NITI Aayog Expert Warns of Potential Inflationary Pressures from Prolonged Iran Conflict

India's Inflation Outlook: Energy Costs and Fertiliser Production

Retail inflation in India edged up to 3.2 percent in February, from a revised 2.74 percent in January, according to government data released on March 12. The Consumer Price Index (CPI) rose to 104.57 in February, up from 104.46 in January and 104.10 in November and December, marking the fourth straight month of sequential increases in the price index.

The prolonged conflict in West Asia could push up food and overall inflation as higher energy prices raise the cost of producing and transporting goods across the economy. NITI Aayog Member Ramesh Chand noted that energy costs could increase fertiliser production expenses and eventually feed into broader inflationary pressures, even though India's food supply remains relatively secure due to strong domestic production.

India's food self-sufficiency provides a buffer against global supply chain disruptions, with the country producing most of its food domestically. However, fertilisers represent the biggest vulnerability for agriculture, if energy prices rise. Roughly 80 percent of India's urea requirement is produced domestically, while about 20 percent is imported, with imports diversified across several countries, including China.

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To mitigate potential supply pressures, India could improve fertiliser use efficiency across states by rationalising fertiliser use, diverting supply to states with balanced requirements. Additionally, promoting bio-based agricultural inputs, such as decomposing agricultural waste into organic inputs, could reduce dependence on chemical fertilisers.

Key Risks and Opportunities

• Rising energy costs could push up food and overall inflation
• Fertiliser production expenses may increase, affecting broader inflationary pressures
• India's food self-sufficiency provides a buffer against global supply chain disruptions
• Fertiliser imports are diversified, with options to procure from countries like China and Russia
• Improving fertiliser use efficiency and promoting bio-based agricultural inputs could mitigate potential supply pressures.