Cereal and Fuel Price Interactions: Econometric Evidence from India

What's fuelling the food prices? While several reasons abound, the role of fuel prices in fuelling food prices cannot be negated. Evidence suggests that there is an increasing co-movement between world oil prices and agricultural commodity prices, with rising demand for bio-fuels also impacting the relationship. This has reinstated the interest in determining the price transmission from world crude oil prices to that of agricultural commodities. In this context, the present study analyzes the fuel-food price relationship in the Indian context. In addition to food and fuel prices, both domestic and international, two macro-economic variables, viz., inflation and real effective exchange rates have been analyzed. Using monthly time series data over the period April 1994 to December 2014, the long -and short term interactions between the variables have been estimated using Toda-Yamamoto causality and Johansen cointegration tests. Additionally, using VAR estimates, the impulse response functions have been generated and analyzed. A specific highlight of the present paper is the analysis based on forecast error variance decomposition. Analysis based on impulse response functions indicates that international cereals price, and fuel prices-both domestic and international, in general, have a positive impact on domestic cereal prices. Based on variance decomposition of domestic cereal prices, the findings indicate that shocks to fuel prices- both domestic and international, have a negligible impact on domestic food prices over ten months period. In view of India's mandate on bio-fuel policy, as also the recent deregulation of fuel prices, the associated impact on food prices cannot be overlooked. The paper concludes with a broad policy perspective.