Moody's warns of India's vulnerability to volatile food, energy prices

Says major challenge for countries will be growing demands on fiscal resources to limit impact of price rise

Moody’s Investors Service has warned that India, along with the Philippines, Thailand, and Vietnam are highly vulnerable to volatile food and energy prices in the Asia-Pacific region as the Russia-Ukraine conflict continues to disrupt supplies and raise the cost of agricultural products, especially cereals and vegetable oils, as well as fertilizers and other agricultural inputs.

This is so because these countries have a higher weighting of energy and food prices in their consumer price index (CPI) baskets, Moody’s said in its report released on Tuesday.

The weighting of energy and food in overall Indian CPI stands at over 55 per cent. Food inflation stood at over seven per cent for the fourth month in a row in June, though it declined to 7.75 per cent from 7.97 per cent in May. On the other hand, fuel and light inflation entered double digits at 10.39 per cent in June from 9.54 per cent the previous month even as the rate of price rise in petrol and diesel declined after the Centre and states announced a cut in indirect taxes on these products.

The report said harvests this year in some of the region’s major producers will be hit by other developments, apart from the impact of the Russia-Ukraine war, such as heat waves in India.

Heat waves particularly damaged the wheat crop in India, leading to a surge in inflation in this item. It also damaged other crops such as mango, guava, and chilli.

India reported 280 heat wave days from March 11 to May 18 — the highest in 12 years, according to a report titled State of India’s Environment 2022.

Stating that there is a growing social risk of demands on fiscal resources to limit the impact of price rise and to ensure the adequacy of basic supplies in the region, Moody’s said a major challenge for India and the other countries is that they have less fiscal space than before the pandemic’s outbreak.

The Centre’s fiscal deficit is projected to reduce from 6.7 per cent in financial year 2021-22 (FY22) to 6.4 per cent in the current fiscal. Even this projection is facing stress due to the extension of the free food programme and rising fertilizer subsidy.

“Compensating for domestic food price increases will entail fiscal costs for governments or state-owned commodity companies (in Asia-Pacific). The pace of fiscal consolidation in some of these economies is likely to slow as spending pressures persist,” Moody’s said.

The report cited India’s move to restrict exports of wheat and sugar as an example of wavering international policy coordination amid the Russia-Ukraine conflict.

Against a backdrop of wavering international cooperation, agricultural subsidies to producers will likely play an even more important role in ensuring domestic food security and ensuring stability in agricultural employment. This will be credit positive for agribusinesses, including a number of investment-grade fertilizer manufacturers that Moody’s rates in the region, it said.

On farm subsidies, Moody’s said India probably has negative subsidies for farmers on a net basis, a point that the country can use to buttress its stand on food security at the World Trade Organization.

“While Indian farmers also receive subsidies, domestic producers are implicitly taxed because of complex domestic regulations and trade policies that more than offset any gains they receive from subsidies,” it said.

On the other hand, Japan and South Korea provide among the highest levels of farm support to their agricultural producers as a percentage of farm revenue. In absolute levels, however, farm subsidies in the US, EU, China and Japan are the largest in the world.