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Food Inflation- A Special Report By The Equicom 15 May
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Food Inflation- A Special Report By The Equicom 15 May


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  • 2. CURRENT STATE OF INFLATIONInflation rate refers to a general rise in prices measured against a standard level of purchasing power. The most wellknown measures of Inflation are the CPI which measures consumer prices, and the GDP deflator, which measuresinflation in the whole of the domestic economy. It is a major source of data and we expect, as it is incorporated intovarious models, that people use it to track the economy. leThe inflation rate in India was last reported at 9.5 percent in March of 2012. From 1969 until 2010, the average inflationrate in India was 7.99 percent reaching an historical high of 34.68 percent in September of 1974 and a record low of -11.31 percent in May of 1976. The inflation rate in India as measured by the Wholesale Price Index (WPI) has been rising continuously over the past three years. Inflation in food products has driven overall inflation. As per the latest data, overall WPI Inflation stood a 9.5 per cent in at March 2012. In the week ending April 22, 2012, food inflation stood , at 9.9% per cent. 3 Call Us: +919200009266
  • 3. WPI Inflation (year-on-year) 2006-07 2007-08 2008-09 2009-10 All Commodities 5,114.15 5,017.80 5,124.75 4,988.00 Food 10,061.25 9,939.60 10,084.45 9,749.30Food Inflation rate from January to April 2012January 5.53%On the back of low price of fruits & vegetables, egg, gram, moong and condiments & spices, India’s food inflation for theweek ended January 14, 2012 has fallen to -1.03 % while the annual rate of inflation was down to 1.89% for the weekended 14th January as against 2.47% the previous week .The index for ‘Food Articles’ group rose by 0.3% to 191.4 from 190.9 for the previous week due to higher prices of bajra,fish-marine and jowar, ragi and barley and wheat, maize and milk.While, the prices of fruits & vegetables, egg, gram, moong and condiments & spices declined.The index for ‘Non-Food Articles’ group declined by 1.5% to 179.9 from 182.6 for the previous week due to lower pricesof flowers, raw cotton, sunflower and raw rubber, castor seed and copra..While, the prices of gaur seed, groundnut seed, and raw jute, coir fiber, linseed, soybean, rape & mustard seed andMesta moved up. Meanwhile, the index for ‘Minerals’ group rose by 0.7% to 325.1 from 322.8 for the previous week dueto higher prices of zinc concentrate, copper ore magnesite and iron ore. However, the prices of dolomite and barytesdeclined. 4 Call Us: +919200009266
  • 4. .February 6.07% The increase in inflation was mainly driven by the steep increase in food inflation which jumped to 6.07% in February compared to -0.52% in January. Food Inflation stood at 9.54% in the same month last year. Potato and Onion prices were dropped by 43.13%, 2.22% and 48.50% respectively in February while prices of pulses, vegetables, protein items, milk, rice and cereals were increased by 7.91%, 1.52%, 20%, 11.7%, 1.53% and 1.71% respectively. Food inflation has 14.3% weight in the overall WPI. Prices of manufactured items, which have a weight of around 65% in the WPI basket, were increased by 5.75% in February. With this increase, inflation has again started its upward movement after some continuous fall. After this increase, RBI may not cut rates just now during its next policy review meeting scheduled to be held tomorrow. March 9.94% While Food inflation stood at 9.94% in March compared to 6.07% in February, non-food manufactured inflation dropped to 4.87% in March compared to 5.7% in February. Food articles have 14.3% share in the WPI basket which has kept the overall inflation at nearly 7%.Onion prices were declined by 24.23% in March. Prices of protein items, pulses, vegetables, milk, potato, rice and cereal were increased by 17.71%, 10.05%, 30.57%, 12.59%, 11.6%, 4.73% and 4.41% respectively in the same month.5 Call Us: +919200009266
  • 5. April 9.9%Food inflation accelerated to its highest in more than three months, making it difficult for the Reserve Bank of India topause interest rate hikes despite global economic uncertainty and deceleration in industrial growth.Inflation has been very volatile and right now monsoons have triggered additional transportation problemsfor food products. Perishables are mostly generating the price spikes now.Food inflation accelerated to its highest in more than three months, making it difficult for the Reserve Bank of India topause interest rate hikes despite global economic uncertainty and deceleration in industrial growth. Prices rose 9.9% forthe week ended July 30 from a year ago, the highest rate of increase since the third week of April. 6 Call Us: +919200009266
  • 6. India Industrial ProductionIndustrial Production in India declined 3.5 percent in March of 2012. Industrial production measures changes in output forthe industrial sector of the economy which includes manufacturing, mining, and utilities. Industrial Production is animportant indicator for economic forecasting and is often used to measure inflation pressures as high levels of industrial atorproduction can lead to sudden changes in prices. From 1994 until 2010, Indias industrial production averaged 7.49percent reaching an historical high of 17.70 percent in December of 2009 and a record low of -0.20 percent in December gh 20of 2008. 7 Call Us: +919200009266
  • 7. FALSE CLAIMS Food demand in an economy like ours naturally grows over time. In order to keep pace with population growth, food production also needs to grow. However, in India, food production and availability have not grown commensurately. In 2008-09, annual per capita cereal availability in India was only around 165 kg, which was that of the same level as in 2000-01. In contrast, per capita cereal availability in China was over 290 kg in 2008-09, and in the US it was over 1000 kg. Moreover, per capita cereal availability in India fell to 161 kg in 2009-10, despite high GDP growth. Therefore food consumption for the entire population is certainly not witnessing any rise. What is happening is that income and consumption growth is getting disproportionately concentrated within the top 10 to 15 per cent of the population, who are benefiting from GDP growth. For the bulk of the Indian people, consumption levels are getting further squeezed. If 77 per cent of the Indian population is spending less than Rs 20 per head a day as per the Arjun Sengupta commission report, one can well imagine what the consumption levels of the majority of Indians are. Widespread hunger and malnutrition is the reality of India. India continues to be home to around 25 per cent of the world’s hungry population currently estimated at 925 million by the UN World Food Programme. Nearly half of India’s children under three years of age continue to remain malnourished, as per the National Family Health Survey, alongside half of pregnant mothers who are anemic. Food price inflation is making matters worse for these sections by squeezing their consumption levels.8 Call Us: +919200009266
  • 8. MAIN REASONS OF INFLATIONThere are four main reasons. The immediate reason for the spurt in the prices of specific food items, like onions today orearlier in the case of sugar and pulses, is hoarding. Trader cartels, encouraged by an inept government, are mainlyresponsible for this. Assured of inaction, hoarders are creating artificial shortages and fleecing people from time to time.Secondly, the growing penetration of big corporates in the food economy, international trade in food items andspeculative futures trading in agricultural commodities has weakened the government’s capacity to control food prices.The share of corporate retail in food distribution has tripled over the past four years. The government has manipulatedtrade policies to allow big traders to make huge profits through export and import of essential food items like wheat,sugar and onions. On the other hand, the PDS has been weakened considerably through targeting. In most states, therole of the ration shops, state agencies like the NAFED etc and consumer cooperatives in food distribution, has beenwhittled down. Therefore, the profit margins of private traders have also increased, reflected in growing gaps betweenwholesale and retail prices as well as farm-gate and wholesale prices.There are medium and long-term reasons too. Our agriculture is in a crisis. We are not producing enough to meet theneeds of a growing population. The peasantry continues to be in distress, with 2.5 lakh farmers committing suicide overthe past 15 years. State intervention in raising agricultural productivity has been weakened. The government is moreinterested in handing over this role to big agribusinesses and retail giants like Walmart and Monsanto in the name of a‘second green revolution’. That will further marginalise the small peasants.Finally, the cuts in subsidies and price hikes of inputs like diesel and fertilizer are also contributing to food inflation. Thederegulation of petrol prices has led to very steep hikes in the recent weeks. 9 Call Us: +919200009266
  • 9. NOTIONAL LOSSESThe so-called ‘under-recoveries’ of oil companies cited by the government are notional losses. In actual terms the oilcompanies are not making such losses. The international crude oil price is currently ranging between 85 to 90 dollars perbarrel, which comes to around Rs 25 per litre (1 barrel = 159 litres and 1 dollar = 45 rupees). However, the retail price ofpetroleum ranges between Rs 58 to Rs 63 per litre in the metro cities. This huge difference between crude oil prices andthe retail price of petrol is on account of taxes, over Rs 30 per litre of which is collected by the central governmentthrough customs and excise duties. If we take these taxes into account, the government earns much more in taxes onpetrol and diesel than it spends on fuel subsidies. If the government cuts these indirect taxes, the fuel prices would notrise.The government does not want to cut these taxes, because otherwise it has to impose more direct taxes on the rich andthe corporates. Therefore the government is passing the burden on to the people. After petrol prices were deregulated inJune 2010, petrol prices have been raised seven times by the oil companies, the last time being in January 2011,amounting to an increase of over Rs 10 per litre in seven months. Increase in fuel prices have been adding to inflationarypressures. 10 Call Us: +919200009266
  • 10. STEPS TO CONTROL FOOD INFLATIONThe present steps being undertaken by the government are inadequate. What we need is a long-term strategy to fightinflation. The first step should be to strengthen state intervention in the food economy, both in food distribution andproduction.The government is dithering on the food security legislation. The food security act should be passed without furtherdelay, which must ensure universal food security. The government is currently holding stocks of nearly 50 million tones ofrice and wheat, which is way above the buffer norms. 35 kgs of food grains per month should be supplied through auniversalized PDS at Rs 2 per kg and not limited to the arbitrarily determined BPL families. Moreover, other essentialcommodities like sugar, pulses and edible oils should be supplied at fixed rates across the country through the PDS.Thegovernment has been sitting on the recommendations of the National Farmers’ Commission for the past five years. TheFarmers’ Commission had made several suggestions to make farming remunerative for the peasantry and step up publicinvestment in agriculture, as well as agricultural storage and marketing. Besides supporting farmers, governmentagencies, cooperatives and self-help groups should be supported to open more outlets to sell food items like vegetables,milk etc. Raising agricultural productivity and modernization of storage and marketing of agricultural products cannot beleft to the private corporates and MNCs. Inflation cannot be controlled with liberalized trade and private profiteering infood items.The influence of private corporates and traders in the food economy needs to be curbed. For this it is essential for thecentral government to take the state governments on board and coordinate measures against hoarding and black-marketing. In this regard, it is also important to prohibit commodity futures trading in food articles, because such tradingfacilitates speculation on food prices.Finally, the costs of agricultural inputs like fuel and fertilizers have to be controlled by the government. Deregulation offuel and fertilizer prices will raise agricultural costs and contribute to food inflation. The government must continue tosubsidize fuel and fertilizer and rationalize the taxes on petroleum products. The decision to deregulate petrol pricesneeds to be reversed. 11 Call Us: +919200009266
  • 11. FUTURES TRADINGFutures trading is linked to inflationary expectations in the economy. Futures are contracts made between sellers andbuyers for sale/ purchase of a fixed quantity of a commodity at a fixed price at a future date. What commodity futuresmarkets do is to enable selling and buying of these contracts on a daily basis, like in the stock market.So, a future contracts of say 10 kg of sugar to be delivered in May 2011 at Rs 30 per kg, can sell at more or less than Rs30 per kg in January 2011. Someone, for example, buys the contract at Rs 29 per kg today, because sugar prices areexpected to fall in the coming months. However, in the coming months international sugar prices can rise, may bebecause the sugar crop from, say Brazil, fails this year. Then demand for sugar contracts in Indian futures market willalso rise and the person who bought sugar at Rs 29 per kg can sell it in March 2011 at, say Rs 35 per kg, making awindfall profit of Rs 6 per kg without having to either produce or consume a single grain of sugar. Moreover, when sugarprices rise in the futures market in India, sugar traders expect to make profits (a) by exporting sugar abroad (b) byhoarding sugar so that there is scarcity in the domestic market, which eventually increases domestic sugar prices. Thecommodity futures markets therefore achieve two things. First, they link domestic food prices to the volatile internationalcommodity markets. Second, they provide avenues for pure speculators, who have nothing to do either with productionor trade in food, to emerge as major players and make capital gains by speculating on food prices.With the advent of multi-commodity exchanges in India since 2002-03 and the commencement of online trading,commodity futures trading have grown manifold. Like most countries across the world, the people who are investing inthese markets are not farmers, but big players of the financial markets who are only interested in making speculativegains. The government was forced to suspend futures trading in some essential commodities like rice, wheat, sugar andsome pulses in 2007 due to the pressure from the Left Parties. However, futures trading in wheat and sugar have onceagain been allowed by the government.India is a food deficient country. Our productivity levels are low and we are not producing enough to meet the demandsof a growing population. Moreover, our agricultural production is heavily dependent on the weather and above or belownormal rainfall (floods and drought), significantly affects the supply of agricultural commodities. Storage capacity in Indiais also limited and many food items cannot be stored because of lack of modern storage facilities. In this backdrop,futures trading in food items distort the price signals and encourage speculation and hoarding, thus contributing to foodinflation. Therefore, in order to control food inflation, futures trading in food articles need to be prohibited. 12 Call Us: +919200009266
  • 12. RETAIL PRICES OF SOME ESSENTIAL COMMODITIES IN DELHI: 2009 TO2012 (RS/KG)Item Retail Retail Retail Retail Price Price (end- Price (end- Price (end- January January (end- January 2011) 2010) January 2012) 2009)Rice 23 23 22 17Wheat 15.5 16 13 13Atta 17 18 14 14Chana Dal 35 38 35 35Arhar Dal 69 84 50 42Moong Dal 68 81 45 36Masoor Dal 54 62 62 39Sugar 34 42.5 23 17Milk (Rs./litre) 25 22 21 20Groundnut Oil 135 113 109 121Mustard Oil 79 71 77 69Vanaspati 77 57 54 67Tea Loose 149 156 144 107Salt Pack (Iodized) 13 12 11 10Potato 10 9 8 8Onion 33 23 21 9 13 Call Us: +919200009266
  • 13. DisclaimerThe information and views in this report, our website & all the service we provide are believed to be reliable, but we do not accept any responsibility (or liability) for errorsof fact or opinion. Users have the right to choose the product/s that suits them the most.Sincere efforts have been made to present the right investment perspective. The information contained herein is based on analysis and up on sources that we considerreliable.This material is for personal information and based upon it & takes no responsibilityThe information given herein should be treated as only factor, while making investment decision. The report does not provide individually tailor-made investment advice.TheEquicom recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser.TheEquicom shall not be responsible for any transaction conducted based on the information given in this report, which is in violation of rules and regulations of NSE andBSE.The share price projections shown are not necessarily indicative of future price performance. The information herein, together with all estimates and forecasts, can changewithout notice. Analyst or any person related to TheEquicom might be holding positions in the stocks recommended. It is understood that anyone who is browsing throughthe site has done so at his free will and does not read any views expressed as a recommendation for which either the site or its owners or anyone can be heldresponsible for . Any surfing and reading of the information is the acceptance of this disclaimer.All Rights Reserved.Investment in Commodity and equity market has its own risks.We, however, do not vouch for the accuracy or the completeness thereof. we are not responsible for any loss incurred whatsoever for any financial profits or loss whichmay arise from the recommendations above. TheEquicom does not purport to be an invitation or an offer to buy or sell any financial instrument. Our Clients (Paid OrUnpaid), Any third party or anyone else have no rights to forward or share our calls or SMS or Report or Any Information Provided by us to/with anyone which is receiveddirectly or indirectly by them. If found so then Serious Legal Actions can be taken. 14 Call Us: +919200009266