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Food inflation is no mystery by Soma Banerjee

If you thought only onion made headlines and governments fall, here is some more food for thought. The retail prices of brinjal soared 110% and those of tomato by 125% between the first weeks of November 2010 and January 2011, while the rise in crude oil paled in comparison, climbing about 12% in the same period. While import-dependent economies are struggling to keep their fiscal math in shape with crude oil hovering close to $100 a barrel, vegetable traders have ensured most homemakers to drop their favourite baingan ka bharta off their menu too.

Except for this year, volatility in perishables such as fruit and vegetables does not hog the limelight as, say, oil. Interestingly, the factors leading to the price escalation of both oil and the brinjal-tomato combo are mysterious.

While Opec, accounting for 40% of the world’s oil production, claims that there is surplus capacity in the system, most farm economists say that the production of brinjal and tomatoes has not shown a significant drop to cause the sharp price rise. If at all, the increase in prices — 71.5% week-onweek in the case of brinjal for the week ended December 18, 2010, and 73% week-on-week for tomatoes in the week ended December 25, 2010 — was only driven by sentiment, a chain effect led by onion prices.

The skyrocketing prices of brinjal, tomato or even crude oil certainly had little to do with supply shortage. But here is where the story of crude oil and veggies takes a turn. The steep veggie prices led to record food inflation figures of over 18%, giving sleepless nights to Prime Minister Manmohan Singh and his men. Petrol prices that went up by . 2.54 a litre did little to fuel inflation.

In fact, the impact of the 5% hike in petrol prices on the wholesale price index was a negligible 0.05%. Moreover, those impacted by petrol prices are city dwellers, mostly owners of private vehicles. Public transport runs on diesel or compressed natural gas; and the same is the case with trains and trucks that move people and goods across the country.

But somehow, petrol has managed to pump up the political class. The outcry by those at protests rallies (read: Mamata Banerjee) or those on prime-time news are only misleading people. If the common man is the target constituency for the high-decibel vote-mongers, then how should petrol price hike make a difference to his life? The common man in remote Sundarbans (West Bengal) shells out . 200 for a litre of kerosene supposedly sold at Rs 11 a litre at the ration shops.

Price hike is a bad term, particularly when it comes to goods that impact household budgets. There was a huge public outcry as food inflation soared, and understandably so. Most economists and policymakers were caught unawares by the spike in inflation rates, particularly that of food items. Economists had projected inflation to be tamed to around 7% by December end. But that was not to be. The policy deficit in both the Indian horticulture and oil markets is evident.

If vegetable prices were soaring due to middlemen making a neat buck at the cost of both the farmer and the end consumer, retail prices of motor fuels had to experience such sharp spikes because the free pricing policy came far too late. And the case can only worsen further but for some radical timely policy interventions.

If the amendment of the Agricultural Produce Market Committees (APMC) Act and removal of horticulture goods from the APMC list should be brought in immediately to cut out the middleman, the removal of the administered pricing mechanism policy for motor fuels needs to kick in as soon as possible. It is estimated that, on one hand, prices of vegetables go up by as much as 10 times between the farm gate and the retail vendor, thanks to the controlled marketing regime.

On the other hand, the controlled pricing regime of diesel has now left a backlog of Rs 7 a litre if market prices were to kick in. Hike in diesel prices, unlike petrol prices, has a rippling effect and there is no way that the economy can absorb such a steep rise at one go. The solution would be to decontrol prices and allow oil companies to gradually increase prices, say by 50 paise a litre per month. This can be the only way to soften the blow of hard reality.

The sharp rise in vegetable prices has more to do with market sentiment than supply shortage. It’s a chain reaction triggered by high onion prices. The impact of the recent hike in petrol prices on the wholesale price index is highly exaggerated for political reasons The steep difference between the farm gate and the retail prices in vegetables is caused by the controlled marketing regime.