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The rise in food prices in the past few years. The story behindit.

Production, procurement, politics

Made by:

Utkarsh Kawatra2008MT50465

Akshay Garg2008TT10659

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Inflation: It is a rise in the general level of prices of goodsand services in an economy over a period of time. Whenthe general price level rises, each unit of currency buysfewer goods and services.

Food Inflation: Food inflation, based on the wholesale price index (WPI) for food articles and food products,entered double digits in April 2009 and crossed the 20%level in December.

Annual average food inflation during the period 2006 to2009 was more than 80% higher than inflation in non-food commodities.

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After 2005, food pricesincreased at a muchfaster rate than non-food prices, except in 2008when the prices of commodities spiked inIndia and in the global market. On an annual basis, food prices in2009 increased by morethan 12% over 2008, incontrast to the 1.76%decline in non-food prices.

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Table : Inflation in Food and Non-Food Commodities during 1994-95 to January 2010(Based on WPI with base 1993-94) and Growth Rate in Food Output (%)

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Shock in supplyDomestic Production

TradeGlobal PricesFood ManagementSpeculative activitiesDemand

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Facts:Food production registered more than 5% growthin each year from 2006 to 2008.

This rate was more than double the growth rateof demand for food.Global prices had reached a very high level in2007 and 2008.Exports of food increased from 6.2% to 10% in06-08 period.

These facts show that a major chunk of theincremental output during those years didntenter the domestic supply.

Therefore, domestic prices soared in spite of substantial increase in production.

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Facts:Global Food prices cooled; FAO Food price Index was20% lower than in 2008.Non-food prices declined and experienced negativeinflation.Production output just increased by 1.6%, which wasshort of annual growth in demand.Domestic food prices soared due to deficiency of 2009south-west monsoons resulting in drought.Drought in 2009 led to loss of Kharif output in 09-10.

Reason: Growth in food production during 08-09 fellshort of demand in 2009. Decline in Food Grainproduction in 09-10 led to increase in prices.

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Table: Growth rate in Output in Major Food Commodities

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Structural factor that has led to foodinflation: Indias creaking food distributionand storage system.

Responsibilities:Food Corporation of India (FCI): procurement of cereals, maintenance of buffer stocks andtransportation of food grains;Food Ministry: allocation of food grains andessential commodities to keep going to StatesPDS and fair price shopsCentre: Inter-State movement of food articles,the timing, duration, quantities and pricing of exports and imports.

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In view of the comfortable levels of production andprocurement, the Kirit Parikh Committee had, some yearsago, brought down the buffer stock to four million tonnes of wheat and six million tonnes of rice

However the stocks with the FCI, as at the end of 2009,were 19 million tonnes of wheat and 24 million tonnes of rice.

During the summer of 2010, the stock of rice and wheatprocured by FCI reached 60m tonnes. However, the storagecapacity of FCI and other government-run warehouses isonly about 50-55m tonnes (including hired storage). Thishelps to explain why between 10 per cent and 30 per centof Indias produce is wasted between the farmer and thefinal consumer.

Just less than 1m tonnes of storage space was added in the2010 financial year.

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More than 90 per cent of Indias wheat procurementby FCI comes from only two states, while close to 70per cent of rice procurement is done in four states.

More than 90 per cent of food-grain is still transportedby roads rather than the rail network, making it a slowand inefficient process.

Bottleneck between marketplaces (known as mandis)

and warehouses. In the state of Punjab alone, thereare 45,000 middlemen (called arthiyas) who control1,700 mandis and often act as informal money-lenders to farmers.

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Conclusion :Government sitting on a huge quantity of buffer stock,far in excess of the minimum essential level of buffer,thereby increasing prices.

Transporting these food grains to different parts of thecountry is a logistical challenge.

There are rampant complaints that middlemen engagein practices like manipulation of weights and quality.Dampening the influence of the powerful middlemenslobby will be key to improving the efficiency of distribution and storage in Indian agriculture.

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The constant blame game betweenthe two levels of government,namely the central government andthe state governments is a majorfactor preventing the control of foodprice inflation.

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Centre versus State

Prime Minister Manmohan Singh asks chief ministers to act againstand crack down on hoarders.He asks the states to forego VAT on sugar saying the role of states inthe rise of sugar prices needs to be assessed.He also asked the states to gear up on rabi crops and also plan thekharif production of 2010.

Chief ministers, on the other hand are blaming the Center for theprice rise messGujarat Chief Minister Narendra Modi blames Centre's badgovernance for the price rise. The Karnataka chief minister puts the onus on the Union AgricultureMinistry for the rise in prices of essential commodities.Uttar Pradesh Chief Minister Mayawati accuses the Centre of issuingstatements that have further added to price rise.West Bengal Chief Minister Buddhadeb Bhattacharya added thatinadequate central investment in irrigation projects is to be blamedfor price rise.

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Dog in the manger policy

The Centre should overcome the tendency to be

indifferent to the offer of cooperation by States ruled byOpposition parties.

For instance, the Gujarat Government offered to crushnine lakh tonnes of imported raw sugar, lying at ports in

the State, in mills to augment availability, but theCentre, apparently weighed down by political inhibitions,adopted a dog-in-the-manger policy of neither taking upthe offer nor making alternative arrangements.

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Escapist ploys by the Centre

The centre has set up a Standing Core Group

comprising the Finance Minister and the AgricultureMinister, the Deputy Chairman of the PlanningCommission and the Chairman of Prime Minister'sEconomic Council and 10 Chief Ministers which hasbeen asked to suggest measures to deal with pricerise and propose steps for improving publicdistribution system, procurement of food grains andproduction of agriculture produce.

However, according to experts, comprehensivedatabases and recommendations already exist andthe whole exercise is a waste of precious time.

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Conclusion:

The government should come up withconcrete steps to tackle the food priceinflation problem instead of trying to find

a scapegoat to blame the entireresponsibility on.

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