Several studies have examined the impact of recent surge in food prices on household welfare. Some predict that an increase in food prices would lead to rise in incidence of poverty while others contradict this arguing that in the in the long run high food prices may actually increase income and reduce poverty. This lack of consensus has led to a debate around the welfare impacts of recent food price shocks. This paper contributes to this debate by analyzing the impact of food price shock on welfare of Indian households located in rural and urban areas. Using natural suitability for food cultivation as a source of exogenous variation, the study identifies the causal mechanism through which the welfare impact of food prices vary across rural and urban location. The results also demonstrate that ignoring the heterogeneity in the impact may lead to misleading conclusions about the impact of high food prices on households welfare. Acknowledgement : This paper is part of my Ph.D. dissertation. I thank Prof. Bharat Ramaswami, Prof. E Somanathan, Prof. Rohini Somanathan, Dean Spears and Diane Spears for their guidance and comments. I am also grateful to seminar participants at 3rd Annual CECFEE Workshop for helpful comments and suggestions.