India’s credit negative food inflation has broad monetary implications
“Sustained food inflation is credit negative because it exacerbates India’s macroeconomic challenges of slowing growth, high inflation and large fiscal and current account deficits,” said the global credit agency’s investors service.
The assessment comes soon after competing agency Standard & Poor’s said a slowdown in India’s domestic growth is adversely affecting India’s sovereign ratings.
However, Moody’s has retained India’s “stable” outlook even though Fitch and S&P had last year downgraded it to “negative”.
The Wholesale Price Index for last month showed that food prices had increased by 11.4% year-on-year—much faster than the global average. This food inflation has served to boost overall inflation for the month to 6.8% despite a 3.8% slowdown in core inflation.
Higher food prices can accelerate broader inflation by pushing up wages, while negatively impacting government finances and reducing monetary policy flexibility. When food inflation is sustained, it has the power to push up wages and reduce the extent through which the central bank can lower interest rates—a big issue in India, where the cost of credit is high.
Sustained food price rises also serves to reduce the competitiveness of exports and sectors that compete on imports.
“Although food inflation is not desirable anywhere, it has particularly credit negative implications for India because of its economic structure and policy framework,” Moody’s reported.
Hurting balance of payments
Food inflation, it said: “hurts consumption, government finances, the balance of payments and monetary policy flexibility.“
“Because the Indian government subsidises food for a large portion of the population, increases in food prices inflate government expenditure… and the budget deficit, which is already high relative to comparable emerging markets.”
The agency estimates that food accounts for more than half of India’s average household spending, which will be a worry for an economy that relies largely on private consumption.
While increasing food supply could be a solution, India has traditionally been constrained by poor rural infrastructure, inefficient food distribution and storage and by agricultural productivity, Moody's also warned.