Food inflation in india: trends and causes

Food Inflation in India Trends and Causes

Presented byGourav Kumar Vani

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CONTENTS

•INTRODUCTION

•TRENDS IN GENERAL AND FOOD INFLATION

•CAUSES OF FOOD INFLATION INDIA


INTRODUCTION •India being a developing country has to bear the necessary evil of inflation.

•Food inflation or Agriflation has remained a major area of concern for the policy makers

after independence.

•Following the years of liberalization India started to change structurally but still it had

around 70 percent of the rural population depending on agriculture for its livelihood in 1990’s

(Survey of consumption expenditure, NSSO, 1999-2000).

•Households that were self employed in agriculture accounted for 28 percent of all the poor,

while households that were primarily dependent on agriculture as labour account for 47 percent

of all the rural poor.

•In such a situation a high rate of food inflation was equal to taxing the poor people who

spend most of their income on food items.

•These facts made focus on food inflation even more important to policy decisions.

Currently population depending on agriculture has come down to 52.8 percent but recent

hyperinflation in food commodities has renewed the interest of research scholars in Agriflation in

India.


TRENDS IN GENERAL AND FOOD INFLATION

Observation: inflation in food product was more than inflation in primary articles and general inflation until 2001-02. There after inflation in food products cooled down and remained lower until the next spike came in during late 2009. WPI for all commodities remained lower than either of the two, i.e., inflation in food products and primary articles. Base year is 2004-05 where both series are equal to 100.


Observation: WPI for Cereals and Bakery products were in tandem until 1997-98 after which both the series started to diverge and after base year 2004-05, they diverged completely. Higher WPI for Bakery products can be attributed partly to increase in WPI for cereals.


Observation: For most part of the series WPI for grain milled products remained lower than that of WPI for foodgrains except for 1993-97 and some part of 2006-07. Base year is 2004-05 where both are equal to 100. Thus inflation in milled products is lower than that of raw materials.


Observation: Except for period between 1994 to 2000, dairy products had lower WPI than that of raw milk. It is clearly visible that raw milk prices took a steep hike in prices from 2009 onwards. However 2009 onwards, dairy products prices did not rise more as fast as that of raw milk. Base year is 2004-05.


Observation: WPI for edible oil was higher that that of WPI for oilseeds until 2000 but the trend reversed thereafter . After 2000, WPI for edible oil remained below that of oilseeds except for some abnormal short-periods. Base year is 2004-05.

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Observation: WPI for manufactured food product was higher than that of primary products. But from 2000 onwards, trend has reversed and for most of the time later on WPI for manufactured food products has remained lower than that of primary articles. Base year is 2004-05.

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Causes of food inflation India1. Supply shortfall: Imbalance between demand and supply is cited as one of the

major source of food inflation in India. This imbalance is due to two major

factors as following

• Inelastic supply of agricultural commodities: It is well known fact that supply

of agricultural commodities cannot respond very well to the price incentive

generated by the market. This is because agricultural production takes place

only during a specified season and all operations are time bound. Each

agricultural operation is so time bound and these timings cannot be altered in

short run. According to Kumar, et al. (2010), own supply price elasticities for

rice, wheat, sugarcane, pulse grains and oilseeds were 0.24, 0.22, 0.12, 0.17

and 0.51 percent respectively. This shows that supply of these crops is price

inelastic.


•Shift in consumption pattern: It is natural to expect the fall in consumer expenditure on food commodities as per Engle law of consumption expenditure. So with growth in per capita income the above expectation remains a valid one. This can be observed in considerable shift in consumption pattern of the agricultural commodities in last five decades after independence.

Item group 1993-94 1999-2000 20004-05 2009-10 2011-12

Cereal 24.2 22.2 18.0 15.6 12.0Pulse and their products 3.8 3.8 3.1 3.7 3.1Milk and milk products 9.5 8.8 8.5 8.6 9.1Edible oil 4.4 3.7 4.6 3.7 3.8Egg, fish, meat 3.3 3.3 3.3 3.5 3.6Vegetables 6.0 6.2 6.1 6.2 4.8Fruits and nuts 1.7 1.7 1.9 1.6 1.9Food total 63.2 59.4 55.0 53.6 48.6Non food total 36.8 40.6 45.0 46.4 51.4Table 1: Trends in Percentage Composition of Consumer Expenditure since

1993-94 for Rural IndiaSource:-NSSO, Ministry of Statistics and Programme Implementation, GOI, New Delhi, June 2013


Item group 1993-94 1999-2000 20004-05 2009-10 2011-12

Cereal 14.0 12.4 10.1 9.1 7.3

Pulse and their products

3.0 2.8 2.1 2.7 2.1

Milk and milk products 9.8 8.7 7.9 7.8 7.8

Edible oil 4.4 3.1 3.5 2.6 2.7

Egg, fish, meat 3.4 3.1 2.7 2.7 2.8

Vegetables 5.5 5.1 4.5 4.3 3.4

Fruits and nuts 2.7 2.4 2.2 2.1 2.3

Food total 54.7 48.1 42.5 40.7 38.5

Non food total 45.3 51.9 57.5 59.3 61.5

Table 2: Trends in Percentage Composition of Consumer Expenditure since 1993-94 for Urban India

Source:- NSSO, Ministry of Statistics and Programme Implementation, GOI, New Delhi, June 2013


Commodity Expenditure Elasticity Rice -0.21 Wheat -0.13 Pulse -0.24 Edible Oil 0.90 Milk 0.55 Vegetables 0.64 Sugar 0.83 Eggs 1.31 Fish, Chicken and Meat 1.17

Table 3: Estimated Elasticities of food expenditure in India by commoditiesSource: - Ganeshkumar, et al., 2012


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Food Grains (Cereals and Pulses) Vegetables Fruits EGGS,MEAT & FISH CONDIMENTS & SPICES

OTHER FOOD ARTICLES MILK

Figure 2: Weighted Contribution to Food Inflation


2. Effect of ill distribution of rainfall: Agricultural sector depends on monsoon

for because only 39 percent of net sown area was irrigated in 2001.

Mohanty (2014) had found two structural breaks in food inflation

series at April-1999 and April-2007. Of these two, the later break was

attributed to the deficient rains during 2002-03 and 2004-05.

It had been reported that due to drought and floods in various parts

states during 2008-09 caused considerable loss of output and food grain,

sugarcane and oilseed output growth were 1.34 per cent, -22 per cent and -5.38

per cent respectively. As a consequence, average WPI inflation rates between

March 2008 and July 2010 were double digit number for milk (15.24 %),

fruits (11.22 %), foodgrains (12.34 %) and egg, fish & meat (17.66 %)

(Chand, 2007; Nair & Eapen, 2012). However, it remains a major fact that

good rains after drought in 2008-09 failed to cool down the effect drought on

food prices.


3. Government’s Apathy: Central Government has failed in keeping the prices

under check.

On one side Government has failed to release the sufficient quantity

of foodgrains from Food Corporation of India’s (FCI) godown to market

while on other hand it could not prevent loss of extra grains stored for the

period. Also, when country was facing drought situation then Union

Government prescribed the strategic reserves of wheat and rice of 3 and 2

million tonnes to be maintained in addition to the minimum stock of wheat

and rice to be held at 11 and 5.2 million tonnes during October (Food

Corportation of India, 2015). During 1st-July-2012, FCI held stock of

80 million tonnes of food grains against capacity of 64 million tonnes

including CAP storage capacity ( Food Corportation of India, 2015).


The Food Corporation of India (FCI) has admitted in data accessed

through RTI that the amount of damaged wheat has increased from 2,010 tonnes in

2009-2010 to 2,401.61 tonnes (2011-2012). (Vani, 2013).

During 2009,International Food Price Index was 20 per cent lower than it

was in 2008 but in food prices were rocketing in domestic market. At this point of

time, Government did not import sufficient quantity to cool down the prices.

Government knew that drought was setting in India and there would be

crisis in not adequate measures are taken. Instead of planning for import of

foodgrains, Government of India allowed export of foodgrains.

Consequently, share of foodgrains exported in total production went up from 6.2

per cent to 10 percent between 2003 to2009 This happened despite the fact that

India had frequent droughts for three periods starting from 2002-03, 2004-05 and

2008-09.


This means that additional quantity of foodgrains produced between 2002

to 2009, went to foreign countries when Indian markets and people were

hungry for food(Chand, 2007; Mohanty, 2014).

This apathy of public agencies was also due to Sugar barons lobbying

Government for not imposing ban on the export of Sugar. Early in 2009, Sugar

export was allowed when sugar prices were hovering around $290 per tonne and

later on when sugar shortage started in domestic market then taking a cue from

Indian sugar shortage, world market price went up to $470 per tonne.

Later on Government of India imported sugar at double the price it was

exported. Thus india lost more than it could gain by exporting while at the same

time Sugar barons gained not only be exporting but also by making money in

domestic market in later period. Same was the case for Onion as well (Chand,

2007).


4. Effect of Minimum Support Prices: Sonna, et al. (2014) found strong effect

of increase in average MSP in short run on food inflation.

5. Rural Wages and MGNREGA: Rural wages matters most to the farming

because farming is still an area dominated by high degree of manual

operations and mechanization was hindered due to small size of farm holdings

(Mohanty, 2014). Thus every increase in rural wages would lead to many

times effect on food prices.

Sonna, et al. (2014) found rural wages as strong influencer on food

inflation in short-run as well as in long-run. Effect of rural wage increase

would last longer than hike in average MSP. Since food inflation onslaught in

2009 coincided with expansion of MGNREGA to all 615 districts having rural-

areas, led many scholars to think that MGNREGA is the cause for labour

scarcity and rural wage hike.


6. Cost of agricultural inputs: Both Mohanty (2014) and Sonna, et al. (2014)

agrees to the fact that agricultural input cost had strong positive impact on

food inflation in short-run.

7. Effect of Exogenous Variables: There are many variables which are out of

the reach of economy and hence, the government cannot exercise any control

on such variables at least in short run. To list some of the variables relevant

to the context of food inflation are oil prices, exchange rate, global prices of

food and agricultural inputs. Oil prices have very much influence on cost of

cultivation because energy and fertilizer cost are the two major costs in cost

of cultivation that are directly linked with oil price.


Effect of oil prices becomes even worse when high global prices

combined with depreciating currency. In this context, inflation induced by oil-

price shocks of 1970’s and ensuing events must be remembered. (Mohanty, 2014).

It has been observed that whenever India faces or is about to face

shortage of critical food supplies then global food prices shoot up to very high

levels. Because India is the major consumer of the most of the staple food grown

across the world. Thus whenever Indian Government procured from international

markets, it had to pay higher prices.


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Economy & Finance

Food inflation in india: trends and causes