India’s Food Inflation Likely To Decelerate: Morgan Stanley

India’s Food Inflation Likely To Decelerate: Morgan Stanley

Aided by sustained moderation in rural wage growth and continued decline in global food prices, food inflation in India will likely be on a decelerating path, notes Morgan Stanley.

Upasana Chachra and team at Morgan Stanley in their July 6, 2015 research note on Indian Economics note that rainfall in July will be key, as 64% of full-year summer crop sowing is typically completed by July-end.

India to witness above-normal trend in rainfall

Monsoon season is one of the key driving forces behind the Indian economy, with agriculture constituting nearly 17.6% of India’s GDP. The Morgan Stanley analysts note the monsoon season is currently tracking at 0% deviation from normal over the June 1 – July 5 period on a season-to-date basis, as against a surplus of 19% over the June 1-28 period:

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The analysts note on a daily basis, the rainfall trend has been below normal over the last week. However, citing official weather forecasting agency IMD as well as private agency Skymet, the taem points out that the monsoon rains are expected to revive from the week beginning July 6 onwards.

Rainfall trend India's Food Inflation

Delving deep into the spatial distribution, Chachra and colleagues point out that the highest deficit in rainfall is in Bihar (-32%), followed by Haryana, Chandigarh & Delhi (-30%), Punjab (-27%) and UP (-23%). They note Haryana, Chandigarh & Delhi, Punjab and UP, which account for 29.5% of the kharif output, are largely irrigated, and the deficit in rainfall should not have an adverse impact:

Spatial distribution India's Food Inflation

Focusing on crop area coverage, Chachra et al. note the total area under cultivation is currently tracking at an increase of 60.2% year-over-year as of July 3. The analysts point out that such an increase was aided by oilseeds and pulses. The analysts further note the mix of crops taken for cultivation is also very good from a food inflation management perspective:

Crop area under coverage India's Food Inflation

Chachra and team also highlight unless the rainfall trend deteriorates significantly, area coverage should record healthy growth in the current season.

Food inflation to moderate in India

Keep in mind that with nearly 54% of the crop area dependent on rains, monsoons still influence growth in agriculture in India. The following table sets forth the historical trends in monsoons, agriculture and inflation in India:

Historical trend India's Food Inflation

Chachra and team at Morgan Stanley point out that India’s CPI food inflation has decelerated significantly, reaching 5.1% YoY in May 15 as against 12% YoY on December 13. The analysts anticipate food inflation to moderate further to 4.8% YoY by QE March-16.

The analysts argue that due to several systematic drivers, food inflation will be on a decelerating path. Some of the systematic drivers include sustained moderation in rural wage growth, decline in other operating input costs, sharp moderation in government spending and moderate increase in MSP in the last two years.

However, the team do not build the adverse weather forecast into their CPI inflation forecasts as they believe actual rainfall trends in the past varied significantly relative to initial IMD forecasts. Moreover, they believe international prices of rice and wheat in local currency terms are lower than domestic prices, which they believe will help reduce any damage a lower crop outlook might have on domestic food prices relative to previous cycles:

International rice and wheat prices India's Food Inflation

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