Decomposing Food Inflation In India

By Divyat Rungta

Edited by Namrata Caleb, Senior Editor, The Indian Economist

Food inflation in India from the period 2008-2013 had regularly been touching the double-digit mark. It is only in the past few months that prices have declined, largely due to a fall in crude oil prices. For an economy where nearly 50% of expenditure is incurred on food, and a large chunk of workers work in the informal sector that have sticky wage increases, food inflation is a serious challenge. This article looks to throw light on some of the structural and policy issues that have aggregated the food inflation India.

1. The mid 1960s saw severe droughts, to which India responded by ushering in the Green Revolution. The introduction of high-yielding variety seeds saw a massive boom in production of wheat and rice. Within years of the Green Revolution, India had become a cereal economy, and half a century later the pattern still holds true. The implementation of Minimum Support Price (MSP) to wheat and rice has served as a major disincentive for farmers to grow high value goods such as vegetables, fruits, pulses and milk.

However, increasing incomes have lead to significant changes in consumption patterns, with demand shifting towards vegetables, fruits and protein-rich food items.  The Economic Survey 2012-13 highlights that the share of protein foods within overall food expenditure increased from 26.28 per cent during 1950-60 to 33.71 per cent during 2007-2012. Furthermore, a working paper published by the Institute of Economic Growth in 2012 has estimated that for every 1 percent increase in per capita income, demand per capita for cereals and pulses is likely to decline by 0.05 percent and 0.2 percent, while the demand for fruits, vegetables and milk is likely to increase by about 0.55-0.6 percent. Thus, due to implementation of the MSP that guarantees both, a certain quantity and price to the farmers, there has been excessive demand pressure on non-cereal products leading to inflation.

2. The Agriculture Production Market Committee (APMC) Act is something that needs to be bought to attention, and has been doing the circles amongst the food economists. As per the Act, each state is divided into several markets with each market falling under a state regulated Market Committee. Once the market is under the committee’s regulation, no farmer is allowed to carry out free trade. The produce sold has to go through the regulated mandis, where state licensed traders create their monopolies. The option of direct selling or bulk supply to agro-processing industries is completely ruled out. The Act has implicitly made farmers mere pawns of middlemen in the supply chain system. Even companies involved in farm-to-house selling of vegetables and fruits, pay a commission of 1% to these mandis. The agents at these mandis have a dual-commission mechanism, from the farmers as well as the consumers. As a result, consumers end up paying 2-3 times the actual price, making it worse off for them without actually benefitting the farmer.

3. There has also been a shift in workforce, from agriculture to the other two sectors. The decline in workforce, coupled with enforcement of MNREGA has lead to rising farm wages. The last seven years have consistently seen an annual rise in real wages of 6-7%, with a simultaneous fall in people engaged in agriculture by 10% over these years. Until a decade back, India agriculture sector was considered a labour surplus. The equations have changed now, and labour shortage is a serious problem. When in real terms farm wages rise faster than the gains from increased productivity, the food economy faces a cost shock leading to inflationary trends. The past 5-6 years have also seen heavy spending by the government as fiscal deficits. High fiscal deficit spending through schemes like MNREGA have served as a double edged sword for food inflation, leading to higher benchmark wages, as well as higher consumption of non-cereal products due to more liquidity in economy. Inflationary trends due to rising farm wages are an example of the classic cost-push inflation. In order to subdue the impact of inflation through rising wages, which is bound to be existent in an economy like India’s, the government will have to compliment it through capital inputs to raise productivity gains.

4. India currently is also facing several infrastructural roadblocks leading to hurdles in the supply mechanism. There are issues in both, capacity and connectivity. Inadequate warehouse facilities, cold storage at places of sale and lack of market areas near production make up the capacity problem, while poor road conditions and inefficient transportation constitute the connectivity problem. To put things into perspective, India has about 6300 cold storage warehouses, with a capacity of 30 million metric tons. This is less than half the capacity required to store optimum amounts. All these factors lead to a gap between quantity produced and quantity sold. As a result, expected revenues from production are covered from lesser quantity, leading to higher prices. Ensuring capacity and connectivity will be crucial in near future as non-cereal products are much more perishable then cereals.

To sum up, tackling food inflation, along with achieving sustained growth in the sector and food security will remain the most daunting task of the government. What makes the problem at hand even more complex is that food inflation is an integral part of the farmers’ lives as well, as they to constitute a fair chunk of consumers. Thus the government, while ensuring price security of food for the poor of this nation, also has the responsibility to maintain income security for the farmers.

Divyat Rungta is currently a second year student pursuing B.A Economic (Hons) in Shri Ram College of Commerce. He is a die-hard sports lover and enjoys listening to Indie music. He has been deeply influenced by his parents, teachers, and the Indian Army! As a member of Enactus SRCC, he spends a lot of time working on social entrepreneurship projects undertaken by the team. Having the opportunity to interact with various communities and give them a sustainable livelihood has made a huge impact in his personal life. He strongly believes the student community has the responsibility of shaping a new India, and wants to make a significant contribution to it.