The Nature of Food Inflation: The case of India


By

Gitanjali Hajra
Faculty of Economics
Brainware Business School
Kolkata
 


Introduction: Food inflation indicates higher prices of agricultural products. World food prices have been showing an upward trend since 2008 due to structural and cyclical changes. India is not an exception of that. Food inflation is a front page news in India and it rises to 17.7% for the week ended March27 2010, where it was at 16.35% in the previous week. This article focuses on the Indian situation in the above context-Specially the causes of food price increase and evaluate the relevant policy measures.

Unit I:  Trends in food inflation in India

The following Figure shows the month wise food inflation rate in India:


Source: The Hindu Business line

The food price index rose to 17.7% in the 12 months to March 27,2010, higher than an annual rise of 16.35%in the previous week.. Prices of essential commodities such as pulses, rice, sugar and vegetables are going up. The overall inflation which includes both the price changes in the food articles and non-food articles reached to 9.89% in March 2010.  The food inflation of different items over the past 52 weeks is given by:

Food items

Inflation Rate

Pulses

31.68%

Potatoes

5.62%

Vegetables

5.12%

Milk

15.31%

Wheat

15.09%

Cereals

10.64%

Onions

6.64%

Fruits

11.06%

Rice

7.42%


Table: Index number of wholesale prices-Selected commodities and commodity Groups

Base:1993- 1994=100

Commodities

Weight

WPI (March 20,2010)

2008-09

2009-10

Primary Articles

22.03

283.4

5.20

13.86

Food articles

15.40

284.7

7.56

16.35

Cereals

4.41

270.6

12.13

10.04

Rice

2.45

251.0

17.43

7.36

Wheat

1.38

277.5

4.89

13.54

Pulses

0.60

359.4

10.74

31.55

Vegetables

1.46

196.3

-6.74

0.62

Potatoes

0.26

176.3

-12.66

-12.20

Onions

0.09

255.8

73.09

-13.38

Fruits

1.46

321.6

9.27

10.06

Milk

4.37

280.0

7.04

18.74

Non-Food articles

6.14

254.3

-1.05

12.57

Fibres

1.52

235.8

0.20

20.18

Oilseeds

2.67

259.4

-2.70

9.13

Minerals

0.48

610.4

7.19

-9.62

Fuel, Power, Lighe &Lubricants

14.23

361.8

-6.11

12.75

LPG

1.64

354.0

5.26

0.45

Petrol

0.89

261.9

-10.96

16.82

High speed Diesel oil

2.02

520.0

-2.92

14.99

All Commodities

100

 

233.9

 

Driving by increasing food prices, India's overall rate of inflation based on WPI rose to double digits. This rising food prices is a concern for Govt. of India, because as a poor developing country, food constitutes a large share of monthly household expenditure. So, now a day, the biggest concern in India is food inflation which almost reaches to near about 20%.

Table: Wholesale Price Index No. In India

Year

General Index for Wholesale Prices

Price Index For manufactured products

Price Index For agricultural products

Price Index for manufactured price Index as percentage of Agricultural Price Index

1994-95

112.6

112.3

116.0

96.8

1995-96

121.6

121.9

126.0

96.8

1996-97

127.2

124.4

136.4

91.2

1997-98

132.8

128.0

140.3

91.2

1998-99

140.7

133.6

157.2

85.0

1999-2000

145.3

137.2

159.1

86.2

2000-01

155.7

141.7

163.7

86.6

2001-02

161.3

144.3

169.5

85.1

2002-03

166.8

148.1

175.3

84.5

2003-04

175.9

156.5

182.9

85.6

2004-05

187.3

166.3

186.7

89.1

2005-06

195.6

171.4

190.7

89.9

2006-07

206.2

179.0

204.2

87.7

2007-08

215.8

187.9

219.2

85.7

2008-09

234.0

203.1

238.7

85.1


Unit-II: Factors contributing to the rise in food prices

Food inflation is a serious issue for any economy and in this section some possible causes are discussed. One main reason is that with the high growth rate of the economy and rising incomes demand for food has been gone up overtime. This results in a mismatch between the supply and demand for food grains there is an increase in the prices of food grains. Along with the above reason there are several factors responsible for this.

  • Shortage of food grains due to flood and drought in several parts of India
  • Poor management & distribution of food grains through PDS system.
  • In some extent hoarding of food grains.

Considering the above factors, this is obvious that, agricultural sector in India suffers from structural problems which must be addressed by the political leaders and policy makers.

Performance of Agricultural sector in India:

>>>
Share of agricultural sector in Indian total GDP:

Agriculture Sector is the oldest sector of the Indian Economy, which is one of the largest employment-generating sectors, is also a source of inputs to the industrial sector. In terms of composition, , out of total GDP in India, Agriculture sector constitutes of 15.7% in 2008-09, compared to 17.8% in 2007-08, 18.6% in 2005 and 21.7% in 2003-04. On an average, percentage share of agriculture sector declined from 28.4% to 19.5% during 1993-94 to 2003-04.

>>> Annual growth rate of agricultural sector:

The agricultural sector grew since independence, since Govt. of India put emphasis on this sector in five-year plans (specially in third plan, 1961-66) for the development of the infrastructure of scientific agriculture, which includes the use of fertilizer, pesticides, agriculture subsidies, Irrigation projects, improved technology etc. The NABARD (National Bank for Agriculture and Rural Development) was set up. The Green Revolution took place in 1978in India, when for the first time Agriculture growth rate exceeds the economic growth rate.

Though the agriculture growth rate increased in India since independence, but in the last few years it has decreased in India. The total production of food grain was 212 million tones in 2001-02 & in the next year it decreased to 174.5 million tones. The average agricultural annual growth rate was 5.2% in 2005-06and 1.6% in 2008-09 . So, after the Green Revolution, we totally ignored the agriculture sector.

Table 3: Annual growth rate in Agriculture Sector

Year

Agricultural growth rate

2005-06

           5.2%

2006-07

3.7%

2007-08

4.7%

2008-09

1.6%

2009-2010

-0.2%


Table: 4 Agricultural Sector: Key indicator

 

Item

2007-08

2008-09

1

Growth in GDP in Agriculture and Allied sector

4.7

1.6

 

Agriculture

5

1.1

 

Forestry & lodging

2.2

2.9

 

Fishing

6

6.3

2

Share in GDP-in Agriculture &Allied sectors

16.4

15.7

 

Agriculture

13.9

13.2

 

Forestry & lodging

1.7

1.7

 

Fishing

0.8

0.8

3

Share of Agricultural Sector in Total GCF 

7.01

9.05

 

Agriculture

6.43

8.49

 

Forestry & lodging

0.07

0.09

 

Fishing

0.51

0.58

4

Share of Agricultural imports in total imports

2.95

2.74

 

Share of Agricultural Exports in total imports

12.05

10.23

5

Employment in Agricultural sector in Total employment in 2004-05

 

52.01


Table 5: Annual Investment in Agriculture Sector

Investment in Agricultural Sector (Rs. In Crore)

Year

Total Investment

Public

Private

 Percentage share of Public Inv in Total

Percentage share of Private Inv in Total

2004-05

78,848

161,83

62,665

20.5

79.5

2005-06

93,121

199,09

73,211

21.4

78.6

2006-07

94,4

22,978

71,422

24.3

75.7

2007-08

1,10,006

23,039

86,967

20.9

79.1

2008-09

1,38,597

24,452

1,14,145

17.6

82.4


Table 3 and table 4 shows that low productivity in the agriculture sector which is resulting from inadequate adoption of modern technology, decrease in the amount of public investment( shown in table 5) , highly dependence on monsoon etc.

Unit III :  Measures taken to control food inflation

In recent times, food inflation is most serious problem in India and in this situation the Govt. of India should take a proper measurement in taming food inflation. Since food articles constitute a large share of all commodities high food prices led to overall inflation too, which rose to 7.31% in December, 2009 from 4.78% in November, 2009. The Reserve Bank Of India (RBI) raised the Cash Reserve Ratio (CRR), the portion of deposits that the banks must keep with RBI by 50 basis points and the Repo rate in February and also by successive rounds expecting to remove some amount of money from the economy.

But according to my suggestion, this action of controlling inflation can  not help in long-term. Because the nature of this inflation is mainly arising from higher prices of agricultural products, which is due to the supply shock in the food grains resulting from the droughts and floods in different parts of the country and low growth rate of food grains, not due to the Increases in the money supply in the economy. This situation happens due to the negligence of the Agriculture sector By the Govt. of India for a long time.

Increase in CRR or other monetary measurement may have a short-term influence on prices of food articles, but I think as a long-term measurement, it is a high time for Indian Govt. to concentrate more on the development of the agriculture sector.

* The Public Distribution System should be properly managed to assure the poor and large section of the economy sufficient supply of food grains to prevent widespread hunger and side-by-side hoarders and black-marketers should be prevented which can help not in raising the food prices further.

* Since, Indian agriculture sector mostly depends on the monsoon, so there must be proper irrigation and storage facilities to prevent with the natural calamities like drought and flood. Irrigation sector should need adequate investment and modern management.

* There should not be a huge gap between the price received by the firmer and price paid by the consumer. This problem needs a proper marketing of the food grains.

So, when food inflation spreads its wings in the economy, the political parties, without blaming to each other and calling for a 'Bharat Bandh', should come forward and discussing with each other to take a proper step in controlling inflation. Politics is everywhere in India and thinking about the common people's problem; priority should be given to the development of the farmers and agriculture, not the politics.

Unit IV:   Conclusion:

From the above analysis, it is very important for Govt. of India to take a proper measure, so that it does not arise again in future. Since, this is a global crisis we cannot only blame India, but India has to meet its needs itself. If India continues to neglect the agriculture sector, the food crisis may come in severe forming near future & there may be riots like Haiti and Egypt, where food prices have risen by 65% in last six years.

References:

1) Reserve Bank of India monthly bulletin
2) Anandabazar Patrika
3) Economic Survey of India
4) Economic times
 


Gitanjali Hajra
Faculty of Economics
Brainware Business School
Kolkata
 

Source: E-mail September 28, 2010

          

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