U Nderstanding the Nature and Causes of Food Inflation
drought, output and inflation
understanding the nature and Causes of food inflation
Ramesh Chand
The main reason for the current surge in food prices is the supply shock due to the drought in 2009 and the carry-over effect of the low growth of food production in 2008-09. As the frequency of such shocks is expected to rise, India needs to have an effective food management strategy to deal with these episodes. It also needs to explore various other options for price stabilisation like maintaining buffer stocks and using trade. The economy has to invest heavily in expanding storage capacity for various types of foods in both the public as well as private sectors. Due to fluctuations in growth, the export of some commodities in one or two years is followed by their imports, which invariably involves a large variation in costs and prices. As India is a net exporter of food, a part of what is now exported needs to instead become part of domestic stabilisation stocks.
P
olicymakers and administrators seem unable to bring food prices under control. 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. The increase in prices is not restricted to a few commodities, and it is being experienced across the board; the exception being edible oils. Inflation at the retail level, which ultimately is what matters for consumers, is more serious than wholesale prices. At this rate of inflation, Indian consumers are required to spend about 20% more on food compared to the previous year to maintain their consumption level. A large percentage of households in the country is not in a position to raise its food expenditure to neutralise the effect of inflation. This is surely going to aggravate food and nutrition deficiency which remains at a very high level (Deaton and Dreze 2009). The debate on the causes of inflation is full of confusion and most experts do not
understanding the nature and Causes of food inflation
Ramesh Chand
The main reason for the current surge in food prices is the supply shock due to the drought in 2009 and the carry-over effect of the low growth of food production in 2008-09. As the frequency of such shocks is expected to rise, India needs to have an effective food management strategy to deal with these episodes. It also needs to explore various other options for price stabilisation like maintaining buffer stocks and using trade. The economy has to invest heavily in expanding storage capacity for various types of foods in both the public as well as private sectors. Due to fluctuations in growth, the export of some commodities in one or two years is followed by their imports, which invariably involves a large variation in costs and prices. As India is a net exporter of food, a part of what is now exported needs to instead become part of domestic stabilisation stocks.
P
olicymakers and administrators seem unable to bring food prices under control. 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. The increase in prices is not restricted to a few commodities, and it is being experienced across the board; the exception being edible oils. Inflation at the retail level, which ultimately is what matters for consumers, is more serious than wholesale prices. At this rate of inflation, Indian consumers are required to spend about 20% more on food compared to the previous year to maintain their consumption level. A large percentage of households in the country is not in a position to raise its food expenditure to neutralise the effect of inflation. This is surely going to aggravate food and nutrition deficiency which remains at a very high level (Deaton and Dreze 2009). The debate on the causes of inflation is full of confusion and most experts do not
References: Chand, Ramesh (2001): “Wheat Export: Little Gain”, Economic & Political Weekly, Vol 36 (25): 2226-28, 23 June. CMIE: Monthly Review of the Indian Economy, Economic Intelligence Service, Centre for Monitoring Indian Economy Pvt Ltd, Mumbai, various issues, 2009 and 2010. Deaton, Angus and Jean Dreze (2009): “Food and Nutrition in India: Facts and Interpretations”, Economic & Political Weekly, Vol 44 (7): 42-64, 14 February. FAO (2009): Food Outlook, Global Market Analysis, Food and Agriculture Organisation of United Nations, Rome, December. Gulati, Ashok and Kavery Ganguly (2009): “Reform Market to Tame Prices”, Economic Times, 18 December, New Delhi. february 27, 2010 13