2/3rd of protein food demand driven by rural households:Crisil

Rising income levels in rural areas have led to an unprecedented demand for protein-based food items, leading to sustained pressure in headline inflation, says a Crisil report.

"Rising incomes in rural areas are fuelling greater spends on protein products such as milk, eggs and meat in the hinterland. Overall spending in the country on protein food doubled to Rs 2 lakh crore in 2009-10 from 2004-05. Two-thirds, or Rs 1.33 trillion, of this came from rural households," according to the Crisil report.

The report warned that while more and more rural population is getting protein in their diets, the concern is that supply shortages are driving up prices and impacting overall food inflation.

Overall, the report said that households spent Rs 2,02,700 crore in 2009-10 compared with Rs 96,100 crore in 2004-05 on animal-sourced protein food, namely milk, meat, fish, and eggs.

It further noted that with the rising incomes and population growth, nearly 1.7 crore more rural households have bought milk and milk products in 2009-10 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 they did in 2004-05.

Similarly, the proportion of rural households purchasing eggs, fish and meat rose to 62 per cent from 58 per cent over the same period, the report said.

The report further said in 2009-10, almost 20 per cent of the demand for direct consumption of milk, eggs, and meat was unmet due to the shortfall in supply, which further fuelled inflation.

For the first time in many months, food inflation came down to single-digit in August at 7.5 per cent, while overall headline inflation inched up a tad to 7.81 in the month. Food inflation stood at a high of 10.5 per cent in May. The persistently high inflation has been forcing the Reserve Bank to hold interest since April.

The rising rural income can be attributed to the more social inclusion projects like the rural employment guarantee scheme of the Central government which gives 100 days of assured jobs to poor households.

Even the Reserve Bank has been taking note of the impact of rising rural income on inflation in its policy assessments for quite some time now, as this has pushed up the overall rural wages.

Crisil estimated that in 2009-10, 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.

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

"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," it added.

However, it says, rural per capita consumption of milk, eggs and proteins continues to remain lower than it is in urban areas, reflecting a potential for significant further growth in rural demand for proteins.

Annual rural per capita 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 the capita urban intake of 6.7 kg and 32.1 eggs, Crisil said.

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, the report said.

"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 the monsoons. Hence, good rain falls do 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," says the report.

"The recent decision by the government to allow foreign direct investment in retail will help develop a more effective cold storage chain, thus reducing wastage and increasing supply of highly perishable protein-foods," Crisil chief economist Dharmakirti Joshi said.

The report also says protein-food prices would have risen only by 5 per cent per year between 2004-05 and 2009-10 had supply been higher by around 11-16 per cent, 15-21 per cent and 18-25 per cent in milk, eggs and meat, respectively.