Non-veg price rise feeding high food-inflation – Crisil study

Rising incomes in rural India are fuelling greater spends on protein products such as milk, eggs and meat in the hinterland, a study by Crisil Research found.

Overall spending by Indians on protein foods doubled to Rs 2 trillion in 2009-10 from 2004-05, it said.

Most of India’s food price inflation is today due to the rising prices of protein foods or non-veg items, the analysis found.

“The contribution of protein-food inflation (animal proteins: milk, eggs, fish and meat) to overall food inflation has risen from 23 per cent in 2005-06 to over 50 per cent in 2011-12. Especially since 2009-10, there has been a sustained divergence between inflation in protein foods and inflation in other food items.

“Unlike other agricultural products, the supply of protein foods does not depend directly on monsoons; hence, good monsoon does not help in alleviating the upward pressure on protein-food prices. If protein-food inflation continues to remain high, it would keep overall food inflation high, and therefore, raise inflationary expectations further,” it said.

“Protein-food prices would have risen only by 5 per cent per year between 2004-05 and 2009-10 had supply been higher,” it said.

Two-thirds of this spending came from rural households.

But while more rural Indians are getting protein in their diets, the concern is that supply shortages are driving up prices and impacting overall food inflation, according to CRISIL Research.

“The affordability of protein food in rural areas has also increased – for example, with rising rural incomes the proportion of rural households purchasing milk and milk products rose to 80 per cent in 2009-10, almost 5 percentage points higher than 2004-05. While protein-food spending soared, the quantity consumed did not rise concomitantly, reflecting a supply shortfall,” the survey said.

In 2012-13, protein-food inflation for April-September stood at 12.2 per cent.

CRISIL found that there was a large unmet demand for non-vegetarian foods in India.

“In 2009-10, around 11- 16 per cent, 15-21 per cent and 18-25 per cent of the demand for direct consumption of milk, eggs, and meat respectively was unmet due to the shortfall in supply,” it said.

The supply shortfall has led to prices of protein-food contributing nearly 50 per cent to overall food inflation in India. Unless this shortfall is addressed, protein affordability in rural areas could be adversely impacted if wages undergo a correction from their current high growth trajectory.

Driven by rising incomes and population growth, nearly 17 million more rural households bought milk and milk products in 2009-10 as compared to 2004-05, taking the proportion of rural households purchasing milk and milk products to 80 per cent in 2009-10, almost 5 percentage points higher than 2004-05.

Similarly, the proportion of rural households purchasing egg, fish and meat increased to 62 per cent from 58 per cent over the same period. However, rural per capita consumption of milk, eggs and proteins continues to remain lower than its urban counterpart, reflecting a potential for significant further growth in rural demand for proteins. Rural per capita (annual) consumption of milk in 2009-10 was 49.4 litres versus 64.3 litres in urban areas.

The same holds true for meat and eggs where per capita rural consumption stood at 5.7 kg and 20.8 eggs in 2009-10 as against per capita urban consumption of 6.7 kg and 32.1 eggs. Even if the share of rural households purchasing milk remains at the 2009-10 level, another 17 million more rural households would purchase milk and milk products by 2014-15.

Thus, unless the supply of milk, meat and eggs for direct consumption is increased to meet the growing demand, protein-food inflation is likely to remain high, Crisil warned.

“If high protein inflation persists, it could eventually adversely impact protein-food affordability, particularly in rural areas. Given the high nutritional value of proteins, this could be detrimental to the welfare of the rural population. It is, therefore, imperative that relevant measures be taken to increase production of protein-food to address the unmet demand and rein in food inflation,” says Mukesh Agarwal, President, CRISIL Research.

The lack of effective cold storage infrastructure has contributed to the supply shortfall. Says Dharmakirti Joshi, Chief Economist, CRISIL, “The recent decision by the government to allow foreign direct investment (FDI) in the retail sector would help develop a more effective cold storage chain, thus reducing wastage and increasing supply of highly perishable protein-foods.”