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Food Inflation

# Food Inflation

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08/08/2011

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# ³FOOD INFLATION ´

Presented By : Bill Gates group

Definition:

INFLATION

Inflation can be defined as a rise in the general price level of goods and services and therefore a fall in the value of money. That means the purchasing power of your money decreases.

There are two methods to calculate inflation 1. Wholesale Price Index (WPI) 2. Consumer Price Index (CPI) 1. Wholesale Price Index (WPI): WPI is the index that is used to measure the change in the average price level of goods traded in wholesale market. In India, a total of 676 commodities data on price level is tracked through WPI which is an indicator of movement in prices of commodities in all trade and transactions.

How Inflation is Calculated?

Cont«
The 676 commodities are divided into different groups & sub groups. Each commodity has some weightage in the WPI index. Below are the weightagesof commodities group wise:
ITEMS Weightage

Primary Articles Fuel & Power Manufactured Products

20.1% 14.9% 65%

ITEMS Basein WPI Base Year Year Recent Changes1993-94) (NEW 2004-05) (OLD

Primary Articles Fuel & Power Manufactured Products

22% 14.2% 63.7%

20.1% 14.9% 65%

CPI is a statistical time-series measure Consumer Price Index (CPI) of

a weighted average of prices of a specified set of goods and services purchased by consumers. It is a price index that tracks the prices of a specified basket of consumer goods and services, providing a measure of inflation.

Most developed countries (UK, US, JAPAN and CHINA) use the Consumer Price Index (CPI) to calculate inflation.

Types of Inflation
Types of inflation : Demand - Pull Inflation
Cost Push Inflation-Aggregate supply is the total volume of goods and services produced by an economy at a given price level. When there is a decrease in the aggregate supply of goods and services curtail from an increase in the cost of production, we have cost-push inflation

There are various factors which cause inflation in the economy

Causes of Inflation
 Expansion of Money Supply  Increase in Disposable Income  Increase in Indirect Taxes  Drop in exchange Rate

Monetary Factors

Non-monetary Factors
 Rising Population  Natural Calamities  Speculation and Black Money  Unfair Practices by Monopoly Houses  Bottlenecks and Shortages

Cont«

Structural Factors
 Capital Shortage  Infrastructural Bottlenecks  Limited Efficient Entrepreneurs  Lack of Foreign Capital  Imperfections of the Market  Unemployment

Cont«

Global Factors  Increase in International Prices  Cold War with other countries  Rise in Fuel Prices

Cont«

Prices just keep on rising! Food inflation at 15.57% Last updated on: January 27, 2011 (google news)

 Today¶s food inflation rate is 17.05%(google news)  Food inflation jumped up by 3.88 percentage points from 14.44 per cent recorded in the previous reporting week, and edged closer to the high level of 19.90 per cent, last witnessed a year ago.

 The rise in food inflation has been mainly on account of 58.58 per cent rise in prices of vegetables in the wholesale market.  Among the individual items, onion became dearer by 82.47 per cent on annual basis, while egg, meat and fish became costlier by 20.83 per cent, fruits by 19.99 per cent and milk by 19.59 per cent.

 With food inflation accelerating, RBI may take more measures in its forthcoming quarterly review of the monetary policy on January 25.  Meanwhile, in the non-food category, the prices of fibres and minerals have climbed by 35.53 per cent and 30.58 per cent, respectively. Rising food prices will reflect on the monthly inflation data for December, scheduled for announcement on January 14.

Union Finance Minister Pranab Mukherjee on Monday said he expected the rise in the food inflation rate to continue till the middle of July, after which he expected things to improve with the onset of monsoon.

 Mr. Mukherjee said efforts were on to improve the supply side with the import option being kept open. ³For instance, our pulses requirement is around 18-19 million tonnes. While we are being able to supply 14-15 million tonnes, there is still a requirement of 4-5 million tonnes,´ he said.  Initiatives such as increasing the Cash Reserve Ratio (CRR) from 5.75 to 6 per cent, and the short-term lending (repo) and borrowing (reverse repo) rates by 25 basis points each had helped to mop up the excess liquidity (Rs.12,500 crore) from the markets.

RBI action may be needed'

 According to a recent Business Standard report, the Reserve Bank of India might further tighten its monetary policy if inflation did not come down significantly by the end of this month, Prime Minister's Economic Advisory Council chairman C Rangarajan said on Thursday.  The central bank is slated to review its credit policy on January 25.  Rangarajan said RBI's action (likely quantum of rise in policy rates) would depend on price behaviour, especially of food items, between December and January. He said if food inflation persisted, it would feed into general inflation.

"Who is hit hardest by the food price rise? Do the rich really care about the price of bread? Most of the time, they eat cake anyway.  The great Indian middle class suffers a little, of course. They have to postpone buying the new dress till next month, turn their paneer days into radish days, and leave the scooter under its plastic cover, taking the crowded bus to work instead.  "But at least they have their radish. What do the poor eat? They don't pay bus fares, and their new dresses are postponed forever. Still, they have to eat.

Why has the price of onions skyrocketed?
"Unseasonal rains have caused havoc across the nation. Onion crop being sensitive to water has been damaged leading to the shortfall in supply and resulting in high prices," said Changdev Holkar, an onion farmer from Nashik in Maharashtra who is also a director at the National Agricultural Cooperative Marketing Federation of India.

Control measures

Increase agro productivity to control food inflation
 New Delhi, Feb 4 : Prime Minister Man Mohan Singh on Friday said food inflation can only be controlled by increasing agricultural productivity. There is a need for a paradigm shift in our institutional arrangements, for improving the availability of various commodities to meet the higher levels of domestic consumption," said Singh.

Govt Announces Steps To Control Food Inflation
 Inter-ministerial group set up under Chief Economic Adviser Kaushik Basu to review overall inflation situation The government announced on Thursday that it will review import and export of all essential commodities in its bid to tame spiralling food prices that have fuelled rapid inflation. Stringent action against hoarders and black marketers manipulating market prices will continue.

RBI raises rates, warns on food inflation
 A series of steps have been taken by RBI by adjusting the crucial rates. Recently it has announced another 25 basis points increase in repo and reverse repo rate.  The RBI in its third quarter monetary policy review recently hiked its repurchase or repo rate to 6.5 percent from 6.25 percent and reverse repo rate to 5.5 percent from 5.25 percent.

RBI steps to control food inflation
 The RBI raised key policy rates on Tuesday and raised its March-end inflation estimate to 7% from the earlier 5.5% and cautioned that there could be a possible spillover of high food prices to a generalized inflation. "These steps the Reserve Bank had to take to give a strong signal to tackle the inflationary pressure which is in the system. On the one hand we will have to control inflation and strong signal should be given. Supply management has to be tackled. Supply bottlenecks have to be removed," Mukherjee told a news conference. Policymakers had earlier said inflation would settle in the 6% to 6.5% range.

Reasons for high Food Inflation
Low production and productivity The prevailing market inefficiencies lack of coordinated efforts in public procurement Poor distribution Wastage due to inadequate and poor storage facilities Inefficient public distribution system Speculative trading Increasing retail margins

Some Prescriptions
The release of food grain stocks together with faster distribution. Part of Foreign Exchange Reserves can be used for bulk import of essential commodities. Improving food production and productivity. Promoting Private sector Participation in Food grain Management. Foreign Direct Investment (FDI) in food retailing

PUZZLING FOOD INFLATION 
The last couple of month witnessed a sudden and almost a run-away of food inflation. The way the prices of vegetables and other food items soared, it created doubts in the minds of the common people and the economists.  In winter generally fruits and vegetables are at the lowest price. This was not so this time. The prices were way above the expected normal 

Unseasonal rains during the October-November harvesting season for onions in key growing states of Maharashtra, Andhra Pradesh, Karnataka and Tamil Nadu spoilt much of the summer crop which led to a supply shortage.  The govt. has raised the support prices of some food items. This along with the rural employment schemes and rural urban salaries infused excess money in the market causing inflation 

Wastage ± leading to shortage. Even the government¶s huge buffer stock lies unused. Why doesn¶t the govt. release its buffer stock on the time to check shortage and food inflation?  Monetary policies ± temporary remedies. There are certain deeper grass root causes which have to be actually tackled 

Problem of middlemen 
There is a huge difference between the cost of production and the price the final consumer pays. The farmer gets a very very small amount of this difference of cost and final price  For eg:- if we are buying a vegetable for Rs. 40 per kg., the dealer at the wholesale market gets Rs. 10 per kg., and the poor farmer gets a meager Rs.3. Again this Rs. 40 too will differ depending on the locality it is being sold. Then there is always the problem of black marketing and illegal stocking of goods to get a higher price. 

Need to checks on the middlemen and the retailers  The system of direct farm to shops has to be developed, so that the farmers are the beneficiaries. This will also motivate the farmers to increase the production.

Thank you

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