 and 42% in October 2024.
• Extreme weather events such as heatwaves and erratic rainfall over the past five years have had a profound impact on staple crops, disrupting supply chains and driving up prices. 

What Is Inflation Management?

• Inflation management refers to the set of policies and actions undertaken by authorities to control the rate of price increases in an economy. Its primary goals include:
• Maintaining economic stability by preventing runaway inflation or deflation.
• Protecting consumers’ purchasing power, ensuring that wages and savings are not eroded by rising prices.
• Supporting sustainable economic growth by creating a predictable environment for businesses and investments.

How is Inflation Managed in India?

• Monetary Policy: The RBI is India’s central bank and primary authority in regulating money supply to control inflation. Key instruments include:

• Repo Rate Adjustments:

• • • Increase in Repo Rate: Raises borrowing costs for banks → reduces money supply → curbs inflation.
    • Decrease in Repo Rate: Lowers borrowing costs → increases liquidity → stimulates growth while monitoring inflation.

• Liquidity Management:

• • • Cash Reserve Ratio (CRR) & Statutory Liquidity Ratio (SLR): Adjustments influence the proportion of bank deposits held as reserves or in approved securities, controlling liquidity.
    • Open Market Operations (OMO): Buying or selling government securities regulates money circulation and influences inflation trends.

• Inflation Targeting:

• • • India follows a flexible inflation targeting regime, aiming for CPI inflation at 4% ± 2%, balancing price stability with growth objectives.

• Fiscal Policy: The government actively manages inflation through fiscal interventions, targeting demand and protecting vulnerable groups:

• • • Fiscal Deficit Control: Rationalizes excessive spending to prevent overheating the economy.
    • Tax Adjustments: Rationalizing GST and excise duties, e.g., on fuel, helps regulate commodity prices.
    • Subsidies & Cash Transfers: Provides relief to low-income households during periods of high inflation.
    • Public Borrowing Management: Prevents excess money circulation, complementing RBI monetary tools.

• Supply-Side Measures: Price stability also depends on enhancing production and supply efficiency:

• • • Agricultural Boost: Improving irrigation, storage infrastructure, and implementing Minimum Support Price (MSP) reforms to increase output.
    • Reducing Bottlenecks: Efficient transport, logistics, and strategic imports of essential commodities mitigate price pressures.
    • Supply Chain Strengthening: Ensures smooth availability of food and essential goods, reducing spikes in inflation.

• Administrative Measures:  Administrative interventions aim to check price manipulation and safeguard consumers:

• • Price Controls & Anti-Hoarding Laws: Prevent black-marketing and speculative price increases.
  • Buffer Stock Management: Agencies like Food Corporation of India (FCI) maintain food grain reserves to stabilize prices.
  • Essential Commodities Regulation: Under the Essential Commodities Act, the government can regulate production, supply, and distribution to curb inflation.

Objectives of Inflation Management in India

• Controlling Excessive Fluctuations: A primary objective of inflation management is to maintain a predictable and moderate rate of price increase. Stable prices:

• • • Reduce uncertainty for household budgeting and day-to-day expenses.
    • Help businesses in planning investments and pricing strategies.
    • Avoid extreme swings that can destabilize markets and consumer confidence.

• Safeguarding Purchasing Power: Inflation erodes the real income of salaried workers, pensioners, and low-income households. Effective management ensures:

• • • Affordability of essential goods, including food and fuel, which constitute a significant portion of Indian household expenditure.
    • Protection for the economically vulnerable, preventing disproportionate hardship caused by unchecked price rises.

• Supporting Sustainable Economic Growth: Inflation control must strike a balance with economic growth:

• • • Overly tight policies may restrict investment and job creation, slowing development.
    • Excessively loose policies risk runaway inflation, undermining stability.
    • Targeted measures help maintain a growth-friendly environment while keeping prices in check.

• Ensuring Financial Stability: Inflation management also underpins financial sector stability:

• • • Stabilizes the domestic currency and maintains trust in the monetary system.
    • Controls interest rate volatility, preventing asset bubbles and harmful market fluctuations.
    • Reduces risks in financial markets that could otherwise spill over into the real economy.

•  Addressing Structural and External Shocks: Effective inflation management requires coordination across policies:

• • Monetary, fiscal, and trade policies must align to address structural supply shocks and volatile commodity prices.
  • Timely interventions help manage fluctuations in food and fuel prices, which are often key drivers of inflation in India.
  • A coordinated approach ensures both short-term relief and long-term economic resilience.

Key Causes of India’s Food Inflation

• Climatic and Weather-Related Causes:

• • • Erratic Rainfall: India’s agricultural system is exposed to climate volatility, with over 65% of cropped land unirrigated and dependent on the southwest monsoon. Unseasonal rains and hailstorms damage standing crops (e.g., onions in Maharashtra, potatoes in Uttar Pradesh and West Bengal).
    • Heatwaves and Rising Temperatures: Heat stress reduces yields (e.g., tomatoes in 2024).
    • Floods and Excess Moisture: Heavy rains damage vegetables during transit and storage by trapping moisture in crates, causing spoilage.

• Crop-Specific Vulnerabilities:

• • • Short-Duration Crops: Tomatoes, onions, and potatoes are highly sensitive to sudden climate shocks, unlike cereals.
    • Concentration of Production: Onions and potatoes are mainly grown in a few states (Maharashtra, Madhya Pradesh, Uttar Pradesh, West Bengal), making supply dependent on regional weather.
    • Post-Harvest Losses: Lack of cold storage and refrigerated transport leads to rotting in mandis and during long-distance transport.

• Structural and Market-Related Causes:

• • • High Dependence on Monsoon: Over 65% of cropped land in India is rain-fed, leaving agriculture vulnerable to monsoon variability.
    • Supply Chain Bottlenecks: Disruptions in transport due to rains or strikes limit timely supply to mandis.
    • Inadequate Storage Infrastructure: Farmers and wholesalers lack proper cold chains, leading to wastage and artificial scarcity.
    • Market Concentration: Asia’s largest wholesale market (Azadpur) reported low arrivals and high spoilage in 2023–24, worsening price spikes.

• Global and External Causes:

• • Pandemic and Post-Pandemic Demand: Disruptions in supply during COVID-19 and surging demand after recovery pushed prices upward.
  • Russia–Ukraine War: Added global pressure on food and fertilizer prices, feeding into domestic inflation.

Challenges in Inflation Management in India

• Neglect of Economic Reality:  Food accounts for nearly 50% of Indian household expenditure, making it the largest component of daily costs. Ignoring food price fluctuations in inflation targeting risks overlooking the most pressing economic concern for a majority of the population.

• Persistent Food Inflation: Contrary to common claims that food price spikes are temporary, India has experienced persistent food inflation for over a decade. This indicates structural challenges in agriculture, supply chains, and market regulation. Simply excluding food from inflation targets will not solve the underlying problem.

• Interdependence of Food and Core Inflation: Food prices directly influence wages and production costs, which in turn impact core inflation. As a result, controlling core inflation independently of food prices is nearly impossible, highlighting the need for integrated policy measures.

• Misguided Policy Risks: Excluding food prices from the inflation framework could expose India to surges in staple prices, undermining the standard of living for millions of households and increasing economic vulnerability among low- and middle-income groups.

• Limits of Interest Rate Adjustment: Raising interest rates has not always curbed inflation effectively. In many cases, higher rates increase production costs for firms, which are passed on to consumers, paradoxically raising prices further instead of containing inflation.

• Monetary Policy’s Singular Focus on Demand : RBI’s monetary policy primarily targets demand-side constraints, leaving it ill-equipped to handle supply shocks in critical sectors like food and oil. This limits the effectiveness of conventional interest rate tools in India’s unique context.

• Flawed Inflation Targeting Models: The statistical models underpinning India’s inflation targeting are not fully validated for Indian data. Most assume that inflation signals an overheated economy (output exceeding natural levels), but actual output levels are unobservable in India. Policy decisions based on such assumptions may be unscientific and ineffective.

• Failure to Address Supply Shocks: Short-term interventions like export bans on wheat, rice, or onions can backfire. Such measures create panic and stockpiling in domestic markets, ultimately driving prices higher and worsening inflation instead of controlling it.

• Growth Sacrifice Due to Inflation Control: A singular focus on inflation has sometimes slowed GDP growth. Since the institutionalization of inflation targeting in 2016:

• • • Policy rates (repo) have steadily increased.
    • Investment rates have declined due to higher capital costs.
    • GDP growth has moderated as a result of reduced private sector investment.

• Ignoring the Global Nature of Inflation: Inflation is increasingly driven by global supply and demand dynamics. Prices of goods are influenced by millions of producers worldwide, making it impractical to control certain commodities through domestic monetary policy alone. A narrow focus on local inflation control may compromise broader economic health.

 Way Forward 

• Promote Climate-Resilient Cultivation: India needs to promote farming practices that are less vulnerable to erratic weather. Protected cultivation methods, such as greenhouses, shade nets, and polyhouses, can shield crops like tomatoes from sudden heatwaves or excessive rainfall. For crops like onions and potatoes, research institutions should focus on developing varieties that are more tolerant to heat, drought, or excess moisture. In addition, encouraging farmers to diversify beyond just a few staple crops will reduce dependence on tomatoes, onions, and potatoes, which currently dominate the market and create inflation risks when their production is disrupted. 

• •  Strengthen Post-Harvest Infrastructure: A significant part of the losses in vegetables comes not only from crop damage in the field but also from spoilage after harvest. To address this, India must invest in a network of cold storage facilities, modern warehouses, and refrigerated transport systems that can preserve perishable produce for longer. Expanding low-cost solar-powered cold storage units in rural areas can make storage affordable for small farmers. Public–private partnerships can help scale up logistics infrastructure by combining government support with private sector efficiency. 

• Releasing Excess Buffer Stocks: The government currently holds over 40 million tonnes of rice, far exceeding the buffer stock norms of 13.5 million tonnes. The Food Corporation of India (FCI) should release this surplus into the open market at reasonable prices, helping to cool food inflation and stabilize staple prices.

• Enhancing Processing : Around 10–15% of perishable commodities like onions and tomatoes should be processed into value-added products such as tomato paste or onion powder. 

• • Deploy Technology and Forecasting Tools: Technology can play a major role in reducing food inflation by giving farmers timely information. Weather-informed advisories, sent through mobile platforms and extension workers, can guide farmers on the best time to sow or harvest. Price forecasting tools can help farmers avoid gluts or shortages by planning their cropping cycles in advance. At the same time, satellite-based monitoring and artificial intelligence systems should be used to give early warnings about crop stress, pest attacks, or yield shortfalls.
  •  Encourage Collective Farming and Shared Resources: Small and marginal farmers often struggle because they cannot afford cold storage, transport facilities, or advanced equipment on their own. Collective farming through cluster models can allow smallholders to pool their resources, share transportation, and reduce costs. Strengthening farmer producer organisations (FPOs) will give farmers collective bargaining power to negotiate better prices and access markets directly. Cooperative cold storage facilities at the local level can further ensure that farmers do not have to sell crops in distress when prices are low.

• Adjusting Import Duties: Reducing import duties on essential commodities such as wheat can allow cheaper imports to supplement domestic supply, helping moderate prices during periods of shortage and supply shocks.

• Updating the CPI Basket Weights: The Consumer Price Index (CPI) basket currently reflects consumption patterns based on the 2011 survey. To accurately capture modern household spending, especially the high share of food and beverages, the CPI basket weights must be updated to reflect current realities, ensuring inflation measures are more representative.

• Allowing Greater Tolerance for Inflation: Given the global nature of inflation, India should adopt greater flexibility in acceptable inflation levels. This can be achieved either by:

• • Adjusting the target range upwards, or
  • Extending the time horizon over which the Monetary Policy Committee (MPC) aims to achieve the target.
  • A more flexible approach ensures that external price shocks do not unduly constrain growth or investment.