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Resource centre on India's rural distress
 
 

Spiralling food prices burning holes in pockets by Aditya Raj Das
As the common man continues to reel under the spiraling rise in prices of essential commodities especially key food items and vegetables the forever-rising food inflation is posing a serious challenge to policy makers. Though top government officials, including the Finance Minister and the Chairman of the Planning Commission have repeatedly assured that the food prices will soon stop rising, in reality it has gone the other way.
 
The rising spree of food inflation— now hovering at an alarming figure of over 16 per cent as per the latest government release-is increasingly putting pressure on the government to reign it.

More disturbing is the fact left unabated rise in food inflation may disturb the overall fiscal equilibrium of the economy thereby hampering the process of economic recovery.
This is also posing a serious problem to the Congress-led UPA government on the political front with the Opposition blaming the former for the failure to curb prices.
 
Inflation hurts everybody. But it hurts the poor the most. As inflation adversely affects the poor disproportionately, it is a serious problem for a country like India with high incidence of poverty. This is the reason why the government should be more worried over how to rein in price rise.

Key contributors

The latest bout of rise in food inflation, which has been showing rising tendency consistently for the last few weeks, is primarily due to increase in prices of key food items like cereals, fruits, vegetables and milk. Signs of moderation in food inflation had surfaced in July and this continued all through the first half of August.

Analysis of data shows on an annual basis prices of cereals-key food items consumed by the people at large-increased by 6.11 per cent. The prices of cereals are moving upwards because of higher prices of pulses, rice and wheat. As the data (for week ended on September 18) show while prices of pulses rose 5.94 per cent on a yearly basis, prices of wheat and rice went up by 9.14 per cent and 4.05 per cent, respectively.

The other major contributor is milk. For instance, milk prices zoomed by 24.32 per cent during the week compared to the same period last year. Analysis shows that vegetables have became costlier by 5.87 per cent on an annual basis. Fruit prices went up by 15.13 per cent during the week under examination. Analysis of inflation data in the past one and half years shows that the second half of 2009-10 witnessed a sharp run-up in the Wholesale Price Index-based inflation. For instance, in September 2009 the headline rate was a mere 0.5 per cent, which jumped to 8.1 per cent by December 2009 and increased further to 11 per cent by March 2010.

But as far as food inflation is concerned the analysis reveals that in the backdrop of relatively low inflation in the headline rate, primary food products like cereals and pulses continued to rise sharply throughout the fiscal 2009-10. For instance, primary food product inflation was as high as 11 per cent in June 2009, 16 per cent in September and rose further to alarming 20 per cent in December 2009— the fastest pace since December 1998.

Inflation in manufactured food products was still running higher-12 per cent in June 2009, 13 per cent in September and 27 per cent in December, 2009.   

Major factors

The pertinent question that is agitating the mind is: Why is food inflation rising? The fundamental factor is simple: the demand for food is far outstripping the supply.

Experts say the ongoing rise in prices of key food items is due to disruptions in supply chain because of many parts of the country are now experiencing heavy rains. Further, the heavy downpour across the country, which has caused flooding in several states, coupled with an expected increase in demand over the next few months due to the festive season, will put additional pressure on prices.

Though the abundant monsoon rainfall has brightened the prospects of a good crop this year, which will help in dousing the flame of rising prices of food items, the pressure on food inflation will continue till arrival the new crop in market.

The new harvest will not reach the market until around October-November. Until then, no relief is expected from mounting food price pressures. An in-depth analysis made by the Economic Advisory Council to the Prime Minister on factors leading to rise in food prices in the past one and half years has revealed that high rates of food price inflation is inevitably linked to shortages of supply caused by the vagaries of the weather and other factors that cause output to fail to respond to rising demand.

Vagaries of the weather

Revealing how mismatch between demand and supply contributed to rise in prices the analysis shows that inflation in food items in the second half of 2008-09 was largely on account of increase in prices of key food items like rice, pulses, coarse cereals and vegetables.

The trend was sharply accentuated by the deficient Monsoon of 2009 which led to sizeable output losses in rice, coarse cereals and pulses. “It can be argued that the price increase in primary food articles starting from the summer of 2009 was on account of output losses-both feared and actual-to the bad Monsoon,” noted economist and a Member of EAC to PM, Dr Saumitra Chaudhuri says.

The other major factor that is contributing to rise in food prices is the growing demand for food articles in the wake of rise in disposable income level of people at large due to impact of growth momentum of country’s expanding economy.

The pull of demand

Many economists believe that there is a strong evidence to show that economic growth in India since the early years of this decade has been quite broad-based across states.  Rural developments schemes particularly-National Rural Employment Guarantee Act (NREGA) and Bharat Nirman as well as several initiatives taken to improve livelihood potential in rural India have succeeded in raising employment and incomes.

While increase in disposable incomes does not lead to proportionately higher expenditure on food at higher income levels that is not necessarily the case at lower income levels on account of substitution of superior over inferior ones as well as higher consumption.

As the EAC to PM says it would therefore be reasonable to infer that higher disposable incomes amongst the poorer sections of rural India would have boosted demand for primary food and that would, in turn, have created pressure on prices.

Thus the success in easing the pressure on food prices is inexplicably linked to enhancing supply of key food items. This can be achieved only by singular focus on raising the food output.

As far as movement of food inflation in near future is concerned there is widespread expectation that with the arrival of new crop the pressure on price will diminish.
 
CRISIL Chief Economist D K Joshi says, “pressure on food prices will continue till the arrival of new crop in the market. Fall in prices will be visible by December when the harvest comes into the market.”

The Planning Commission Deputy Chairman Montek Singh Ahluwalia has projected that food inflation would moderate by the second half of November.

“Food inflation is little high now. The high rate of food inflation is mainly on account of milk and fruits. But if you look at cereals prices, the inflation rate is coming down…. You will see food inflation going down significantly by mid or second half of November,” was his forecast.

Since food prices are primarily cyclical in nature and are overwhelmingly influenced by basic theory of demand and supply, the rising trend in food inflation can be curbed through timely assessment of supply demand situation and necessary follow-up action to remove supply constraints.