Indias average wholesale price inflation in food articles was 12.24% in the first half of FY14, far higher than the inflation rate of 4.65% for food products, a paradox because the latter additionally includes the margins of food processing units.
The obvious reason for this is the subdued prices of edible oils and sugar, which have a combined weightage of 48% in the manufactured food products basket. But whats kept processed food prices in check is also the increasing trend of processors directly sourcing raw food items from the farmer, which not only helps to eliminate the middleman but also reduce wastages.
Processed food items can lower inflation further if greater synergy is achieved between industry and farmers. Despite being one of the top two producers of fruits and vegetables, Indias processing of these items stands at 2.2% against 65% in the US and 23% in China, says a KPMG report. India accounts for only 2% of the global trade in processed food items.
Reflecting the reduced pricing power at the retail level, the CPI food and beverage inflation in H1 rose slower than the WPI food inflation.
That processing keeps prices low is evident. For instance, while cereal prices have risen at an average of 15.74% in the first half, the price rise in biscuits and bakery products have remained around 2%. Also, even when the price of oilseed prices in the domestic market rose 18.20% in April, inflation in the edible oil segment was 2.01%, thanks to low prices overseas.
Industry executives said one reason for the low increase in processed food prices is that companies tend to stock up significantly from time to time when prices in the open market are relatively low to beat a price rise later.
"Inflation in (primary) food articles this year is pushed up by an exorbitant increase in the prices of vegetables and protein articles like eggs, meat and fish. But the inflation in manufactured food products is contained primarily due to edible oil prices, which are heavily influenced by imported palm oil prices. Palm oil prices globally are coming down and India is getting the benefit of that," Ashok Gulati, chairman of the Commission For Agricultural Costs and Prices, told FE. "Sugar prices being down also impact food products inflation. And this, too, is influenced by global prices of sugar." The country imports roughly 10 million tonnes of edible oil a year,