Zero Inflation and Consistent Food price rise

1. 1

2. 2
I Seminar on
Zero Inflation and
Consistent Rise in Food Price

3. Introduction to Inflation
Zero Inflation
Factors
Pros and Cons
Examples of Zero Inflation
Consistent Rise in Food Price
Reasons for food price rise
Impacts
Measures to check the price rise
3

4. “something which decides economy of the country”
INFLATION
LAYMAN TECHNICAL
Rise in price It is a rise in the general price level
caused by an imbalance between the
quantity of money and trade needs.
“Inflation means a persistent rise in the prices of goods and services”
4
INTRODUCTION

5. TYPES OF INFLATION
I. Depending upon the rate of growth of prices i.e. on the percentage
of inflation
• Creeping Inflation:
• The inflation of a nation increases gradually but continually over long period
• when rate of general price increase is in the range of 1 – 5 %
• Walking/Trotting Inflation:
• When the price rise is moderate. It is a warning signal for the government to
control it before it turns into running inflation
• when rate of increase is in the range of 5 – 10 % 5

6. 6
•Running Inflation:
• A rapid acceleration in the rate of rising prices are in the range
10-20% per annum is referred as Running Inflation
•Galloping/Hyper/Runaway Inflation:
• Most dangerous type of Inflation and out of control
• Inflation > 20%
• Prices rise by double or triple digit,
Inflation rates like 400% or 999% per annum
• Shouldn’t allowed to persist
• Eg: Many Latin American countries like Argentina and Brazil had Inflation
rates of 50 to 700 percent per year in the 1970s and 1980s and developed
and industrialized countries like Italy and Japan witnessed this type of
inflation.

7. II. Based on the causes of Inflation, It can be of two
types:
• Demand-Pull Inflation:
• Inflation caused by increase in demand
• When ‘Too much money is chasing too few goods’
•Cost-Push Inflation:
• Caused by reduction in supply, also called Supply Shock
Inflation when such changes occur prices increase rapidly.
7

8. MEASURING INFLATION
8
• To measure “General fall or rise and rate of change of prices”
‘Different countries use different ways like GDP deflator, Cost of living
Index, Producer price Index, Wholesale price index, Consumer price
index and others.
• In India, To check the increasing trend of general price levels, Two levels are
used:
• Wholesale Level and Retail Level.
• Wholesale level of prices form the Wholesale Price Index (WPI)
• And Retail level forms Consumer price Index (CPI)

9. • The Wholesale Price Index(WPI) is ‘The price of a representative
basket of wholesale goods’.
• This basket is composed of three groups:
• Primary Articles (20.12% of total weight),
(Food Articles (14.3%)+ Non food articles (4.26%) + Minerals(1.2%))
• Fuel and Power (14.91%)
Coal , Mineral oils , Electricity.
• Manufactured Products (64.97%)
-Chemicals and Chemical products (12.00%),
-Basic Metals, Alloys and Metal Products (10.80%),
- Food Products (9.97%)
-Machinery and Machine Tools (8.93%),
- Textiles (7.30%) and
- Transport, Equipment and Parts (5.21%), 9

10. 10

11. WPI includes 676 items which comprises of
• Agricultural commodities (such as Rice, Tea, Raw Cotton),
• Industrial commodities (such as Iron Ore, Bauxite),
• Intermediate products for industry (such As Cotton Yarn, Iron and Steel),
• Products for consumers (such as Atta (Wheat Flour), Sugar, Electricity,
Ceiling Fans, Among others) and energy items (Petrol, Kerosene).
But one of the biggest drawbacks of WPI is that it does not include services
which CPI includes like Transport, Health, Education etc. 11

12. 12
INDIA WHOLESALE PRICE INDEX, 2015
Source: www.tradingeconomics.com, Ministry of Statistics & Programme Implementation (MOSPI), India

13. • A Consumer Price Index (CPI) measures changes in the price level of a
market basket of consumer goods and services purchased by households.
• The CPI is a statistical estimate constructed using the prices of a sample of
representative items whose prices are collected periodically.
• CPI Inflation India November, 2015: 5.00 %
• There are 200 weighted items in CPI
13Source: Inflation.eu

14. 14

15. 15
Source: The Hindu,
13, Nov. 2015

16.  There are three CPI
CPI for the entire urban population viz. CPI (Urban)
CPI for the entire rural population viz. CPI (Rural)
Each type track the retail prices of good and services for specific group of
people.
Its main purpose is to measure the impact of price rise in rural and urban
poverty.
CPI gives larger weight on food items than WPI and therefore is more
sensitive to changes in prices in food items
16

17. “From 2012 India begin to use CPI for
calculating the inflation rate”
“Most of the developed nations like UK, USA,
JAPAN, use CPI for the inflation calculation”

18. Prime Drivers of Inflation
Food prices : High Protein and nutritious items
like Pulses and Milk continue to see high rates of
Inflation (eg. 22% & 7 % respectively, rise in June
2015)
19
Fuel prices: Which has a direct and indirect feed into retail Inflation –
The cost of petrol before customs duty, excise, state taxes, VAT and cess,
an increase in excise duties per litre.

19. 20
Source: www.tradingeconomics.com, Ministry of Statistics & Programme Implementation (MOSPI), India
Inflation
Rate
Nov. 2015 Oct. 2015 2014
5.00 4.41 3.78
INDIA INFLATION RATE, 2015

20. 21
INFLATION LEAD TO
Reduces
purchasing power
- Hit on the poor
Unemployment
increases
Cost of goods
increases

21. 22

22. “Zero Inflation is where the economy reach a state of
0% Inflation rate”
23
ZERO INFLATION

23. WPI @ ZERO
We are tired of the Inflation in last couple of years,
“This phenomenon is quite talked about in the economic intelligentsia and is termed
as ‘Zero Inflation’’
November 2014, 0.0%
Source: www.tradingeconomics.com
INDIA WHOLESALE PRICE INDEX CHANGE, 2015

24. • International crude oil prices have fallen to half of its earlier
prices
• Fall in crude oil prices was one of the most important reasons behind
the ‘Zero Inflation’.
• In CPI, Food is given around 50% of the weightage which
mainly contains cereals
• The MSP in recent times has not been increased in cereals which has a
direct effect on the prices.
25
Factors Influenced Zero Inflation

25. • Demand compression is further caused due to stagnant
Social spending like on MNREGA and other schemes.
• Tight monetary policy by RBI
26
Raghuram Rajan
RBI governor
“Emphasized that interest rate cut by itself would not lift the economy. Industry has been
demanding easing of interest rates to boost growth, which has slumped to 4.7 percent in
2013-14. The economy is estimated to grow in the range of 5.4-5.9 percent this fiscal
(2014-15).”
timesofindia.indiatimes.com, December 2014

26. Zero Inflation is good……! Why?
 Growth with no Inflation
Is feasible by having supply-side policies.
“An increase in supply equivalent to that of the increased demand would
theoretically result in inflation of zero”
There is an accumulation of long-term investments as the investors are willing
to invest money for a long time without any risk.
Welcomed more by people with fixed incomes and households and pensioners.
27

27. 28
Zero Economy enables to lessen the price distortion, it also reduces
the uncertainty involved in price drift
Corporation is in a better position to plan for the economy and
implement new rules, policies for the betterment of the economy.

28. Zero Inflation increases unemployment rate
Not only skill loss but tax revenue
Limited wages
Slows down economic growth
Encourage people to delay buying expensive goods
29
Zero Inflation is Not good…!! Why?

29. 30
Zero inflation has no use in a dynamic economy
Which is an indication of low growth.
Demotivates producers to produce because there is no change in price
levels
Very low inflation lead to lower government tax revenues
e.g. VAT (%) of goods will not rise by as much as expected.

30. 31
Can there be economic growth with zero inflation?

31. 32
Consumers Producers Economy
Zero
Inflation
Not affected at all
No incentive to
produce more, same
production
Stagnant for almost
same level of
production
Mild
Inflation
Affected but not
much, Demand
may be same
Have incentive to
produce more, Higher
production
Economy expands as
production increase
High
Inflation
Affected much,
Demand may be
lower in many
products
Producers of inelastic
products affected,
Production lower for
lower demand
Economy squeezes as
production falls
EFFECTS OF INFLATION

32. 33
Mild Inflation
Is basically low
rate of inflation
around 2% to
3%
Mild inflation
shows that an
economy is stable
and indicates
economic growth.
It Is better compared
to Zero Inflation
because in the
first place it motivates
producers in producing
more, since price
increase is an
incentive to them.
Secondly excess demand
will be partially regulated
here because price
increase reduces, hence,
prospects of higher
inflation minimized

33. Zero Inflation Economy:
Examples

34. 35
1. Best Example is USA. It had faced a high inflation
during the 1970s but after a long effort they could
establish an economy that was clear off inflation. They
reached a stage of Zero Inflation in Jan, 2015.
2. In the UK, CPI inflation has fallen to 0% in July 2014

35. 36
http://www.economicshelp.org/ 25 March 2015
Public of UK Said
The fall in Inflation will be mostly welcomed by the ‘Average’ joy in the
public. They will benefit from cheaper prices and the feeling of more
disposable income. This ‘feel good’ factor may encourage stronger
confidence – Investment, Spending and Growth. In the current climate,
low inflation could be a blessing in disguise.
“Reducing Inflation above target is relatively easy –
solving Deflation is more of an unknown quantity”

36. India is the world’s second largest producer of food next to china
 India has 2nd largest arable land in the world
 Largest producer of Pulses, Milk, Tea, Mangoes, Bananas,
Largest livestock population
The Indian food and grocery market is the 6th largest in the world
 India is one of the leading exporters of the agriculture products
Indian Food Industry
37
www.makeinindia.com

37. RISE IN FOOD PRICE
Rise in prices of food items – “FOOD INFLATION”
38

38. • Rising food price is all set to hit
the Asians countries hard in the
next few years.
• Millions of people in
developing nation are about to
face additional burden as
domestic food prices in Asia
rose by 10% while international
prices in annual terms soared to
30% in the initial years of this
decade
39
ileadkolkata.wordpress.com
Rising prices are like a fire feeding on itself
– As they erode the incomes of wage earners,
they give rise to labor unrest.

39. Food Inflation Rate
• It is calculated by the Central Statistical Organization
(CSO)
• The current rate is 4.4% ( October 2015)
Year
Inflation
Rate
2005-06 4.83
2006-07 7.78
2007-08 5.46
2008-09 8.01
2009-10 14.72
2010-11 15.78
2011-12 7.27
2012-13 14.3
2013-14 9.8
2014-15 4.78
2015-16 4.4
“Volatility due to dependence on imports, the
uncertain impact of Monsoon Rains on large farm
sector, difficulties in Transporting food items to
market because of Poor Roads and Infrastructure
and high Fiscal Deficit”

40. 41
Price rise trends over last six decades indicate that India has bump into
successive bouts of high food Inflation, but the fundamental drivers have
changed over time; The influence of monsoon and drought has declined
and some new sources of price pressures like surging prices of Fuel,
Commodity, Fruits and Vegetables have emerged.

41. REASONS FOR RISE IN FOOD PRICE
42
• Govt. policies –
• Pressure stemming from
inclusive growth policies- Food
security, MNREGA
• Minimum Support Price –
• MSPs of food grains:
• Seasonal Cycles
• Bad monsoon in India
• International prices
• -Shocks from global food
prices
• Food Wastage
• Rise in living standards leading to
improved diets
• - A Shift in dietary habits towards
protein foods:
• More demand for food/ change in
consumption pattern
• Decreased production and Less
productivity
• Export of food
• Holding by marketers
• Financialisation of commodities and
market regulations

42. While food prices
have been declining
everywhere else, why
are they rising at such
a fast clip in India?
Former Prime
Minister Man Mohan
Singh had famously
said high food
inflation was the
result of
people eating better;
a reasonable response
from an economist
accustomed to cold
facts
43Source: suparna-sen.blogspot.in and Bhattacharya et al (NIPFP & ADB), 2014
Diversification of Indian diets
associated with raised per capita
income has increased the demand for
high-value food products

43. 44
• Major contributor to Food Inflation is Protein rich foods like Milk, Pulses,
Eggs, Fish etc.
• The trend of food consumption has shifted from Carbohydrate rich foods to
Protein rich foods.
• In the case of Pulses the problem is compounded by the fact that India is the
single biggest consumer and only a handful of other countries produce in
quantities that India demands.
• Shortage in demand and supply: pulses production fallen by more than 2
million tonnes in 2014-15 and are falling short of about 4 million tons this
year.
†. More demand for food
(Change in consumption pattern)

44. 45
Drought-induced : Shortages in food supply are deemed to be the
prime reasons for food rise in India
Scarcity of Rainfall: The late coming of monsoon is held responsible for
the price rise.
Cheating temperament of local vegetable vendors
Poor monsoon of the previous year that kept the prices of food grains
uneven
†Seasonal Cycles
Only a small portion of food price rise can be blamed on weather

45. • Besides availability, the process of acquisition is held up in legislative
uncertainty, costs and legal complications.
» Land
• Rising wages, availability and reliability of skilled labour,
» Labor
• Credit growth is stagnant in the face of rising stressed assets and low bank
capitalization.» Capital
• Despite record coal availability and generation, the condition of state
electricity boards and distribution companies still constrain the availability of
power
» Power
• Slow pace of road building, lack of cold chains and warehouses, paucity
of railway rakes, and absence of a clear master plan to integrate
highways, ports and railways leave the industry constrained.
• Value chain
» Supply chain
46
†Decreased production and Less productivity
Factors of production

46. • Food subsidies—in the form of the Minimum Support Price,
• MSP—for crops can also pressure inflation in the short term.
47
†. Minimum Support Price –
MSP is the floor price that the government guarantees to
farmers for 25 crops, if the output is weak.

47. • Nearly 40% of all fresh produced in India perishes before it can get to
customers
• Inappropriate supply chain management and lack of basic facility to
store the food
48
†. Food Wastage –
www.bbc.com, 2014

48. 49
 Growth rate of the essential
goods and commodities (like
food, oil, land etc.) has not been
able to match population
growth.
Food crisis in the world is due to increase in population rate
But this is not the case in India as ->
There is consistent growth is achieved in food production year-on-year
From 208 million tonnes in FY 06 to an estimated 265 million tonnes in FY14, a 3
percent annual growth, compared to a 1.2 percent population growth rate.
forbesindia.com

49. FARMERS - The benefits of high prices go primarily to farmers with a large
marketed surplus and these farmers are not the poorest of the poor.
TRADERS – Take advantage of market and price gap
INVESTORS - High prices represent an opportunity to spur long-term
investment in agriculture, which will contribute to sustainable food security in
the longer run
50

50. EXPORT AND IMPORT
Countries that export a
large proportion of their
production benefit the most
when prices are high.
Higher food prices will be
strongest in countries
where food subsidies are an
important part of the
budget 51

51. The rapid rise in food
prices has been a burden
on the poor in developing
countries like India, Who
spend roughly half of their
household incomes on food.
52
Indian’s spending pattern
Effects of food inflation
Soucre: Would the Real Inflation Rate Please Stand Up, Jan 19, 2012

52. 53
oHike in food prices posses a threat to the over all growth of the
economy and can push millions of people below the poverty line.
oFood Inflation encourages hoarding of essential commodities
oLowers the purchasing power of common man
oForces common man to borrow money from banks and other
financial institutions
oMal-functioning of PDS shops

53. Differential impact on net food exporters (e.g. China) and net food importers
(e.g. Indonesia)
Among the developing countries, the impacts are more severe in poorer
countries. Interestingly, the impacts are lesser in countries that have a higher
contribution of agriculture to GDP.
54

54. Food price rise resulted Infant Mortality, Child Mortality and
Undernourishment
It is found that a one per cent increase in Food Inflation leads to an increase of
0.3 percent in both Infant and Child mortalities and 0.5 percent in
Undernourishment.
Influences of food inflation of earlier years was visible in increased infant and
child mortality, and that of recent years in increasing undernourishment.
Impact of food price rise on Nutrition
55Rising food prices are comrade with negative childhood nutrition

55. 56
Source: indianexpress.com
Rising food prices were associate with significant declines in the consumption
of rice, a major source of caloric intake, And eggs and meat which are
important high-protein sources in Indian diets. In turn, these declines were
associated with a greater risk of children’s wasting, a short-term respondent
to prices, but not stunting, which is a long-term deprivation measure,”
In near future the impact of high food price will show in terms of more
malnourished

56. In both rural and urban areas, the poorest quintiles are the worst affected.
 “The poorest of poor people usually buy more food than they sell.
Thus, High food prices tend to worsen poverty, Food Insecurity and
Malnutrition”
The poor landless are likely to be worse-off
Female-headed households fail to benefit due to limited access to land, credit
and markets
On the other hand, farmers who are net food sellers are likely to grieve more
Impact of food price rise on Poverty
57

57. 58
The situation of price rise coexists with a set of short-term complexes.
To combat food inflation, It is these myriad factors the government
needs to focus on.
Measures to Control Food
Inflation

58. Increase in
Production
&
productivity
59
Food
Inflation
Crucial Measure
Price stability is a prime concern of the governments the world over.

59. • Price and quantity restrictions make matters worse
• Subsidised food distribution provides partial relief but does not mitigate
food insecurity
• The food system is global but the principal actors are national governments
• International agencies can play a supportive role but improvements require
sound national policies
• In the long-term, higher agricultural growth needed for food security and to
raise incomes of smallholders.
60

60. Rakesh Bharti Mittal
Vice-Chairman of Bharti Enterprises
Emphasized 10 Point Measures, Both short term and long term to tackle the
inflating prices @ CII (Confederation of India Industry, 2011)
Views to Tackle Food Price Change
61
“Measures should be made a part of long term policy for ensuring food security
rather than ad-hoc emergency measures. And also, A strong political consensus and
push is needed to ensure that the State Governments accept this recommendation”

61. Lower import duty, especially on fruit & vegetables and allow imports:
Looking at the rising prices of fruit and vegetables, the Government should react fast on
lowering the existing tariffs (hovering around 30% to 50%) and allow import of these
commodities.
State Governments should take stern enforcement measures to curb
hoarding and speculations.
The Government should invite and Incentivize private sector
(Both domestic and foreign), Cooperatives and NGOs to come up with business models
that directly link the growers with processors and retailers.
62
Short TermMeasures

62. Mediumto Long TermMeasures
Exemption of perishables from the provision of the APMC Act
All the fruits, vegetables and other perishables including fisheries having very short shelf-
life should be fully exempted from the provisions of the APMC Act.
Processors and organized retailers should be incentivized
To procure directly from the farmer groups (growers, companies or cooperatives) for building
infrastructure in rural areas for aggregating the fresh produce, cleaning it, grading, packaging, and
storing in cold storages before bringing it for retail distribution. This will create not only
employment in rural areas but also build much needed infrastructure.
The Centre should also encourage the States
To help build the infrastructure, especially cold storages, to save on wastages which will boost
supply side and help in price moderation. 63
www.dayafterindia.com

63. 64
A unified national market :
The Government should move towards a unified national market and allow free
movement of fresh produce across the country without any taxes whatsoever.
Creating a marketing platform
Most importantly it is time to usher in market reforms by compressing the value
chain of Agri-commodities. The model of creating a marketing platform at the
village level needs to be promoted where the buyers will come to the producer
groups directly rather than farmers going outside to sell their produce.
Investments in organized retail
(Both domestic and foreign) to shore up the entire supply chain and ensure good
prices to farmers as well as consumer.

64. 65
Farm Productivity
Strong and urgent focus is needed to enhance farm productivity by way of adequate
Inputs usage and by extension
For enhancement of the supply side to meet the growing demand on a sustainable
basis
A special agreement
should be signed between India and the neighbouring countries - for import and
export of perishables.
This will be a confidence building measure and will ease demand supply
challenges of similar commodities between India and the neighbouring countries.

65. 66
Investment
by Multi
Brand
Outlets
Increased
Competition
Organized
Supply
Chain
Job
Creation
Increased
Disposable
Income
Increased
Consumption
Inflation
Decrease
Reduced
Waste
Middle
Man Cut
Out
Increased
Income Of
Farmers
Offset of
Existing
Distributors
IMPACT OF FDI ON INFLATION RATE

66. 67
In India Wholesale Price Index hit zero in
November 2014, (the lowest in about five
and half years) was because of decline in
prices of food, fuel and manufactured items.

67. 68

68. 69