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| FOOD INFLATION- CAUSES & NEEDED CORRECTIONS |
After inflation and agflation, the new economic phenomenon is foodflation: prices of food items increasing sharply across major product groups. An interesting aspect of foodflation today is that it is not captured by the conventional WPI, and CPI numbers only touch the periphery of the issue. Disaggregated WPI data shows that prices of cereals have increased by 11%, pulses by 17%, vegetables by 26 % and sugar by 33 % (as of July 18th). And what can be done? There are three parts to the answer to the first question. |
The first pertains to foodgrains, where production has been higher than last year. Increase in MSPs was 30% for paddy and 8% for wheat last year. These two cereals constitute 80% of total cereals production and 70% of total foodgrains.
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Also with changes in income mobility there has been a tendency for shifting preference to rice and wheat from coarse cereals, which has pushed up demand for these grains. With progressively higher procurement of rice and wheat by the FCI, there has been a squeeze in the private market, thus bringing about this anomaly of coexistence of rising prices and excess stocks of 50 mn tonnes of wheat and rice. |
The second story pertains to pulses, which have witnessed abnormal increases in prices. The basic problem is that July-September is the period when there are no fresh arrivals in the market. The kharif crop of tur, urad and moong arrives from late September onwards and hence, present consumption has to be met from the stocks of last year. |
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Now, in FY09, there was a fall in production of tur, urad and moong. Unlike rice and wheat where there are buffer stocks which can be used, there is no such option for pulses. One way of augmenting supplies is through imports; but in case of pulses there are limitations in terms of harvest timings in countries like Myanmar and Canada, and supplies will continue to be squeezed until then. |
There have been two associated issues here. The first pertains to the impact on rabi crops like chana and masoor, where prices have been volatile, albeit to a lower extent due to substitution in the consumption of pulses. Further, the months of August till November are the festival season in India, when typically demand for food products increase. The second is that inflation expectations have been heightened by the news of the subnormal monsoon this year. Conjectures are that output will be affected across crops, especially rice, tur and urad on account of deficient monsoon, late sowing and probably late harvest. Hence, monsoon-related inflation expectations have added to the price increase that we are witnessing today. |
The third part of this story of foodflation is in the area of vegetables and sugar. Vegetables prices have increased due to lower output on account of delayed monsoon and higher transport costs due to the increase in fuel prices announced in June. |
It must be pointed out that even as the WPI shows a decrease in fuel prices of around 12% due to the impact of high base year, higher diesel prices have fed into the price of transportation, which is irreversible for some time now. The indirect impact of a fuel price increase is more significant than the direct increase and will impact prices of all food products which are primarily transported by road. |
The higher price of sugar witnessed this year has been brought about by low production and a mess-up in policy. Production declined by over 50% in FY09, and indications are that there could be problems this year too given the possible lower production of cane this year. More importantly there are low carry-over stocks which will exert pressure on the prices this year too. In hindsight it may be said that the policy to export surplus sugar of almost 5 mn tonnes in 2007-08 has perhaps led to the problem of high prices today. |
Foodflation in India is serious because it affects the real standard of living of all households. So, what can be done? There unfortunately appears to be no immediate solution except imports wherever it is possible. With a slightly longer perspective, we need to revisit our policies to ensure that MSPs, procurement or excess procurement, absence of buffer stocks concept in non-rice and wheat products, export-import of farm products are all looked at as part of a comprehensive policy rather than as adhoc measures, which are the norm. Madan Sabnavis –Courtesy F E Aug 06, 2009 |
| New inflation data series to downgrade food inflation : |
The new Wholesale Price Index (WPI) series with a revised base of 2004-05, an updated product portfolio and increased data points will understate food inflation, as the weight accorded to primary articles will see a significant decrease from the current 22.02 per cent to around 10 per cent. The new series, expected to be out by October, will see a significant increase in the weightage for the manufactured products category to around 80 per cent from the current 63.75 per cent. |
Economists argue that an understatement of food inflation in the major inflation indicators will mislead the direction in which prices are moving; however, it will not have any major effect on the formulation of monetary policies. “If the weight of primary articles do go down, then the divergence between CPI and WPI will continue and might increase further. The WPI-based inflation rate, which is followed more widely than CPI, would of course be a little misleading for the common people. However, as increase in food prices is related to supply side problems and monetary policy generally pertains to the demand side, there should not be any major effect on the policy making front.” |
Agriculture contributed around 32 per cent to the GDP in 1990-91; its share went down to 20 per cent in 2005-06 and now stands at around 16 per cent. The trend continues and as the GDP base is also set to be revised, the share of agriculture is expected to contract further. |
The weight of the primary article category was reduced by around 10 percentage points to 22 per cent when the base of the series was revised from 1981-82 to 1993-94, as the manufacturing sector started making a major contribution to growth.
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