Thursday, 14 January 2010

The awfulness of food price inflation

Inflation, of any sort, is bad. Some stability in prices, is necessary for orderly economic activity and for growth. Countries which have experienced hyper inflation recall it with absolute horror. But the most awful form of inflation is when there is huge inflation in food prices. In non food products, one can curtail demand if prices rise. But what do you do with food ? After all, you have to eat.

In the last few months, food prices in India have gone through the roof. If you are living in India, you are experiencing it first hand. If you are abroad, you would have surely heard about it. The official food price inflation figure is 20%. In many key food items, the inflation has been much higher than that.

The first hint came in pulses, a vegetarian Indian’s main source of protein. A kilo of arhar dhal (pulses) has apparently touched the unbelievable level of Rs 100/kg. Then came vegetables. Onions at Rs 35/kg, potatoes at Rs 40/kg, and so on. Sugar is now at Rs 50/kg. Name a food item – prices are at levels never before seen.

Indian stoicism is legendary. Families simply tighten their belts more. Those who cannot afford it, just forego “luxuries” such as vegetables. Thankfully wheat prices haven’t gone up by too much, but rice prices have soared. Where does the poor man go ?

Economic growth is all very good, but some fundamentals have to be ensured in any country. Foremost amongst them is that food is affordable. The surest way to social unrest is through inflation in price of food. In the past, governments have been voted in or out of office, most famously on the price of onions.

Why is this happening in India now. Combination of circumstances unfortunately. This year the weather has not been kind to agriculture – both floods and drought have been significant factors in different parts of the country. Rising fuel prices is another cause. Supply demand mismatch, always the bane of agriculture, has been acute this year. A series of misguided policies have not exactly been helpful.

But I fear, food price rise is a structural thing and not easily reversible. While such a sharp increase will be reversed, I think the long term trend of significant price rises is, perhaps, inevitable. As populations grow, and agriculture declines as a profession of choice, the pressure on food availability will increase. The oil price rise will inexorably result in higher food prices as I have argued before in this blog.

What can be done ? I don’t know. I know very little of agricultural policy and economics. What I do know is that dhal at Rs 100/kg is neither sustainable nor acceptable.

13 comments:

Sandhya Sriram said...

maybe i got it wrong as ever, but as ever, every mistake i make, you open my eyes to a far wider outlook which i would have missed otherwise. so i attempt again :-)

I want to link this post to your earlier post - on how independent the central bank should be.

We are anticipating that central bank will raise the CRR as an attempt to curtail overall inflationary pressures in the economy. if the central bank were operating purely independently, maybe it wouldnt feel the political pinch of rising food prices as it is feeling now. maybe some amount of intermingling helps.

But the other perspective is that no intervention can change the fundamentals of demand supply mismatch. that still remains a big challenge not just for developing economies but developed economies as well.

an another green revolution maybe one solution. but the revolution is not to increase the per capita output of farming lands but to increase teh per capita income of farmers.

gils said...

:( rate at which prices are increasing...just like gold price rates which gets displayed in news daily..vegetable ratesum seekram vanthirum nenkren..horribly expensive...

Ramesh said...

@sandhya - Hey - you make the most perceptive of comments and you write better on business than me.No way am I going to let you get away with modesty !!

Actually, if RBI had been independent, their main aim would have been to curb inflation and they would have acted even sooner I believe. Although the currehnt price rise on food is more to do with agriculture andf supply than monetary policy.

@gils - Yes, horrendously expensive especially for the poor,. Imagine a family unable to afford food. Thats why I believe food prices are one of the most important factors affecting humankind.

hansjoerg said...

I do not think the issue is the raising food prices as such. The issue is the low income of so many people by not particpating in the development of the economy. If you look on the trend of the food prices in the industrial countries over the last 50 years. You will see the absolut food prices went up dramatically (farmers also have the right to particpate in the growing income), but relativly speaking to the overall income of the people food prices were constantly going down.

J said...

Affordable food is definitely a fundamental human right. The demand supply gap needs fundamental changes in how we farm and bring produce to market. For instance I read somewhere that losses in handling and transportation of vegetables in India are around 15% which can apparently be reduced quite a bit. But who has the vision and incentive to make big changes... and how long are we going to be so susceptible to failed monsoons?

Deepa said...

There has to be adequate supply to keep the prices stable. And if I am to believe my 10th Std Geography text, we are sitting on such a variety of fertile soils.

Agricultural Sector in India is so severly embattled that probably it will take another decade to clean it up. We rested on the Green Revolution laurel and wasted 4 decades after that. And look at where China has taken its Agriculture. We have a sorry Supply Chain System in this sector, almost exploitative to the producer, but it continues to remain so. We have a natural impediment with unpredictable monsoons, so much so that our Budgets come with a silent monsoon disclaimer. This should have made such a strong case for R&D in 'Agricultural Meteorology' in our country, but no Agricultural Minister so far has ever had any agenda in this country, let alone AgroMeteorology.

Every excuse in the book for the shoddy state of agriculture in our country has been defied by other agrarians else where in the world, but we still cry foul over them.

But then, all agruements bring us back to the same old culprits.

kiwibloke said...

A contrarian view again! I do'nt want to sound like "if you can't get bread, eat cakes" but some thing radically needs to be done about the resource intensive Indian diet. Rice (has the highest water/land requirement per tonne of output) and probably the lowest nutritional value has been the main stay of atleast 40% of the population. There are new technologies evolving in this whole area of agronomy and change of cropping/consumption patterns. Perhaps over a few generations hopefully Indian food habits will change to completely different sources of nutrition. Of course the leaking supply chain as Deepa points out is a quick fix target. About 25-30% of horticultural output rots on the way from the farm gate to the family table!

Durga said...

I really wonder if it makes sense talking about food price inflation when I still can't see a single eating joint in Bangalore which isn't bursting at its seams! How many of us stop to think that the best economists in India are the intermediaries in the supply chain system of agro products? They are the ones who decide the food price "inflation". It is not enough if you flaunt a degree from LSE. Be a "leech" in the agro products supply chain and you become an economist by default! Agreed there are a whole lot of factors which contribute to price rise of the grains. Do a micro level examination and the results will be devastatingly different from what you think it is (RTI Act will certainly help us in this endeavour).

PS-Would the corporates be kind enough to give its employees a hike which will match the food price inflation?!?!?!?!?!?!?! We all have a stomach(s) to feed...
:-D

athivas said...

So,with this price-rise, all the cart-pullers, rickshaw wallahs, the flower sellers, fruit sellers have every right to plunder the wealth of their customers, with an extra 10Rs or so. Is it also possible that we, as a corporate employees are also responsible to some extent in this inflation- with our relatively huge payscales? And rather than we going back to their levels, what a beautiful world it will be if, every corporate employee takes the responsibility of educating one person-raising them to our standards, employable in a corporate atmosphere,so food, rather whatever will be reachable to them, too?? And, what if every corporate employee has also to know farming, and must also be assigned farming responsibilities(like the month long village responsibility every year-this will also increase his/her appreciation of food,reducing wastage) in an attempt to improve productivity?? Am I thinking too much, or dreaming too much??

athivas said...

//the responsibility of educating one person//--this does not meean mere going to school, they do go! They need the quality imbibed in them, so they are at par??

Ramesh said...

@Hansjoerg - Great perspective as always. Oh yes farmers deserve their incomes as well. The trouble with Indian agriculture is its so inefficient. If industrial efficiency could be brought to agriculture, the farmers will make lots of money AND the pric of food will be low. Utopian ? Maybe, but ....

@Deepa - Yes, India has a huge competitive advantage - its percentage of cultivable land is one of the highest in the world. Supply chain is a problem, but overall "industrialisation" is really absent. Tiny farms, lack of technology, water wastage , etc all contribute to poor yields. Industrialise agriculture would be a good mantra, but its socially not doable.


@J - Absolutely, supply chain waste will more than absorb price inflation. But then, we in India haven't learnt the power of good infratsructure and probably never will.

@kiwi - That's a tough one. Changing eating habits is unbelievably difficult. Supply chain leakages can be plugged, but where is the will to build infrastructure in India ?

@Durga - The problem with food price inflation is that it doesn't really affect middle class upwards. Its devastating on the poor. Henc the apparent dichotomy - restaurants bursting at the seams and yet many people being massively hit. Nice idea of yours to ask for a raise. BL, are you listening ?!!

@athivas - If you make me go back to the village, then you have to suffer more posts of the bovine variety !

VA said...

I think that this food price inflation is here to stay in the longer term whereas we would definitely see some reductions in shorter term. One major breakthrough may be to let economy grow at exponential rates and raise the income levels of poor people (perhaps we need some sort of extraordinary plans working in place for agriculture sector). This might be one of such seasons where a lot of factors have worked in favor of inflation. I also reckon that the income distribution at various supply chain points could very well be the same also as it used to be. Just a thought from what I see around...

Ramesh said...

@VA - Number of valid points - yes I too think its here to stay, yes growing incomes faster than prices may be a solution, yes this has been a bad season and yes there are various supply chain points where the value is disproportionate. There seems to be a case for much more industrialisation and efficiency in agriculture. That calls for scale - unfortunately in agriculture scale seems to be growing smaller and smaller.

Follow by Email

Blog Archive

Featured from the archives