Inflation

Posted By: Rise Team|Dated: June 9, 2011

Food for thought

High inflation is a key global concern, particularly for emerging economies like China, Vietnam, Brazil and of course India, all of which are facing double-digit food inflation. The efficacy of monetary policy actions in addressing food price inflation without hurting a nascent economic recovery has now become a subject of debate.
Inflation - Food for Thought

Nearly 43% of personal disposable income goes into food products. Unfortunately, this is also the area experiencing the highest inflation. In India, it was 18.32% in December and is currently running at over 13%. The average annual food inflation rate over the past five years for food prices has been twice as high as the general inflation. Even though prices for food grains showed a declining trend, the same was not true for fruits and vegetables.

With the high growth rate of the economy and rising incomes, demand for food has increased over time. Per capita food availability has grown only 1% over the last decade, while per capita income surged 5.5%. This has resulted in a mismatch between supply and demand for food that has caused an increase in the prices, particularly fresh produce.

Some of the Causes of Food Inflation:

Productivity: One of India’s biggest challenges is its productivity per hectare. The per hectare agricultural yield in India is half that of China. With only 100 million hectares of agricultural land, China produces 400 million tonnes of grain. India averages only 108 million tonnes from 146 million hectares of agricultural land. The reason is that 60% of the country’s total cultivated area is not irrigated. For several years crop productivity has stagnated, and extra high yields remain isolated instances. For example, between 1951 and 2008, the productivity of pulses increased by only 45%. The area under pulse production has also grown only 25%, which is lower than any other food grain. Per capita production of pulses has decreased from 60g/day in 1970-71 to 36g/day in 2007-08.

Wastage: About 30% of farm produce is wasted every year for want of storage, transportation, cold chain and other infrastructure facilities. It was estimated that India loses INR 58,000 crore in agricultural food items due to lack of post-harvesting infrastructure such as cold chains, transportation, and storage facilities.

Distribution Inefficiencies: The presence of multiple intermediaries is one of the major barriers in market integration. Paying middlemen leads to increases in the price for the final consumer.

Government Regulations: Regulations such as the APMC Act, which restricts the movement of farm produce across the country, contribute to the problem. Such regulations often lead to ‘artificial shortages’ of commodities even when the overall production has been regular or near regular.

What can be done?

Government Responses: Several governments across the world have attempted to combat food inflation by taking certain, short-term measures such as:

  • Introducing export tariffs/ hiking interest rates – curbing exports or licensing the control of the exports by using temporary export quotas to ensure a sufficient supply on the domestic market.
  • Freezing prices on some basic food stuffs – Implementation of price controls in order to curb food inflation.
  • Lowering of import duties on certain food products that need to be imported
  • Increase in strategic reserves of essential foods, including grains.

Short term interventions are a typical response to provide immediate solutions to problems of plenty or scarcity. However, to address this problem over the longer term, a holistic approach is required to look at both the production and supply chain management of food commodities to reduce inflationary effects.

Some long term suggested interventions:

  • An integrated approach to streamline procurement and reform supply chain. The Anand Model, a vertically integrated three-tier self-generative system for cooperative dairy development provides an excellent example that includes storage and re-distribution of the produce to all markets.
  • The development of the cold storage sector. This will require intervention from both the government and the private-sector participation. The Central Government must set up a ‘single window’ clearance system to reduce time spent on multiple agency involvement. The availability of the right kind of storage, particularly for highly perishable crops like onions, tomatoes etc. is more critical than just creating cold storage and warehousing.
  • Increasing irrigated areas to enhance productivity. For instance, providing incentives for growing pulses are one option. Nitrogen credits to farmers as well as tie-ups with research institutes for better technology will encourage the planting of pulses. The introduction of improved varieties that can enhance productivity will ensure availability of pulses to a larger population at an affordable price.
  • Private and cooperative sectors must be encouraged to invest and develop appropriate market mechanisms and supply chains. By re-aligning supply chains, particularly for fresh produce, farmers can reduce wastages and control distribution costs. This would also build up buffer stocks for certain essential commodities like onions and lend some price stability in the longer run.

Tackling food inflation requires both short and long term measures to manage the supply of food grains. All this can be possible if the Government creates a conducive environment to attract private capital to the agricultural sector.

This article was researched and written by Mahindra’s Center for Rural Information and Insights (CRI) team. The CRI conducts research on rural India in order to guide and strengthen Mahindra’s relationships with the Indian rural economy, markets, and consumers. The following article was part of the February edition of the CRI’s Rural Review, a bimonthly periodical circulated internally and among a small number of external subscribers, including several ministries within the Indian government.

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