SEMINAR - I

SAVAN, B.P.PALB 1140

FOOD INFLATION IN INDIA AND POLICY MEASURES

Seminar Teacher: Dr. T. R. Keshava Reddy

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Outline of Seminar

Introduction.Trends and Structure.Inflation related terminologies.Inflation India vs. World.Main drivers of global food inflation.Reasons for the food price inflation in India.Policy Measures.

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Introduction

Inflation is a rise in the general price level of goods and

services in an economy over a period of time.

It is measured by comparing two sets of same goods at

two points of time and computing the increase in cost

not reflected by an increase in quality.

When the price level rises, each unit of currency buys

fewer goods and services.

It is an erosion in the purchasing power of money – a

loss of real value in the internal medium of exchange.

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The financial year 2011-12 started with a headline

inflation of 9.7 per cent, which briefly touched double

digits in September 2011 before coming down to 6.6 per

cent in January 2012.

Prices of onions, vegetables, wheat, sugar, edible oils

and vegetables are experiencing high price spikes.

In the past three years, wholesale prices of food have

risen by nearly 40 per cent and retail prices have gone

up even faster. This has been much faster than the non-

food inflation rates.

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Inflation in India - WPI

FOOD ARTICLES

ALL COMMODITIES

Source: www.indiastat.com

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Trend and Structure of Inflation

The average rate of annual inflation, based on the WPI (1993-94) was close to 6 % for the period from 1994-95 to 2004-05.

Inflation in food items, which includes food articles as well as food products, was 5.64 %.

After 2005, food prices increased much faster than non-food prices.

Food and non-food prices showed a disparate movement after January 2009.

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Trend and Structure…

On an annual basis, food prices in 2009 increased by more than 12% over 2008, in contrast to the 1.76% decline in non-food prices.

Food inflation in wholesale prices since 2005 has been accelerating, and it was close to 20% in January 2010.

The highest inflation is observed in the case of pulses and the lowest in the case of edible oils.

Annual average food inflation during the period 2006 to 2009 was more than inflation in non-food commodities.

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Trend and Structure…

These trends show that the real prices of food (food prices relative to non-food prices) declined during the period 1993-94 to 2004-05 and increased after 2005.

Except edible oil, the real prices of all major food items have registered an increase during the past four years.

Food prices increased in real terms and food inflation accelerated in 2006-09 despite a more than 5% annual growth in food output during the period 2005-06 to 2007-08.

Annual Inflation Rate Based on Wholesale Price Index in India{(Base 1993-1994/2004-2005 = 100)

Financial Year

All Commodities

Primary Articles

Fuel, Power, Light &

Lubricants

Manufactured Products

Base 1993-1994 = 1001994-95 12.60 15.80 8.90 12.301995-96 7.99 8.20 5.14 8.551996-97 4.61 8.38 10.39 2.051997-98 4.40 2.65 13.77 2.891998-99 5.95 12.05 3.27 4.381999-00 3.27 1.15 9.09 2.692000-01 7.20 2.80 28.50 3.302001-02 3.60 3.60 8.90 1.802002-03 3.40 3.30 5.50 2.602003-04 5.50 4.30 6.40 5.702004-05 6.50 3.70 10.10 6.30

Base 2004-2005 = 1002005-06 4.50 4.30 13.60 2.402006-07 6.60 9.60 6.50 5.702007-08 4.70 8.30 0.00 4.802008-09 8.10 11.00 11.60 6.202009-10 3.80 12.70 -2.10 2.202010-11 9.55 17.70 12.30 5.702011-12 8.79 9.66 13.35 7.23

Source: www.indiastat.com

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Inflation related terminologies

Price Index: A price index is a weighted average prices of a number of goods and services.Each goods and services is weighted according to the economic importance of the commodity in question.

Base Year:Until August 2010, the WPI which was

often used to discuss inflation was 1993-94 as it’s base period. Only in August 2010, a new WPI was released with 2004- 05 as it’s base period.

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Wholesale Price Index (WPI)

WPI was introduced in the year 1907.

It is calculated on the basis of average rate of change in price of the wholesale market.

The base year has been revised to 2004-05 from the old base year of 1993-94.

The Revised WPI have 676 commodities as compared to 435 in 1993-94.

The new wholesale price index would give a more accurate figure for inflation then previous.

The weights of items were assigned in proportion to their share in the total value of transaction (output) in the economy.

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Price of onion:

Year Prices WPI

2005 481.6667 100

2006 313.3333 65.0519

2007 910.4167 189.0138

2008 667.0833 138.4948

2009 945 196.1938

2010 844.5833 175.346

2011 978.3333 203.1142

The base year is taken as 2005.

WPI= 910.4167 X100 313.333

=189.01

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THE DEFECTS OF WPI METHOD

It neglects the service industry’s contribution to the development of economy.

Once the number of items fixed can’t be changed.

We can’t measure the effect of price rise on end consumer.

Many commodities not consumed by consumers get calculated in the index.

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Commodity Price Index (CPI):

CPI is a statistical time series value based on the weighted average rate of change in prices of a set of goods and services purchased by consumer.

It measures the retail prices of several thousand goods and services purchased by households.

It catches the inflation value from the end consumer side rather than from wholesale side.

It is based on monthly basis.

Most of the developed countries use CPI calculations for inflation rate.

COMPARISON OF CPI INFLATION AND WPI INFLATION

WPI do not contain any items from health, telecommunication, education etc. CPI inflation is more than WPI inflation and also the increase in CPI inflation more than WPI inflation. This clearly indicates that even though inflation has eased the prices of consumer goods and services are increasing.

Source: PATIL, HALASAGI, 2012.

2010 Jan Feb Change Mar Change Apr Change May Change

CPI IL 16.22 14.86 1.36 14.86 0 13.33 1.53 13.91 -0.58

CPI AL 17.57 16.45 1.12 15.77 0.68 14.96 0.81 13.68 1.28

CPI RL 17.35 16.45 0.9 15.52 0.93 14.96 0.56 13.68 1.28

WPI 9.9 9.89 0.01 8.5 1.39 9.59 -1.09 10.16 -0.57

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INFLATION IN FOOD AND NON-FOOD COMMODITIES DURING 1994-95 TO JANUARY 2010

Source: Ramesh Chand, 2010.

(WPI with base 1993-94) and Growth Rate in Food Output (%) Items 1994- 95

to2004- 05

2005 2006 2007 2008 2009 2010 January

Average2006- 09

All commodities

5.90 4.74 4.82 4.82 9.12 2.01 8.54 5.19

Non-food commodities

6.02 5.37 4.72 4.54 9.55 -1.76 4.53 4.27

Food articles

5.91 3.94 6.83 7.02 6.64 12.32 17.41 8.20

Food products

5.33 1.58 2.55 3.43 9.80 13.79 22.55 7.39

Food commodities

5.64 2.97 5.09 5.60 7.87 12.90 19.42 7.8616

Items1994- 95

to2004- 05

2005 2006 2007 2008 20092010

JanuaryAverage2006- 09

Food grains 5.54 3.83 9.71 6.27 6.37 14.14 17.89 9.12

Cereals 5.57 3.68 6.63 6.97 7.20 12.96 13.69 8.44

Pulses 5.46 5.04 32.05 2.14 1.30 21.81 45.62 14.33

Rice 5.00 4.01 2.13 6.05 8.97 15.96 12.02 8.28

Wheat 5.93 1.08 12.99 6.77 5.06 6.83 14.86 7.91

Oilseeds 5.89 -6.11 -3.96 26.58 17.46 0.92 10.05 10.25

Fruits and vegetables 7.47 7.51 2.24 6.49 5.94 11.77 8.33 6.61

Dairy products 5.20 0.11 4.20 6.08 8.38 6.12 12.87 6.19

Milk group 5.57 0.73 4.48 8.17 7.87 8.93 13.99 7.36

Egg, fish and meat 6.46 9.46 6.72 6.38 3.75 14.44 30.71 7.82

Edible oils 4.85 -7.19 1.23 13.11 12.52 -6.59 -1.17 5.07

Sugar 4.06 15.09 4.83 -14.69 5.62 36.34 58.94 8.02

Growth in food output (%/a year)

2.39 0.55 5.87 4.10 5.39 1.60 -02 4.24

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The food price index consists of two sub- components,primary food articles.manufactured food products.The overall weight of the composite food index in the WPI is 24.31 per cent.

a) primary food articles: 14.34 per cent.b) manufactured food products: 9.97 per cent.

Inflation of primary food article remained at an average level of 15.8 per cent in 2010-11 and 15.27 per cent in 2009-10.In the current financial year (April-January 2011-12), food articles has significantly declined to 7.4 per cent.

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The weights at major group, group levels are as given below

Major Group/Group 2004-05 1993-94

I. Primary Articles

(a) Food Articles

(b) Non-food Articles

(c) Minerals

20.12

14.34

4.26

1.52

22.1

15.4

6.1

0.6

II. Fuel, Power, Light & Lubricants 14.91 14.2

III. Manufactured Products

{a) Food Products

(b) Beverages, Tobacco & Tobacco Products

(c) Textiles

(d) Leather & Leather Products

(e) Others

64.97

9.97

1.76

7.33

0.84

45.07

63.7

11.5

1.3

9.8

1

40.1

TOTAL 100.000 100.00

Food Inflation – India vs. World

Food inflation in India started creeping up from January 2008, food prices at the global level were already ruling high.

From April 2006 onwards the world witnessed a significant surge in food prices, which firmed up until September 2008.

The average and peak food inflation rate was from August 2005 to September 2008 was 18.43% and 45.20%, respectively.

The movements in the world food prices between August 2005 and April 2010 can be classified into three phases:

a. Phase I : August 2005 to September 2008 (high food prices).b. Phase II : October 2008 to October 2009 (negative food

inflation).c. Phase III : November 2009 to April 2010 (high food

inflation). April 8, 202320

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Monthly Movements in Food Inflation – India vs World (%) (January 2005 to July 2010)

Source: NAIR, EAPEN, 2012.

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Average Global Food Inflation Rate of Major Food Items (in %)

Items Aug 2005 to Sept 2008 Oct 2008 to Oct 2009 Nov 2009 to April 2010

FOOD ARTICLES

Rice (Thailand/Bangkok) 38.89 -8.61 40.08

Wheat (Argentina) 47.11 -33.04 9.9

Maize (US Gulf Ports) 33.26 -24.94 24.23

Poultry Index (United States/Georgia) -3.77 -12.8 13.14

FOOD PRODUCTS

Butter (New Zealand) 25.61 -36.77 40.89

Coconut oil (Philippines) 30.29 -42.31 26.1

Groundnut oil (Europe) 28.58 -36.99 32.22

Linseed oil (any origin) 15.29 -38.78 42.95

Soybean oil (US) 38.84 -34.13 31.49

Sugar (Brazil) 9.69 18.08 33.32

Tea average auction (London) 6.24 11.15 32.77

Coffee (Brazil) 16.78 -11.97 16.59

Total food 18.43 -17.52 10.32

Source: NAIR, S. R., EAPEN, L. M., 2012.

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Main drivers of global food inflation

The unfavorable global climate:The prices are largely based on demand and supply conditions, a poor harvest rises demand leads to a hike in food prices.

The unfavorable climate change across the globe has resulted in unprecedented poor harvest in most of the countries.

Australia, the second largest wheat exporter in the world, experienced the worst drought in recorded history starting from 2002.

Climate conditions hit parts of Europe, like Spain, Portugal and Ukraine and certain North African countries.

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The soaring fertilizer prices and freight charges:Due to the High demand from developing countries, together with high energy prices.

Natural gas, mainly utilized in production of nitrogen based fertilizer.

Imports of bulk food commodities extremely expensive.

Increased fuel costs, port congestion and high demand for food and feed products from developed countries are the underlying factors that led to a gush in freight costs.

Freight prices not only increased the cost of transportation, they have also changed the geographical pattern of trade.

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Bio-fuels from food commodities:The surging oil prices and the global warming threat have prompted an increased demand for food-based fuels.

Diverting food produced for consumption to fuel production.

Increasing use of maize/corn crop for the production of ethanol.

In 2006-07, more than 2.1 billion bushels or 20 per cent of the corn crop was used for ethanol production.

Due to this both futures and cash prices have increased rapidly in the international markets.

This also have resulted in the increased prices of livestock and dairy products.April 8, 2023

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Contribution of Food Inflation in Headline Inflation in different regions

Contribution (per cent)

2000-06 2007 (January to April)

World 26.6 36.4Advanced economies 14.2 18.4

CIS 41.3 26.9

Developing Asia 34.1 55.9

Africa 46.5 37.9

Central and Eastern Europe

29.9 33.0

Middle East 37.4 52.2

Western Hemisphere 25.6 37.2

India 9.8 24.2

Source: MUNJAL, POONAM, 2008.

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Reasons for the food price inflation in India

Hoarders are creating artificial shortages and fleecing people from time to time.

Loss of agricultural food items due to lack of post harvesting infrastructure.

Per hectare agricultural yield in India is not satisfactory: As small size of land holding not supporting for scientific cultivation.

Change in the consumption pattern of people: people switching to greater meat consumption causes greater demand for grain.

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Government policies: Regarding holding of buffer stock is not well designed. In 2010 sugar was exported for Rs. 12.50 per kg. But in 2011 year country imported for Rs. 30.00 per kg.

Increased transportation rates by 15 percent immediately after imposed excise tax on gasoline and diesel as a part of a plan to withdrawing fiscal stimulus and cut the budget deficit.

Bad monsoon in India: Indian monsoon was late by more than two weeks and steadily decreasing rainfall caused drought in India for the first time since 2002.

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Year-on-Year Growth of Production of Various Food Commodities (in %)

ITEMS 2005-06 2006-07 2007-08 2008-09 2009-10

Pulses 1.98 6.05 3.94 -1.29 0.14

Fruits -7.54 7.6 10.11 4.39 2.47

Vegetables 10.03 3.23 11.7 0.49 4.77

Tea 4.64 2.54 1.43 -1.44 1.89

Coffee -0.54 5.11 -9.03 0.11 10.41

Milk 4.97 3.91 3.87 3.53 3.23

Egg 2.21 9.74 5.52 3.39 8.03

Meat (mutton) 3.81 16.93 -15.71 7.59 2.72

Fish (marine) 1.33 7.39 -3.44 1.99 -9.7

Fish (inland) 6.55 2.37 9.41 10.27 4.81

Spices -53.98 6.69 10.22 -4.87 -3.11

Oilseeds* 14.91 -13.19 22.52 -6.85 -10.06

Edible oils 14.75 -11.38 17.42 -0.65 -4.63

Source: NAIR, S. R., EAPEN, L. M., 2012.

Source: NAIR, S. R., EAPEN, L. M., 2012.

Export and Import of Agricultural Products

Commodity 2005-06 2006-07 2007-08 2008-09 2009-10

Pulses Export 447.44 250.7 164.2 136.27 100

Import 1,695.95 2,270.97 2,835.05 2,474.11 3,448.35

Edible oils Export 273.94 313.48 342.21 359.35 399.81

Import 4,288.10 4,269.38 4,903.39 6,719.35 7,968.49

Spices Export 400.24 482.8 614.86 673.87 680.6

Import 108.93 118.51 144.63 122.85 150.03

Tea Export 162.86 185.63 197.39 207.46 208.55

Import 18.75 23.29 19.73 25.16 33.64

Coffee Export 177.68 213.65 178.3 174.08 177.23

Import 24.94 5.71 9.35 14.19 16.55

Milk and cream

Export 67.1 41 58.07 50.1 26.74

Import 1.63 3.09 1.98 3.23 8.24

(in ‘000 tonnes)

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Fiscal Measures

Reduced import duties to zero for rice, wheat, onion, pulses, edible oils (crude) and to 7.5 per cent for refined and hydrogenated oils and vegetable oils.

Permitted National Dairy Development Board (NDDB) to import 50,000 tonnes of skimmed milk powder.

Permitted the State Trading Corporation of India (STC) and National Agricultural Cooperative Marketing Federation of India (NAFED) to import duty-free sugar initially with a cap of 1 million tonnes.

Later duty-free import was also allowed by other central/ state government agencies and private trade without any cap on quantity.

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Administrative Measures

Removed levy obligation in respect of all imported raw sugar and white/refined sugar.

Imposed ban on export of non-basmati rice and wheat for short period of time.

The central issue price (CIP) for rice maintained (at Rs 5.65 per kg for below poverty line [BPL] and Rs 3 per kg for Antyodaya Anna Yopjana [AAY]).

Wheat (at Rs 4.15 per kg for BPL and Rs 2 per kg for AAY) since 2002.

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Ten lakh tonnes of wheat and 10 lakh tonnes of rice allotted under the Open Market Sale Scheme (OMSS).

15 lakh tonnes of wheat for bulk sale, including sale to small traders for the period October 2011 to September 2012.

Permitted export of edible oils in branded consumer packs of up to 5 kg subject to a limit of 10,000 tonnes.

Prohibited export of milk powders (including skimmed milk powder, whole milk powder, dairy whitener, and infant milk food), casein and casein products.

Suspension of futures trading in rice, urad, and tur.

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Banned export of edible oils (except coconut oil and forest-based oil) and pulses (except Kabuli chana and organic pulses up to a maximum of 10,000 tonnes per annum).

Ban on export of onion was imposed for short period of time whenever required. Exports of onion were calibrated through the mechanism of minimum export prices (MEP) of onion.

Extended the Scheme for distribution of subsidized imported edible oils through state governments/UTs with subsidy of Rs. 15 per kg for distribution to ration card holders at 1 litre per ration card per month.

Thank you