Food Inflation in India

I am not targeting this article for Economic students alone, so I will try to make it simple and easy to understand yet strong.

A GENERAL INTRODUCTION

So to begin with, I must describe to my readers what inflation is?.. Inflation in simple terms can be defined as a general rise in price level. And for budding economists I will put forward the definition given by Wicksell, Hansen and Keynes: ‘Inflation is the result of excess demand over full employment’. Also one by Caul Bourn who says: ‘Inflation is a situation where too much money chases too few goods’. Inflation may arise because of two main reasons: 1. Demand increases over the supply of goods and services (Demand pull Inflation). The demand for goods and services increases well above its supply..... naturally price rises. 2. Cost Push Inflation – A situation where price rises on account of increasing cost of production for any reason. When price of various factors of production like land, labour etc... increases, cost of production is bound to increase and so is the case with finished final goods and services. Let me also inform you that there are two measures of Inflation that are commonly used. 1. Wholesale Price Index (WPI) and Consumer Price Index (CPI).In India we use WPI as the common measure of Inflation. Let me not bore you with more economic facts and get to the point straight away......

Food Inflation based on the WPI for food articles & food products reached double digits in April 2009 and have crossed the 20% level by December. We must have in mind that Inflation in retail level is more important than the wholesale level because it is what matters in the case of consumers. This is true in the case of all Economies. In order to maintain the consumption pattern or level, Indian consumers should spend about 20% more on food compared to previous years. This is surely going to worsen food and nutrition deficiency, which remains at a very high level.    

THE GENERAL TREND OF INFLATION

The average annual inflation based on the WPI (1993-94) was close to 6% during 1994-95 to 2004-2005. But during these periods, food inflation varied between 4% to 7% and comparatively it was lower than that of normal inflation rate. But the scenario changed after 2005; food prices increased at much faster rate than non-food items.

It is to be noted that food inflation touched near to 20% in January 2010. The annual average of food inflation during the period 2006-2009 was very much higher than that of ordinary inflation. Statistics show food inflation was 80% more than ordinary inflation during this period. The highest inflation is observed in the case of pulses and the lowest in the case of edible oils. Now let me throw some light on the reasons behind the current food inflation.

FACTORS AFFECTING FOOD INFLATION

The acceleration in food inflation towards the end of 2009 have been caused by several factors , relating to a shock in supply, trade, global prices, food management, speculative activities and demand.

                        
          (1)Production

In India, food inflation commenced accelerating in the beginning of 2008, even though production was double than that of the domestic demand. But a major portion of this did not enter domestic market (supply). As global price soared in 2007 and 2008, exports seemed attractive. The share of exports in domestic production of food increased from 6.2% during 2003-04 to 2005-06 to more than 10% during 2006-07 to 2008-09. This resulted in the seeping in of global prices to the domestic market to a certain extent. The main cause of an increase in food prices during 2008 was the influence of exports led by high global prices.

Global food prices cooled down considerably during 2009. The FAO Food Price Index in 2009 was 20% lower than in 2008. In contrast to the global trend, domestic food prices followed a rapid increase through 2009. The main factor underlying high food inflation during 2009 and beyond is that, growth in food production during 2008-09 fell short of demand. Contributing to these woes large parts of the country experienced deficiency of 2009 southwest monsoon resulting in draught, which caused considerable loss to kharif output. According to the advance estimates issued by CSO, food grain product in 2009-10 is estimated to decline by 8% and oilseeds and sugarcane by 5% and 11% respectively. The decline in food production was bound to occur since we have no mechanism to promptly correct the imbalance in demand and supply.

                        
          (2)Trade and Global Prices

Changes in international prices exert direct and indirect influence on domestic prices. However this influence varies greatly across commodities. The prices of edible oil in India turned out to be lower than that in 2008, even though the domestic production fell by 5%. Imports which meet around 40% of domestic demand for edible oil is the major factor holding edible oil prices at low level.

Then how come the prices of rice, wheat, egg, sugar, pulses, meat, fish etc... have not decreased? In commodities like pulses, the global market is very thin. The total trade in pulses is around 10 million tonnes, out of which India imports about 30%. The global market does not seem to be having the capacity to meet India’s rising demand for pulses.

The lack of cooperation between the centre and the states further complicates the likelihood of a quick execution of the import option to meet the domestic shortage, as was seen in the case of sugar recently.

CONCLUSION

It is relevant to ask whether proper food management could check this high inflation levels. India needs to be stronger in food management like keeping more buffer stocks and utilising it properly. Proper implementation should be in order and the gap between desired action taken and actual action taken should be minimised to a great extent. India needs to invest heavily in expanding storage capacity for various types of food in public and private sectors. A food market regulator should be established to check hoarding and speculative trade. To keep food inflation at low levels, India must develop improved technologies for raising food production to meet the ever increasing demand.