India’s inflation fight starts in the kitchen

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Getting a taste of juicy tomatoes comes with a steep price tag in India these days. According to 33-year old New Delhi resident Nirmola Sharma, prices have quadrupled since June."It used to cost about 15 to 20 rupees ($0.25-$0.35) a kilogram, now it is about 80 to 100 rupees ($1.30-$1.65)."

Sharma, who shops for a family of five, had hoped the new government would do something to curb the stubbornly high food prices, but sees no respite to date. Instead, her monthly food bill jumped more than 60 percent from a year ago.

Sharma's experience with skyrocketing prices underscores the inflation risk in India, which remains a headache for policymakers. This week brings further clues on the state of price pressures as the government prepares to release data on consumer prices and wholesale prices for July.

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According to poll from Reuters, the consumer price index (CPI) due on Tuesday is expected to show a rise of 7.4 percent from the year ago period compared to a 7.3 percent gain in June, while the wholesale price index is expected to climb an annual 5.1 percent in July compared to a 5.4 percent increase in June.

But some analysts have targets of over 8 percent on-year rise for the CPI, on the back of costlier vegetables and a delayed monsoon season.

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According to a note by DBS, vegetable prices were up 25 percent year on year in July, which will be felt the most among low-income households who spend the bulk of their income on food staples.

Meanwhile, although the recent monsoon season has improved,the rainfall levels remain around 17 percent below average, according to IHS Global Insight.

"This could reduce crop yields and push up prices for keyfood staples," said Rajiv Biswas, IHS chief economist for Asia Pacific, who sees July CPI at 7.9 percent.

Reforms in India may take years: Pro
Reforms in India may take years: Pro   

While adjusting interest rates remain the key policy tool in fighting inflationary pressure, market watchers say the problem can't be easily tackled by the Reserve Bank of India alone. RBI hopes consumer price inflation rate will hit 8 percent by January next year, before falling to 6 percent by early 2016. The central bank kept benchmark interest rates unchanged last week at 8 percent.

"India's inflation is structural in nature, stemming largely from supply constraints, especially in food and infrastructure. While monetary policy remains the first line of defense, a lasting solution to India's inflation lies in real sector solutions like improving and expanding infrastructure and getting its food policies right," Duvvuri Subbarao, RBI's former governor, told CNBC.

Taimur Baig, chief economist at Deutsche Bank, agrees that India's high food prices need a better fiscal recipe. "The government should definitely take the lead to tackle inflation, especially when it comes to improving the supply side policy," he said.

While he is expecting CPI in July to fall to a lower than consensus rate of 7.1 percent year on year, he notes the risk of higher food inflation is very real, especially if the government fails to keep up the speed of its food inventory release, to cope with possible shortfall.

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That puts the burden back on newly-elected Prime Minister Narendra Modi, whose election victory in May raised hopes of quick action to tackle India's food shocks. But so far, most have criticized his policies of the old cookbook of import curbs and punishment for hoarding to tackle food inflation.

"India's food price fluctuations reflect decades of under-investment by successive governments in agricultural infrastructure, the government needs to substantially accelerate programs to build modern food storage and distribution systems, as well as significantly improve water storage and irrigation systems," said IHS's Biswas.

Economists say curbing runaway food prices will be vital if India is to achieve a broader revival from a two-year-old slowdown in growth.

"Curbing inflation remains one of the challenges India is facing, because high inflation limits room to ease monetary policy, which is necessary to boost economic recovery," said Biswas. "70 percent of India GDP comes from consumer spending,so until you bring rates down you cannot boost consumption in a big way."