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LATEST NEWS UPDATES | Inflation: Three reasons why rising food prices could be here to stay -M Rajshekhar

Inflation: Three reasons why rising food prices could be here to stay -M Rajshekhar

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published Published on Aug 20, 2014   modified Modified on Aug 20, 2014

-The Economic Times

None of the standard explanations quite explain the rise in food prices India has seen: pronounced since 2006 and alarming after 2010. Drought and poor rains? The country has seen good aggregate rainfall in most of those years. Spike in global prices? Those were high in 2007-08, not now. Fragmented value chains that allow middlemen to grab large margins? The value chain has always been fragmented.

Growth has slowed in the last three years, but food inflation hasn't. After hitting 15.2 per cent in 2009-10, food inflation, notes former Planning Commission member Abhijit Sen, fell to 6.3 per cent in 2011-12. And then, it jerked up again, growing at 11.9 per cent and 12.4 per cent in 2012-13 and 2013-14, respectively.

The cast of commodities fanning these high numbers - and making households, central bank governors, finance ministers and company CEOs fret - have kept changing. Back in 2008, it was foodgrains and food products. By the fourth quarter of 2010, it was fruits and vegetables, led by onions. After that, cereals and pulses again. And, today, it is tomatoes and potatoes.

It is not very clear what explains these patterns. In most diagnoses doing the rounds, comments Sen, the question of food inflation "pre-dates the inflation itself". For instance, he says, the theory that blames inflation on India's agriculture markets (or mandis) has been around since the early 2000s. With this surge in prices, Sen says, "all the old views that say the government should not have anything to do with agriculture have come back out of the cupboard."

This lack of clarity on the reasons for food inflation could force the Narendra Modi-led NDA government into a tight spot. In a country with high malnourishment, and reducing per capita availability of cereals and pulses, among others, consistent price rise further aggravates food - and nutrient - deficiencies.

It also threatens to rapidly erode the social capital of the Modi government. "If Modi doesn't tackle onions, potatoes and tomatoes, his credibility will be gone," says Ashok Gulati, former head of the Commission of Agricultural Costs and Prices (CACP).

The government knows this. In the last two months, it asked state governments to allow farmers to bypass mandis and sell fruits and vegetables in the open market. It has added onions and potatoes to the Essential Commodities Act to check hoarding. It wants to cap the bonus states can add to the MSP. And it is now planning to break up the Food Corporation of India, the government company, to pave the way for the private sector to enter the foodgrain business.

It's too early to say, but nothing has changed so far: the latest Consumer Price Index numbers show that food inflation in July increased to 9.36 per cent in July, against 8.05 per cent in June.

The problem lies elsewhere. Over the last 10 or so years, India's food economy has seen a set of structural changes in farming, in agricultural produce marketing, and in demand itself. Some of these are reversible, others less so. These coexist with a set of short-term occurrences to create the complex outcomes that we see. To combat food inflation, it is these myriad factors the government needs to focus on.

FACTOR 1: Rising Cost Of Cultivation

Something incredible happened to the cost of cultivation between 2009-10 and 2013-14. For example, the cost of growing paddy increased by an average of 17.6 per cent a year during this four-year period, against 4 per cent in the five-year period preceding that. Other crops too showed a similar spike.

Cost of cultivation comprises many things. There's labour: human, machine and bullock. There's inputs: seeds, manure, fertilisers, pesticides, insecticides and irrigation. If the farming land is owned or the capital borrowed, there's rentals and interest. Just about every variable in that equation is seeing a strong - and concerted - upward pull.

Take labour, which, according to Sen, accounts for about 30 per cent of the cost of cultivation. A discussion paper by Ashok Gulati, Surbhi Jain and Nidhi Satija, titled 'Rising Farm Wages in India: The 'Pull' and 'Push' Factors', on the CACP website shows that growth in farm wages rose, dipped and then sharply rose again.

It grew at an "almost uniform rate" during the 1990s (around 3.7 per cent per year). Between 2001 and 2007, it fell by 1.8 per cent a year. Between 2007-08 and 2011-12, it grew 6.8 per cent a year, which is still less than the average rise in white-collar salaries and barely matches the rate of price rise. "When we started work on this paper, we thought it was NREGA (National Rural Employment Guarantee Act), but it wasn't," says Gulati.

The hypothesis is the ever-present NREGA option reduced the incentive for farm labourers to work in fields and increased their bargaining power. "Wages were going up across the country, even in states where NREGA was not being implemented well," adds Gulati. Last week, RBI governor Raghuram Rajan confirmed this reading, and quantified the NREGA impact on rural wage increase at 10 per cent.

Something else is going on. In the last 10-15 years, rural India has lost a large chunk of farmland to real estate and industry. This trend has also pulled labour.

The 2001 census counted 107.5 million agricultural labourers. Sen, quoting NSS (National Sample Survey) data, says between 2004-05 and now, about 34 million people left primary employment in India. Of these, 20 million were women, most of whom dropped out of the workforce. Of the 14 million men, most seem to have moved into construction work. This decline naturally puts upward pressure on farm wages, more so in areas abutting these construction boom sites.

Land transactions impact food inflation in another way. In most cases, says Sen, vegetables are grown near - up to 150 km - large consumption centres like cities and towns. That's because vegetables are perishable and need an assured market nearby.

However, with the property boom, agricultural land in this radius is leaving farm use. As distances between vegetable fields and cities grow, says Sen, the cost of accessing markets goes up. In areas where less fertile land is replacing fertile land lost, agriculture gets more input-intensive or yields smaller crops. Labour is not the only input to get costlier. In a paper titled 'Making Sense of Persistently High Inflation in India', published in the Economic & Political Weekly in October 2013, Sthanu R Nair observes light diesel oil prices grew 19 per cent between December 2009 and August 2013, electricity for farm use by 12.7 per cent and fertilisers by 9.7 per cent.

These rates of increase are all well above, the paper says, "the average headline inflation of 8.17 per cent in the same period". This, adds Himanshu, an assistant professor of economics at New Delhi's Jawaharlal Nehru University, is also contributing to inflation. "Stability of input prices helps stabilise prices," he says.

FACTOR 2: Concentration Of Power In Mandis

In a recent interview, food and public distribution minister Ram Vilas Paswan pinned the responsibility for the current instability in food prices on middlemen. Farmers can mostly sell their produce only to registered traders in primary mandis, which are governed by the Agricultural Produce Marketing Committee Act - a model law whose jurisdiction lies with individual states.

The bigger problem is the very construct of agricultural produce marketing. Most crops are grown in a few states and then dispatched countrywide. In each of these states, a handful of mandis handle most of the trade and set reference prices. In onions, for instance, most of the surplus comes from Maharashtra and Karnataka. And the reference mandis in Maharashtra are Lasalgaon and Pimpalgaon.

In the last five years or so, two significant processes have played out in these mandis, says Himanshu. One, local politicians have come to control them. For instance, the Nationalist Congress Party hovers over almost all mandis in western Maharashtra, along with other rural institutions. Two, fewer traders (both in mandis and in entire commodities) account for a greater chunk of trade.

A 2012 report commissioned by Geeta Gouri, member, Competition Commission of India (CCI), and prepared by researchers at Bangalore's Institute for Social and Economic Change, found rising volatility in onion prices. It found greater volatility in the wholesale market than in the retail market. And that the amplitude of this volatility was getting more pronounced from 2009 onwards.

The study notes that the main onion mandis have very few traders. Further, most of the onion produce enters the mandis between October and February. This is when prices are highest. This suggests, according to the report, that "other exogenous factors like hoarding, market cartels, etc are influencing onion prices".

The report showed the onion mandis don't allow new players to become traders, promoting cartelisation. An internal CCI note dated 10 April 2012 says that just one trader accounted for 7.2 per cent to 20.4 per cent of the onion trade in Lasalgaon mandi during December 2010, when onion prices climbed from Rs 35 to Rs 88 in just one week.

As in onions, so elsewhere. An February 2014 EPW paper by Kannan Kasturi, titled 'Have Farmers Benefited from High Vegetable Prices in 2013?', says prices of vegetables are spiking only after the crop has left farmers and reached aggregators, who need not be mandi traders. Says G Chandrashekhar, an advisor to the government on agricultural commodities: "If you look at rice, wheat, corn, cotton, sugar, the top five companies now account for 70 per cent of the business."

Numerous small processors, lacking economies of scale, used to supplant incomes through trading. However, the volatility is edging them out, Jigar Gala, a trader in tur and urad dal at Mumbai's APMC yard at Vashi, told ET in December 2013.

Another reason, added Devendra Vora, another trader at the yard, is government policies. There are three types of licences: retail trade, food dealer or industry. "Companies with these licences cannot keep a stock of over 300 tonnes," he says. "However, a company with a corporate licence can hold up to 50,000 tonnes without any declaration. With a declaration, they can hold more." The balance of power is, thus, increasingly tilting towards bigger players

FACTOR 3: Calibrating Agri Trade

From farms and mandis, the produce reaches consumers. The eating habits of Indians are changing. The more affluent are eating more proteins than carbs. Even the poor are moving from coarse cereals to finer ones like rice and wheat. But this is far from being the only process at work.

As Ramesh Chand writes in 'Understanding the Nature and Causes of Food Inflation', published in EPW on 27 February, 2010, the share of exports in domestic production increased between 2003 and 2009. This, he says, was the main cause of the rise in food prices in 2008. In 2009, he adds, food prices stayed up not due to exports but because of poor rains.

The current year throws up new problems. Sen says the raging inflation of the last two years is a mystery. "The economy is down. So, construction is down, labour shortage is down, even the wage growth rate is down," he elaborates. "Demand should have weakened. And with production continuing as before, inflation should have gone down, which did not happen."

According to Sen, one factor is the depreciation in the rupee, which makes imported fertiliser more expensive and also makes exports more attractive. In the last two years, agri exports, notably non-basmati rice and wheat, are up. Even this, Sen cautions, is only part of the larger narrative in inflation. "It is not clear if the amount exported is enough to explain the jump we see in inflation," he says. "Also, if you look at exports, it is true for rice and wheat, but not for vegetables."

The agriculture ministry can do little about currency movement. Or, weather patterns, which are unleashing floods and droughts more frequently in the country. India will keep encountering supply shocks from such changes.

These can be addressed, says Chand, by either maintaining buffer stocks or by tapping international markets judiciously. However, he adds, beyond wheat and rice, "there is no arrangement in the country to carry large inventories of other food items." Nor, he writes, can the country always turn to global markets. "The total trade in pulses is around 10 million tonnes, out of which India imports about 30 per cent.

The global market doesn't seem to be having the capacity to meet India's rising demand for pulses." At the same time, India's machinery of food imports and exports lacks "swiftness and efficiency", says Chand. For example, the first serious indications of a drop in sugarcane planting came by July 2008. Yet, sugar exports continued till March 2009, and in the first half of 2009-10, India had to import $306 million worth of sugar.

Hard Choices

Being of a structural nature, a band-aid fix won't do in all three factors. Each needs a reformist intervention to bring about a change that is effective and enduring. And thus, by extension, each poses challenges and choices that involve tradeoffs.

Between the rising cost of cultivation and the fact that an assured government offtake at a fixed price, called minimum support price, is available only for some crops, and that too only in some regions, farmers are facing uncertain incomes. Keeping them there means either offering them higher prices, but that stokes inflation. Or, it means dampening the price of agricultural inputs like fertiliser, oil and electricity, but that might take the form of higher subsidies.

Loosening the hold of cartels is a straighter reform in one sense. But it has an element of politics ingrained in it - the political class has links and stakes with traders.

The same is the case with showing better responsiveness on the trade front. All these are issues that cropped up under the UPA, but went wilfully unacknowledged. Will the NDA do better? Or has India entered a future of persistently rising food prices?

 

The Economic Times, 19 August, 2014, http://economictimes.indiatimes.com/news/economy/indicators/inflation-three-reasons-why-rising-food-prices-could-be-here-to-stay/articleshow/40383085.cms


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