Food Inflation in India


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When i was going through articles about food inflation thought to compile and present it in a simple way for the benefit of all. It talks about what is inflation, causes for inflation and ways to resolve...

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Food Inflation in India

  1. 1. A brief note on Food Inflation July 2, 2011 by Siddharthan Sundaram
  2. 2. What is inflation? <ul><li>Inflation is defined as a sustained increase in the general level of prices for goods and services . It is measured as an annual percentage increase. As inflation rises, every rupee you own buys a smaller percentage of a good or service. </li></ul><ul><li>“ Inflation is when you pay fifteen dollars for the ten-dollar </li></ul><ul><li>haircut you used to get for five dollars when you had hair” (Sam Ewing) </li></ul>
  3. 3. In(dia)flation* Source: *Basis : consumer price (CPI) 13.73 %  June 2010 - June 2009 11.25 %  July 2010 - July 2009 9.88 %  August 2010 - August 2009 9.82 %  September 2010 - September 2009 9.70 %  October 2010 -October 2009 8.33 %  November 2010 - November 2009 9.47 %  December 2010 - December 2009 9.30 %  January 2011 - January 2010 8.82 %  February 2011 -February 2010 8.82 %  March 2011 - March 2010 9.41 %  April 2011 - April 2010 8.72 %  May 2011 - May 2010 inflation  Inflation (yearly basis)
  4. 4. Calculation and Composition of Wholesale Price Index <ul><li>Wholesale Price Index (WPI) is a price index which represents the wholesale prices of a basket of goods over time. In simple words, WPI is an indicator of price changes in the wholesale market. WPI measures the changes in the prices charged by manufacturers and wholesalers . WPI measure the changes in commodity prices at a selected stages before goods reaches to the retail level </li></ul><ul><li>The WPI is based on the prices of 435 commodities in India, which is an indicator of movement in prices of commodities in all trade and transactions. </li></ul><ul><li>Cereals like Wheat, Rice, Jowar and Bajra which have a 4.41% weightage in the WPI, Pulses has 0.6% weightage and Sugar, Khandsari and Gur have 3.93% weightage. </li></ul>
  5. 5. Causes for high food inflation <ul><li>Deceleration of investment both by public and private sectors, in rural and agricultural infrastructure. </li></ul><ul><li>Food consumption amongst Indians is on the rise, in absolute terms. However, the share of cereals fell from 41% of consumer expenditure to 18% in rural India and from 23% to 10% in Urban India. “ As income increase, there is progression to higher value up crops like fruits and vegetables” (Vyas, Member of the Economic Advisory Council). So, people started buying foods they could not earlier afford and discretionary expenditure on perishables is going up. </li></ul><ul><li>The increasing proportion of dual income families and the need for quick fix meals has its own impact: processed foods are becoming more popular. </li></ul><ul><li>India has the highest proportion of (49%) of arable land to total geographical area in the world and would have no trouble in feeding its citizens. But farm productivity is an issue . The countries with far lower areas of arable land like the US (18%), China (14%) and Canada (4%) seem to manage pretty well because of high productivity/yield. </li></ul>
  6. 6. Causes for high food inflation <ul><li>Water management is the most crucial element in improving productivity. Experts believe that if just the entire arable land in India were to be irrigated, agricultural productivity could be doubled. Irrigation played a key role in the Green Revolution, when we took quantum leap in Wheat and Rice productivity using high yielding varieties of grain. But the clock stopped there and productivity of wheat and rice has plateaued. </li></ul><ul><li>Reasons for low productivity: </li></ul><ul><ul><li>lack of certified seeds </li></ul></ul><ul><ul><li>falling soil health </li></ul></ul><ul><ul><li>the lack of effective extension services such as diffusion of innovation from the lab to farm and on demand affordable agricultural advisory services </li></ul></ul><ul><ul><li>fragmentation of land and the small size holdings (average size of holdings is 1.3 hectare and this is further declining) do not allow economies of scale. </li></ul></ul><ul><ul><li>Productivity of fruits increased from 10 MT/hectare to 11.2 MT/hectare between 1991/92 and 2008/09. Vegetables fared little better i.e from 10.5 MT to 16.2 MT/hectare </li></ul></ul>
  7. 7. Causes for high food inflation <ul><li>Agricultural Produce Marketing Committee (APMC) Act necessitates selling of agri produce through APMC yards or mandis through licensed agents working there. Geographical restrictions also limit farmers to selling within their states. </li></ul><ul><li>Trouble is the farther the farmer is from the mandi , the more levels that created. What he sells to a local APMC yard, the trader/agent will further sell the product to biggest mandis across the country. </li></ul><ul><li>At the district APMC, farmer is a `price taker’. He has nowhere else to go. In economics, the situation is called `monopsony’- where several sellers chase limited buyers. The middleman is a winner from both ends. (their margin, after accounting for transport costs, 50-60%) </li></ul><ul><li>There are about 7,700 mandis across India . Is this enough or does India need more mandis? – the problem is not number but proximity to the farmers. Ideally, a farmer should not have to travel more than 15 kms to sell his produce. But the mandis located near farmgates lack basic amenities like weighing scale, drinking water, shed for shelter etc. </li></ul>
  8. 8. Causes for high food inflation <ul><li>Wastage and lack of cold storage facilities. Food stocks worth Rs 60,000 crore (USD 13 billion) are lost every year due to lack of storage facilities. Worse, another Rs 2.6 crore (half a million USD) is spent on disposing of rotten grain. </li></ul><ul><li>The storage capacity gap is around 151 million tonnes in 19 states. </li></ul><ul><li>Against the annual production of 180 million tonnes of fruits and vegetables that need cold storage facilities India has facilities for only 23.6 million tonnes and the bulk of this (about 80%) is devoted to potatoes. The result: Wastage, supply shortage and higher price. </li></ul>
  9. 9. Ways to resolve high food inflation <ul><li>Our policies are mostly short-term and ad hoc. Over the years, there has been a decline in public investment in agriculture: Rs 24,452 crore (USD 5 billion) in 2008-09. It constitutes merely 0.5% of the GDP. The policy should be worked out in long term perspective </li></ul><ul><li>Three areas to focus on: (according to member of planning commission) </li></ul><ul><ul><li>soil and nutrient quality management </li></ul></ul><ul><ul><li>Judicious water management </li></ul></ul><ul><ul><li>Technology </li></ul></ul><ul><ul><li>Critical to have inclusive policy that will play special attention to the dry lands – </li></ul></ul><ul><ul><li>areas that depend on rain for irrigation i.e. about 60% of India’s arable land, but </li></ul></ul><ul><ul><li>farming here remains at a subsistence level with farmers struggling to meet their </li></ul></ul><ul><ul><li>own demands for food, feed, fibre and fuel. </li></ul></ul><ul><ul><li>“ Innovative products, processes and concepts and their integration into existing agricultural systems is the pathway to true inclusive agricultural growth in India” said Icrisat Director General . </li></ul></ul>
  10. 10. Ways to resolve high food inflation <ul><li>There are many answers and possible solutions. But there is no easy and quick way to resolve the problem of rising prices. </li></ul><ul><li>Is the food inflation here to stay? </li></ul><ul><li>how long ..? </li></ul><ul><li>1.2 billion people are looking up to the decision makers for the answer! </li></ul>
  11. 11. Sources: <ul><li>Ministry of Consumer Affairs, Government of India </li></ul><ul><li>Outlook Business, May 28, 2011 </li></ul><ul><li> </li></ul><ul><li>Wikipedia </li></ul>Thank You