Beyond inflation

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Food constitutes more than 40% of an Indian household’s budget. Can inflation be lower if food is more expensive? A look at the economics of agricultural growth and food consumption in India.

The cue for this column was a comment overheard at the grocery store. A loud cantankerous voice wanted to know how the Governor of the Reserve Bank had decided that inflation had fallen. The old gentleman was paying for edibles, fruits and vegetables. He said, loudly again, that almost everything was more expensive than 6 months ago. I leaned over to help him with his bag and mentioned that the Governor said that the prices were still going up, only the rate at which the price of everything was going up had fallen. That seemed to infuriate more than edify. He wanted to know whether the Governor thought that “after crossing Rs. 100 per kg, should lentils gallop to overtake meat?” I abandoned him rather quickly on that hazardous topic.

But the truth is that food inflation has been close to double digits for almost a decade. That does take the base price up pretty high and even a small increase on that high base is bound to hurt in a country where food is more than 40% of household consumption (unlike a developed country where it is about 10%). Effective inflation rates will rise as we go down the socio-economic pyramid. At present, the government in power does not seem to have a stated policy on it. The basic reason for endemic food inflation is overall supply shortages compared to demand. Agricultural growth has been much slower than the overall per capita income growth for two decades. These domestic supply shortages are made good by imports. That also exposes domestic prices to external shock. Augmenting domestic production, subsidising expensive agricultural inputs and distribution should be the pillar of food policy, and indeed some rescue efforts were made in the past few years, but policy seems to have become indifferent to farmers again.

The second reason is widespread difference between the wholesale and retail prices, in other words, the food distribution system. Organised retail was peddled as the final solution. Organised retail in the grocery segment has grown fastest as food prices have soared. Traditional agricultural produce whole sale markets (Agricultural Produce Marketing Corporations or APMCs) were also spoilers. They were said to be controlled by large grain traders, biased against the majority i.e., small farmers. Commodity exchanges were created to balance the value chains. Multi Commodity Exchange of India has been around since 2003, long enough to suggest that it does not help to reduce food prices either. On 29 September 2015, SEBI (Securities and Exchange Board of India) and FMC (Forward Markets Commission) were merged – apparently, this move to merge two regulatory bodies, one of the stock exchange and the other of the commodity exchange, will help the government in managing inflation from the wholesale mandi/APMC onwards, correct wild speculation and illegal activities. It is also expected to pave the way for foreign institutional investors (FIIs) to speculate in food prices in India.

The third reason is definitely as old as Vedic time, irregular monsoon. In July, fears for the current year’s agricultural produce were already being voiced. Cost of food increased by almost 4% in September, over the same month in 2014. Irrigation inadequacy was and is the main reason for over dependence on monsoon. Regrettably, no private sector company is announcing major irrigation projects across rural India (on the other hand, ports, roads and bridges projects are in the news). Only drip irrigation ideas from Israel are being discussed. (Opinion is divided, with some saying that it consumes more power and is too expensive to lay out.) The irrigation projects will not be profitable till either farm land is corporatised or the irrigation company can charge distribution charges, which more than recover costs. Such charges will both increase food inflation and bankrupt the farmers.

Since there is no other plan in the news, the default plan is more food inflation veiled by lower overall inflation. And the default plan is going to hurt.


Anuradha-Kalhan

Anuradha Kalhan

Anuradha Kalhan is a Fellow at Teen Murti, Nehru Memorial Museum and Library (NMML).

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