Food, fuel, and facts: Distributional effects of global price shocks

Abstract

We show that global commodity price shocks lead to a significant decline over time in Indian household consumption. These negative effects are heterogeneous along the income distribution: households in lower income deciles experience more adverse consumption effects following an exogenous rise in food prices, whereas households in both the lower and the middle income deciles are affected similarly following an exogenous rise in oil prices. We investigate how income and relative price changes contribute to generating these heterogeneous consumption effects. Global food price shocks lead to significant negative real earnings effects that mirror the pattern of negative consumption effects along the income distribution. Both global oil and food price shocks pass-through to local consumer prices in India, increasing the relative prices of fuel and food respectively. Consumption expenditure shares of food and fuel however, increase for certain income groups with such a rise in relative prices, thereby providing evidence for non-homothetic preferences. Specifically, we show that food, and particularly, pulses and sugar, is an essential consumption good for the lower income groups, whereas fuel is an essential consumption good for the rich.