Food, Fuel, and Facts: Distributional Effects of Global Price Shocks

Exogenous 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 groups experience more adverse consumption effects following an exogenous rise in food
prices, whereas households in the lowest and the two highest income groups are affected similarly
following an exogenous rise in oil prices. We investigate how income and relative price changes contribute
to generating these heterogeneous effects. Global food price shocks lead to significant negative wage
income 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 and increase the relative
prices of fuel and food respectively. Expenditure share of food increases with such a rise in relative prices,
which provides unambiguous evidence for non-homothetic preferences. Using the expenditure share
responses together with theory, we show that food, compared to fuel, is a necessary consumption good
for all income groups.