[final] food inflation
TRANSCRIPT
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Purpose This study attempts to outline the trends of food inflation and its impact on the
general price level in the Indian economy. The purpose of this paper is to study the magnitude
and various causes of the food inflation.
Further, the paper aims to suggest policy measures towards the solution of problem of food
inflation in India and the need for EverGreen Revolution to tackle the need for increasing
agricultural productivity and thus pricing of food crops.
Design/methodology/approach To verify the problem of food inflation, the paper mainly
utilizes food price index of UN Food and Agriculture Organization (FAO) and qualitative
information from various economics journals and research papers to highlight the domestic
reaction/initiative/scenario in food price inflation regime.
Findings The challenges in achieving stability in food prices lye in the field of increasing
productivity as well as effective supply chain management of agricultural produce. To solve the
problem of rising food inflation, a coordinated multi-stranded approach is needed which can be
designed in form of an EverGreen Revolution.
Practical implications Improving the situation of agriculture through the introduction of
EverGreen Revolution will help Indian government to bring about stability in food prices to a
large extent. Stable trend in agricultural prices will thus help in bringing about a
macroeconomic stability as Food prices play a major role in pulling up or pushing down the
overall CPI during any given year. Moreover, an evergreen revolution when implemented
effectively will bring about Food Security which will not only help to eradicate hunger, it will
help to break the cycle of poverty.
Originality/value The paper presents comprehensive research work in the field of prices in the
agricultural sector and highlights the various dimensions of the need for another green
revolution. The paper also provides innovative policy measures and a new agri-eco model to
solve the problem of low agricultural productivity, poor retailing and thus tackle the instability
of food prices.
Keywords Inflation, Food Prices, CPI, WPI, Agriculture and food technology, EverGreen
Revolution
Paper type Viewpoint
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I take immense pleasure in thanking Prof. ShashiKant, for having permitted me to carry out
this research work.
While bearing full responsibility for any mistakes, the author wishes to thank to her supervisor
Dr. S. Prakasam for reading the earlier versions of this paper and making a number of helpful
comments and constructive criticisms.
I wish to express my deep sense of gratitude to my Internal Guide, Mrs. Vinita, for her able
guidance and useful suggestions, which helped me in completing the research work, in time.
The helpful comments of the reviewers are gratefully acknowledged.
Finally, yet importantly, I would like to express my heartfelt thanks to my beloved parents for
their blessings, my friends/classmates for their help and wishes for the successful completion of
this research.
1Opinions presented in this paper do not necessarily represent those of the faculty of Department of Economics of
P.G.G.C.G, Sec-11, Panjab University.
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1. Title i.
2. Abstract ii.
3. Acknowledgements iii.
4. Table of Contents iv.
5.
Introduction
About Inflation Trends in food inflation
Causes First Green Revolution Shortcomings of first green revolution
1
6.
Main Framework of Study
New Agri-Eco System Requisites of EverGreen Revolution 7
7. Review of Literature 10
8. Conclusion and Suggestions 12
9. References 13
10.
AppendicesA. Diagrammatic representation of trendsB. Food commodity price trends 1971-2007, with projections to
2017C. Abbreviations used
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A high and sustained economic growth in conjunction with low inflation is the central objective
of macroeconomic policy. Low and stable inflation along with sustainable budget deficit,
realistic exchange rate, and appropriate real interest rates are among the indicators of a stable
macroeconomic environment. Thus, as an indicator of stable macroeconomic environment, the
inflation rate assumes critical importance.
The causes of inflation, and the method by which inflation is transmitted through the economic
system, are two of the important recurring theoretical issues in modern economics.
Inflation was the primary macroeconomic concern throughout 2010-11. It was driven by a
combination of factors, both structural and transitory. Based on drivers of inflation, the year
2010-11 can be broadly divided into three periods.
In the first period from April to July 2010, the increase in wholesale price index (WPI)by 3.5% was driven largely by food items and the fuel and power group, which
together contributed more than 60% of the increase in WPI.
During the second period from August to November, while WPI showed a lowerincrease of 1.8%, more than 70% of the increase was contributed by food and non-
food primary articles and minerals.
In the third period from December 2010 to March 2011, WPI increased sharply by3.4%, driven mainly by fuel and power group and non-food manufactured products,
which together contributed over 80% of the increase in WPI.
Thus, the inflationary pressures, which emanated from food, clearly became generalised as the
year progressed.
According to the FAO, international food prices rose by 37% (y-o-y) in March 2011, reflecting
both higher demand and weather related supply disruptions. The increase in global food prices
was led by the prices of cereals (60%), edible oils (49%) and sugar (41%).
Large supply shocks emerge as an important source of inflation in EMEs. As pointed out by
Fischer (1981), supply shocks may have major macroeconomic implications for EMEs like India.
Notwithstanding the nature of the shock - i.e., temporary versus permanent - the size of the
overall price impact hinges on the importance of the sector in question for overall consumer
inflation. For instance, food sector has a relatively larger share in the CPI compared to advanced
economies. Consequently, a marked increase in prices of agricultural commodities not only raise
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short-run inflation owing to their high weight in CPI, but also can engender a sustained increase
in the inflation rate if it raises expectations.
TREND
In the recent years, India has been struggling with high inflation in food items. Food (Primary)
inflation accelerated from 5.6% in 2007-08 to 8% in 2008-09 & further to 20.6% in 2009-10.
In the current year these numbers had flared up to as high as 20% in the first half of the year.
Source: Office of Economic Advisor, Ministry of Commerce
Although the trend of food prices is now downward, the instability still leads to much
macroeconomic instability and with the ever increasing population and hence demand for
agricultural products never has grown multi-fold. Nevertheless, a fall in food prices is a good
sign but still strong policy measures need to be adopted to maintain the trend while increasing
agricultural productivity.2
2See appendix-A for diagrammatic representation of current trend in food inflation.
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CAUSES
This is not the first time that the world economy has witnessed such sharp increase in the food
prices. But, rather than this simplistic approach, it is likely that there are many other factors at
work. So, it is important to study all these factors before to suggest policy measures.
Exogenous factors such as rise in global commodity prices, drought condition in the country
have been significant contributors to the inflationary trend.
International Food price inflation flared to 23% in 2008 & after coming down to -17%in 2009 in 2010 was up again to 7.2%
The deficient South-West monsoon during 2009, with a short fall of 23% inprecipitation, resulted in drought in several states.
However, it is increasingly being viewed by researchers & policy makers that there are structural
elements embedded in the food inflation being witnessed in India.
1. Decelerating Production: Annual Growth in food grain (cereals & pulses) production inthe country has been decelerating from 2.8% in the 1980s to 1.6% in the 1990s and
further to 1.2% 2000 onwards.2. Growing population & per capita income: Indias population is rising annually by 1.5%
(2004-05 to 2009-10) and per capita income is showing robust growth of 6.9%(2004-
05 to 2009-10) and the fact that the present level of average nutrition and food intake
levels are way below prescribed levels has led to an accelerated growth in food demand.
3. Changing dietary patterns: With increase in income levels, the consumption basket isgetting diversified from carbohydrate dominated diet to include more proteins such as
pulses, milk, poultry & fish and vitamin sources such as vegetables & fruits. The
decomposition of food inflation indicates that during the recent period the key drivers
of food inflation are non-cereals.
Besides, there are certain features of the food sector in India that perpetuate inflation.
1. Inadequate Storage Infrastructure: Food storage capacity in the country is very low andthe quality of storage infrastructure is not suitable for keeping food beyond a few
months. This is particularly true for semi-perishable and perishable foods. Because of
this, much of the growth during a year of bumper production cannot be carried over to
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meet a shortfall in production in the next season. (EPW, 27 Feb 2010, Understanding
the Nature and Causes of Food Inflation)
2. Constraints in Importing: In theory, in a scenario of domestic shortage, imports can beused to augment demand. In case of edible oil the theory works very well for India.
Indias demand for edible oil far exceeds the production. Large public & private import
houses regularly import edible oil and the size of the international edible oil market is
quite big. This has been in instrumental in keeping prices of edible oil under control.
However, this is not true for other commodities and many constraints are encountered
importing:
a. Institutional Limitations: Lack of private import houses in case of certaincommodities, heavy government regulation & control over imports, high import
duties on grains, vegetables & fruits.b. Nature of the Market: The classic case here is of that of pulses. The size of the
international market is small relative to the growing demand of pulses in India.
India already imports 30% of the total pulses internationally traded.
3. Hoarding & Speculation: From time to time episodes of hoarding & speculation come tofore. The availability of opportunity to indulge in these points towards failure of
regulations & trade policies in respect of the sector.
Apart from the above mentioned reasons, there are many other factors worth mentioning thatadd to the already sky-high prices of food.
The food subsidy in India is poorly targeted. Many of the poor receive insignificant amounts of
subsidy and depend on the market to access supplies. In spite of this, a reduction in the food
subsidy is not in their interest as the reduction in subsidy increases the market price of food.
The inefficient storage and mal-functioning of PDS has also led to inflation of food
commodities. FCI informed that 1.83 lakh tonnes of wheat, 3.95 lakh tonnes of rice, 22
thousand tonnes of paddy and 110 tonne of maize were damaged between 1997 and 2007.
Thus, total 10 lakh tonne of food grains worth several hundred crores of rupees, which could
have fed over 1 crore hungry people for a year, were damaged in FCI godowns during the last
decade (Gupta, 2008). The FCI said in the northern region the damage incurred was several
lakh tonne and the PSU spent Rs 87.15 crore to prevent the loss besides spending over Rs 60
lakh to dispose off the damaged food grain. Similarly in the eastern India, the damaged
incurred was 1.5 tonne of food grains while the FCI spent Rs 122 crore to prevent it from
rooting. But the damaged lot was disposed off after spending another 1.65 crore. In thesouthern India, the damage was 43,069.023 tonne despite spending Rs 25 crore. This damage
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food grain was disposed off after spending another Rs 34,867. While the damage in the
Maharashtra and Gujarat mounted to 73,814 tonne, the FCI spent Rs 2.78 crore to prevent the
loss. However, this lot was also disposed off later at a cost of Rs 24 lakhs. In Madhya Pradesh
and Chhattisgarh, the damage incurred was 23,323.57 tonne of food grains and the amount
spend to stop the damage was Rs 5.5 crore.
FIRST GREEN REVOLUTION
The green revolution in agriculture was characterized basically by a capital intensive technology
in which exotic varieties of seed, existence (or creation) of assured irrigation, and use of modern
inputs like chemical fertilizers play a crucial role.
The term "Green Revolution" came into use in the late 1960s to cover the then predicted
consequences of the introduction of new, high-yielding varieties (HYVs) of cereals (especially
dwarf wheats and dwarf rices) in association with chemical fertilizers, insecticides and
pesticides; and also in association with controlled water-supply (usually involving irrigation) and
new methods of cultivation. All of these were seen together as a "package of practices" to be
adopted as a whole.
Wheat: Indian wheat production trebled between 1963-64 and 1971-72 from 9.9 million
tonnes in the former year to 26.4 million tonnes in the latter year.
Rice: Rice has, generally speaking, had derived much less benefit from the "Green Revolution"
than wheat; in fact, in many areas it was still a problem crop, whilst still the basic food-stuff.
Thus, while wheat production was trebling in India (1963-64 to 1971-72), rice production only
increased by about 16 per cent.
Millets, maize and other crops: The 6th five-year plan gave high importance to all the
miscellaneous crops including pulses and along with ongoing green revolution helped
improvement in their production.
SHORTCOMINGS OF THE FIRST GREEN REVOLUTION
1. The benefits of the Green Revolution tend to be unevenly spread, even where there is ahigh aggregate level of adoption of the HYVs and the associated inputs. The short
answer, as a generalisation, is that bigger farmers do benefit most, smaller farmers
(often with very tiny holdings) less, and landless labourers least of all (indeed they may
even be worse off). The reasons are not far to seek, though they vary with crop, local
social and land tenure structure, and other factors; for the bigger farmers are wealthier
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and more influential, and can afford, or acquire through influence, costly inputs like
fertilisers, tube wells, and power-pumps.
2. An inevitable consequence of the Green Revolution has been increasing inequality inrural India. As the high-yielding varieties of crops require regular supply of irrigation and
fairly large amounts of fertilisers, the advantage has been biased towards the large
farms. These farms have also begun to substitute capital (eg., tractors) for labour. Since
the new varieties are profitable there would be an increase in capitalist farming, an
attempt by landlords to evict their tenants and cultivate the land with hired labour, and
an attempt by large farmers to buy out small farmers as far as the land ceiling legislation
will stretch.
3. The fruits of the 'green revolution' are pocketed mainly by the rich and prosperousfarmers and the disparity between them and the have-nots, particularly landless
labourers, has increased.
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New Agri-Eco System
India is badly in need of a second green revolution, according to Prime Minister, Manmohan
Singh. But before we get immersed in evolving the model for the second green revolution,
some of the challenges faced by Indian agriculture are worth mentioning here
Fragmented, small holdings No price discovery, research Existence of middlemen Lack of cold storage, warehousing Poor Logistics Retailing large unorganized sector
To overcome the above mentioned challenges and hence, more importantly, to tackle the
problem of food inflation, a new agricultural model is hereby proposed.
The model with no middlemen
Under the new Indian model envisaged by the author, land will remain in the hands of farmers,
while corporate farms may take land on lease and also have their own lands for cultivation. The
organized retail players will be directed to invest in modern warehousing and logistics.
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Retail
Both organized retail (currently holding 4% of total business) which may increase if government
policy to allow FDI in multi-brand retail is implemented and un-organized retail will continue to
play their respective roles. The unorganized retail wont be affected by FDI, according to India
Government. The end consumer benefits in terms of superior quality products at affordable
prices as middlemen are eliminated.
Warehousing, Logistics
Warehousing, cold storage and logistics network needs huge investments and that is the vital
missing link in the conventional system leading to huge crop losses. Here again, the organized
retail along with government/ public sector agencies is expected to pump capital to augment
capacity.
A better policy option would be to have the new overseas players mandated to invest a portion
of their capital for augmenting our warehousing, supply chain, logistics through a public-private
partnership model. The augmenting of logistics capacity will in turn benefit the entire
stakeholders in the agriculture supply chain.
Requisites of EverGreen Revolution
Even the father of Green Revolution, Dr M S Swaminathan, is now pushing for an "EverGreen
Revolution", for increasing productivity without ecological harm.
Giving roadmap for this change, Swaminathan highlighted the need to start a land and water
care movement through a switchover from resource guzzling to sustaining ways. He revealed
that the NAC, headed by Sonia Gandhi, has recommended that maize be introduced in PDS
along with other nutri-cereals like bajra, jawar, ragi and other millets.
He pointed out that it may not be possible to wean farmers away from paddy in the coming
season, since, including alternative crops in the PDS would come only with the enactment of
Right to Food Act. The procurement policy would determine land use by the farmer. Paddy
cultivation would reduce by 2012, once these grains are included in PDS.Speaking to Times
News Network, Prof Swaminathan said, "We must not look at a crop in isolation but in the
respect of soil conditions, water, rotation of crops and use of pesticides. Unless that is done, we
would be headed for a crisis situation. The need of the hour is a sustainable model of
agriculture which in other words is evergreen revolution."
The need for a second green revolution or more suitably, an EverGreen revolution is being felt
because of the sharp and persistent increase in prices of food commodities, which if not tackled
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judiciously might lead to a nation-wide strong inflationary pressure to the magnitude of about
10%. Green revolution was conceived with the aim of increasing crop productivity. However,
certain adverse consequences came to light owing to the excessive use of pesticides, depletion
of ground waterlevel, pollution and crop monoculture. To touch the territories left outside the
purview of first Green Revolution and correct all the problems magnified by it, a effectively
formulated Second Green revolution in the form of a strategically spread EverGreen revolution
is required.
The EverGreen Revolution will require:
1. Genetically modified (GM) seeds to double the per acreage production i.e. technology,2. Private sector to develop and market the usage of GM foods i.e. efficient marketing of
the ideas,
3. Linking of rivers as much as economically possible to bring surplus water of one area toothers i.e. linking of the rivers.
4. Intervention of the private sector in the Supply Chain Management of AgriculturalProduce.
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As clearly stated in a study on RISING FOOD PRICES: CAUSES AND CONSEQUENCES by OECD
2008, the increases in agricultural commodity prices have been a significant factor driving up
the cost of food and have led to a fuller awareness and a justifiably heightened concern about
problems of food security and hunger, especially for developing countries. In the same study, it
is quoted that The commodity price developments witnessed recently are certainly unusual
when viewed from the perspective of the last decade or so, but less so when seen in a longer
historical context. Figure13
shows the evolution in nominal and in real terms of annual
average world prices of wheat, coarse grains, rice and oilseeds from 1971 to 2007 with
projections from 2008 to 2017. While spot prices for April-May 2008 are not shown, for these
commodities price levels greatly exceeded the expected annual average for 2008. Two pointsare clear: first, agricultural commodity markets are notoriously volatile; second, the current price
spike is neither the only nor even the most significant one to occur in the last forty years.
Born in 1925 in Tamil Nadu and a graduate of Cambridge, Prof Swaminathan has an extensive
CV listing memberships of learned societies, honorary positions and international awards. He is
also a scientist with a remarkable research record and is widely accepted as the godfather of the
"Green Revolution" - an effort to increase food production while protecting the environment.
According to Hari Sud, an Economist and a Thinker, the issue at hand is not today but what is
likely to happen in next 10 years, if the agricultural production stayed sluggish. Hence
Government of India is back into square one i.e. what needs to be done to trigger higher
agricultural growth in India. We may wish to call it the Second Green Revolution,but it should
be a consistent high-end initiative with both Federal and State governments as full participants.
According to R Sthanumoorthy, agricultural sustainability forms an important component of the
EverGreen revolution. Agricultural sustainability is defined as farming that makes the best use of
nature's goods and services while not damaging the environment (Altieri 1995; Conway 1997;
Pretty 1998, 2002; Hinchcliffe et al. 1999; NRC 2000). It does this by integrating natural
processes such as nutrient cycling, nitrogen fixation, soil regeneration and natural enemies of
pests into food production processes. It minimizes the use of non-renewable inputs that
damage the environment or harm the health of farmers and consumers. It makes productive
use of the knowledge and skills of farmers, so improving their self-reliance, and seeks to make
3See appendix B
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effective use of people's collective capacities to solve common resource management problems,
such as in pest, water-shed, irrigation, forest and credit management.
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The importance of agricultural shocks for inflation in a country like India has been
acknowledged in this study. The fact that food accounts for a larger share of the consumption
basket complicates the conduct of monetary policy. This is because the role of monetary policy
is more lucid and its impact is more potent when inflation is mainly driven by demand shocks
and when demand changes can be traced by indicators such as monetary growth or output
gap. By contrast, the strong impact of agricultural shocks on inflation engenders questions
about the appropriate target for policy. Moreover, in view of the relatively high weight of food
in the CPI, agricultural shocks not only increase short-run inflation, but also can generate a
sustained increase in the inflation rate if it raises inflationary expectations. As a consequence,
India should endeavor to liberalize agriculture to reduce the volatility of food prices and such anendeavor is EverGreen Revolution.
The EverGreen Revolution of boosting food-grain output in India to 400 million tons in next 15
years is need of the day. Its achieving is not very difficult. Rather it is achievable if mindset on
introducing newer technology is changed. India has to whole-heartedly embrace the new
technology. Private sector is better suited to deliver results than government managed schemes.
Governments on the other hand can play a key role in expediting irrigation schemes and
managing water resources.
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Saini, G.R. (1976), Green Revolution and the Distribution of Farm Incomes,Economic and Political Weekly, Vol. 11, No. 13 (Mar. 27, 1976), pp. A17-A22
Lamm McFall, R. (1979), Dynamics of Food Price Inflation, Western Journal ofAgricultural Economics, Vol. 4, No. 2 (December 1979), pp. 119-132.
Farmer, B. H. (1981), The "Green Revolution" in South Asia, GeographicalAssociation,Vol. 66, No. 3 (July 1981), pp. 202-207.
Doma, Ilker ; Ycel Eray, M. (2005), What Triggers Inflation in Emerging MarketEconomies?, Review of World Economics / Weltwirtschaftliches Archiv Vol. 141, No. 1
(Apr.,2005), pp. 141-164.
Sud, Hari(March 25, 2007) ; Indias Second Green Revolution,http://www.ivarta.com/columns/OL_070325.htm
Rising Food Prices-Causes and Consequences- OECD, 2008 report Singh, Sumanjeet. (2009), Global food crisis: magnitude, causes and policy
measures, International Journal of Social Economics ,Vol. 36 Nos 1/2, 2009, pp. 23-36
Economy Mirror, Corporate Planning and Economic Studies Deptt., Issue No. 17 of2010,31
stDecember 2010.
Raghavan, Sreekumar, (8th December, 2011), Indias second green revolution basedon a new agri-eco system, http://www.commodityonline.com/news/indias-second-
green-revolution-based-on-a-new-agri-eco-system---!-44264-3-1.html
4The references have been arranged in the chronological order of their year of publishing.
http://www.ivarta.com/columns/OL_070325.htmhttp://www.ivarta.com/columns/OL_070325.htmhttp://www.commodityonline.com/news/indias-second-green-revolution-based-on-a-new-agri-eco-system---!-44264-3-1.htmlhttp://www.commodityonline.com/news/indias-second-green-revolution-based-on-a-new-agri-eco-system---!-44264-3-1.htmlhttp://www.commodityonline.com/news/indias-second-green-revolution-based-on-a-new-agri-eco-system---!-44264-3-1.htmlhttp://www.commodityonline.com/news/indias-second-green-revolution-based-on-a-new-agri-eco-system---!-44264-3-1.htmlhttp://www.commodityonline.com/news/indias-second-green-revolution-based-on-a-new-agri-eco-system---!-44264-3-1.htmlhttp://www.ivarta.com/columns/OL_070325.htm -
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Trend of Food inflation (in terms of WPI)
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ABBREVIATIONS USED
1. UN United Nations2. FAO Food and Agriculture Organisation3. CPI Consumer Price Index4. EMEs Emerging Market Economies5. FCI Food Corporation of India6. PSU Public Sector Unit7. HYVs High Yield Variety8. WPI Wholesale Price Index9. PDS Public Distribution System10.OECD Organization for Economic Cooperation and Development11.GDP Gross Domestic Product12.Vol. Volume13.GM Genetically Modified