NEW DELHI: India could face a “stagflationary shock” on account of rising upside risks to food prices, which may result in higher inflation while real GDP growth remains subdued, BMI, a unit of Fitch Solutions, said on Tuesday.
“Higher food prices would constitute a broadly stagflationary shock for India, raising inflation while dampening growth, employment, and fiscal and external balances,” the report said.
Based on its simulations, the report warned that real GDP growth in 2026 could slow by 20-80 basis points (bps) relative to the baseline growth forecast of 6.6 per cent, while inflation could rise by 90 bps to 3.40 percentage points from a baseline of 5.4 per cent during the calendar year.
With over 43 per cent of the nation’s labour force engaged in the agricultural sector, according to World Bank estimates, the incomes and consumption patterns of a large section of the population are exposed to weather risks and price volatility.
On the other hand, rising inflation is likely to affect a much larger population as food comprises 36.8 per cent of the Consumer Price Index (CPI) basket, directly impacting headline inflation and eroding household purchasing power, BMI said.
“Like many of its EM (emerging markets) peers, India’s economy is vulnerable to food price shocks, which can quickly spill over into higher inflation and lower growth,” it added.
The report comes as the twin challenges of the US-Iran conflict and a strengthening El Niño event have gripped the economy.
According to the report, disruptions to shipping in the Strait of Hormuz could limit fertiliser supply and availability, translating into higher input costs. Moreover, a super El Niño event has led to expectations of crop losses in key agricultural production areas such as Asia and Australia.
“The interaction between higher input costs and greater weather uncertainty is particularly concerning,” the report said, adding that this could lead to lower and more cautious fertiliser application by farmers, posing downside risks to crop yields.
The report argued that even though India is a net exporter of food and agricultural products, the economy is likely to be impacted by higher food prices, as any benefits from increased export receipts from rice, sugar and spices would be available only to a narrow segment of the economy.
“The drag on domestic demand would more than offset the positive contribution from stronger agricultural exports, leaving the overall effect on growth negative,” the report said.
Although, according to BMI, India’s food buffers have improved after bumper crop yields in FY26, future price hikes are still likely for perishable items such as fruits and vegetables and for crops with limited reserves, such as pulses.
Source: Business Standard
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