How does supply chain distortion affect food inflation in India? During the recent episode of persistently high food inflation in India in 2007-2014, the role of rent seeking activities of food suppliers emerged as the centre of debate in the country. The rent seeking activities of agents in both wholesale and retail marketing of food, and the lack of a competitive food market and required infrastructure, often causes large positive shocks to mark-ups. This paper estimates the contribution of the mark-up shocks at both wholesale and retail levels, in food inflation. In the process, indicators for mark-up at wholesale and retail activities were developed, using farm, wholesale, and retail price data of various food commodities, sourced from the Directorate of Economics and Statistics, Department of Agriculture and Cooperation, Ministry of Agriculture. In the study, the ratio of wholesale to farm harvest prices defines the indicator for wholesale mark-up, while the ratio of retail to wholesale food commodity prices proxies the mark-up at retail level. The study finds moderate but significant pass through of mark-up shocks in food inflation after controlling for other factors. The duration of the transmission effect depends on the origin of the shock in the wholesale market, while the effect seems to last for five months in retail food inflation. Against the backdrop of the advocated competitive national market for food, this paper makes a contribution towards understanding the extent to which stabilisation of mark-up shocks at both wholesale and retail levels can lower wholesale and retail food inflation in the country.
