The rising cost of essential food items in India, including onions, vegetable oil, and ginger, is placing significant pressure on household budgets. Food constitutes a substantial portion of expenditures: for some rural families, it accounts for nearly half of monthly spending, while in urban areas, it is around 40 percent.
According to the latest consumer price index for August, onion prices have increased by almost 50% compared to the previous year, and ginger, which is essential for flavoring dishes, has risen by more than 70%. There is also an observed increase in the price of vegetable oil used for frying street snacks.
Several factors are influencing this rise. Firstly, the annual monsoon was weaker than usual, leading to water shortages on farms. Secondly, increased production of biofuels to ensure energy security is diverting grain crops. Thirdly, military actions in Iran and Ukraine are contributing to higher global prices for fuel and agricultural products.
As a result, food has become a key driver of inflation in the country, making up over a third of the retail inflation basket. The overall inflation rate in August approached the upper limit of the central bank's target range. This situation may serve as a warning for other countries facing the consequences of conflicts and extreme weather events, exacerbated this year by the El Niño phenomenon.
Madan Sabnavis, Chief Economist at Bank Baroda, noted that in an interconnected world, the problem lies not in supply, but in prices.
The monsoon rains, concluding this month, are an obvious sign of the problem. Rainfall since early June lags 15% behind the normal level, and the meteorological department forecasts continued low precipitation in September. This deficit is linked to the El Niño phenomenon, known for causing drier years in the country.
This could negatively affect crop forecasts for crops such as rice, soy, corn, and sugarcane. Rice and corn plantings lag behind the previous season by more than 3%, and time is running short. In August, domestic sugar prices rose sharply due to scarcity fears, forcing the government to permit duty-free sugar imports—an unusual move for a country ranking second globally in production.
According to Yuvika Singhal, an economist at QuantEco, in years of deficient monsoons, every one percentage point lag in rainfall from the norm leads to an increase in food inflation of approximately 25 basis points.
Biofuel policy is also playing a role. The country accelerated its goal to blend 20% ethanol, originally planned for 2030, to 2025, which stimulated the expansion of a network of thousands of fuel stations. This policy increased the demand for corn and rice as raw materials, alongside sugarcane. Sabnavis suggested that this could further restrict domestic food and feed stocks, as farmers are likely to sell their harvest to ethanol producers if the price is higher.
Ajaz Azam Qureshi, a chicken and egg vendor in Mumbai suburbs, reported that the price of feed for live poultry, which he buys daily, has doubled in the last month. He raised his prices to 260 rupees ($2.74) per kilogram from the previous 240 rupees, despite the holy month of Shravan reducing meat demand. However, he expects further price increases after the end of the sacred period in Maharashtra, planning to raise them to 300 rupees ($3.20).
Qureshi stated: 'I have to protect my margin, but the price hike forces customers to reduce consumption, and business will decline. However, if feed prices do not decrease, we cannot lower the price of chicken.'
Data from the Central Statistical Office also shows that major dairy products, such as paneer (soft cheese) and milk, have become more expensive. Furthermore, cooking has become costlier. Earlier this year, India faced a shortage of liquefied petroleum gas needed for cooking due to the Middle East conflict. Shivam Fauzdar, owner of a small restaurant in the Noida suburbs, said he raised prices after the initial spike in gas costs, but now that ingredient costs are rising, it is difficult for him to increase menu prices further. His business competes with half a dozen nearby street carts offering flatbreads with a serving of vegetables or lentils at lower prices.
Fauzdar noted: 'We cannot raise our rates because customers will stop coming.'
The situation will become particularly relevant during the Indian festive season, which begins around now and culminates in Diwali—the Hindu festival of lights—in November. This period is traditionally characterized by increased food consumption, with demand for sugar and vegetable oil peaking due to the consumption of more traditional sweets, fried foods, and other treats.
Food inflation has accelerated every month this year, and its growth will impact interest rates, as the country's central bank targets overall consumer price inflation. Broader inflation in August accelerated to its highest level since December 2024, exceeding the Reserve Bank of India's medium-term target of 4 percent for the third consecutive month.
The central bank, which cited El Niño as a key risk to food prices, has not changed rates since the beginning of the year. Economists are increasingly seeing a higher probability of an interest rate hike as early as October.
RBI Governor Sanjay Malhotra stated in a recent interview with CNBC TV18 that inflation 'is no longer harmless.' He added that risks must be monitored when higher prices for food, fuel, and other input resources could lead to widespread inflation and 'de-anchoring of expectations,' noting that any evidence of these risks materializing could necessitate a tightening of policy.