Article

Dynamics of Food Inflation: Global Business Review

19(5) 1363–1378
Assessing the Role of Intermediaries © 2018 IMI
SAGE Publications
sagepub.in/home.nav
DOI: 10.1177/0972150918788763
http://journals.sagepub.com/home/gbr

Sugandha Huria1
Kanika Pathania2

Abstract
The recent upsurge in the food prices experienced by the Indian economy since the latter half of 2000s
has made it imperative for the policymakers to identify the crucial factors, which affect food prices
within the economy. Against this backdrop, the present article determines the various key factors
impacting the prices of food grains, specifically elucidating the role of intermediaries in this regard.
By applying the autoregressive distributed lag (ARDL) approach to cointegration and quantifying the
role of intermediaries by computing the price wedge between wholesale and retail prices of food grains,
the study establishes the existence of both short-run and long-run relationships between price wedge
and food grain inflation.

Keywords
Inflation, Wholesale Price Index, Consumer Price Index, cointegration, ARDL approach

Introduction
The most recent decade has experienced historically high levels of inflation, more so in the emerging
market economies (EMEs). The case of Indian economy is no outlier in this regard. Since 2008, the infla-
tion rate based on Consumer Price Index (CPI) has averaged 10.32 per cent for agricultural workers and
9.69 per cent for industrial workers, while that based on Wholesale Price Index (WPI) has averaged
around 7.07 per cent. These close to double digits inflation rates have raised serious concerns amongst
the policymakers. More specifically, among other commodities, rising food prices have added to the fate
of the country. With around a quarter of population living below poverty line (Tendulkar Committee),
which spends a major proportion of their incomes on food products, it has now become imperative for
the policymakers to ascertain the causes and define appropriate measures to prevent the prevalence and
persistence of vicious cycle of poverty. Furthermore, stability of prices is also crucial for ensuring
sustainable growth of a country.

1
PhD Scholar, Center for International Trade and Development, School of International Studies, Jawaharlal Nehru University,
New Delhi, India.
2
PhD Scholar, Department of Economics, Delhi School of Economics, Delhi University, Delhi, India.

Corresponding author:
Sugandha Huria, Jawaharlal Nehru University, 5826, New Chandrawal, Jawahar Nagar, Delhi 110007, India.
E-mail: sugandhahuria@hotmail.com
1364 Global Business Review 19(5)

Given this situation, the present study aims at assessing the role of various plausible factors that deter-
mine the extent of food inflation in an economy and check for the relevance of these factors in the
context of the Indian economy. The index for food inflation is computed on the basis of various food
products such as cereals and pulses, fruits and vegetables, milk and milk products, egg, meat and fish,
among which cereals and pulses account for the highest proportion of the index. Additionally, for most
of the Indian population, cereals and pulses form an essential element of daily meal. The review of the
literature suggests that various demand and supply side drivers such as increased demand due to high
growth rates in the EMEs, money supply shocks, agricultural wages, stockpiling, trade restrictions and
speculation are amongst the major causes of rising food inflation. However, most of the empirical studies
do not generate any unambiguous conclusion, and their results vary significantly.
The present article qualifies the available literature by focusing on another factor that constraints
supply and leads to higher food inflation, which is the existence of intermediaries that leads to the creation
of a wedge between wholesale and retail prices of such commodities. Thus, the main question of interest
is to assess ‘the role of middlemen in determining food prices’. The question has been specifically
addressed by focusing on the trend and structure of food inflation and culling out the long-term and
short-term impact of this wedge, among other major factors. The study is divided into four major sections.
The second section briefly discusses the dynamics of food inflation in India and explores the empirical
literature determining the causes of rising food prices. The third section presents the theoretical design
of the study and specifies the base model that has been used to assess the role of various factors affecting
food inflation, while the fourth section describes the data and the econometric methodology that have
been employed to conduct the analysis. The fifth section presents the estimation results, and the last
section concludes the study and briefly discusses the policy implications of our research.

Review of the Literature

Dynamics of Food Inflation: Theory and Evidence

Food inflation in India has remained mulish in the past few years, more so post 2005. The latter half of
the recent decade has experienced severe fluctuations in prices of food. Sonna, Joshi, Sebastin, and
Sharma (2014) have found out that, beginning 2005–2006, Quarter 2 until 2012–2013, Quarter 4, with the
exception of few quarters during 2007–2008 and 2011–2012, food inflation in terms of WPI has remained
above overall inflation in India. The quarterly food inflation grew at an average rate of 10.16 per cent
during this period compared with 6.76 per cent for overall inflation. This is in contrast to the scenario in
the preceding five years—1999–2000 until 2004–2005, during which the overall inflation was generally
observed to be higher than the food inflation. Figure 1 plots the year-on-year (y-o-y) food inflation using
WPI for the years 2005–2013.
As shown in the figure, the rates of food inflation have even entered double digits during the years
2009–2010 and 2012–2013. These elevating rates and fluctuating trends, more specifically in an essen-
tial commodity prices, have made it inevitable to control the factors that contribute to such persistently
high rates of food inflation. At the same time, the basket of items contributing to food inflation includes a
wide range of products such as cereals and pulses (collectively called as ‘food grains’), fruits and vegetables,
milk, meat, egg and fish, with the first three accounting for the majority (approximately 80%) of the
index. Cereals and pulses not only account for the maximum share in defining the index for food inflation
but also constitute an essential element in daily diets of most of the Indian population. The contribution
Huria and Pathania 1365

Figure 1. Y-o-Y Food Inflation (based on WPI) for the years 2006–2013
Source: Drawn by authors based on data extracted from the Office of Economic Advisory, DIPP (n.d.).

Figure 2. Contribution of the Three Major Products to WPI for Food

Articles for the Years 2005–2013
Source: Drawn by authors based on data extracted from DIPP Statistics.

of these three different products to the aggregate Food Price Index (based on WPI) for the years
2005–2013 is shown in Figure 2.
A glance at Figure 2 indicates that from 2005 onwards, the WPI for food grains has increased and, in
fact, is more than that for fruits and vegetables and milk for most of the years under consideration.
In this context, the aim of the present study is to assess the factors that contribute to the hike in prices
of cereals and pulses, which, in turn, has been the major product contributing to the food inflation since
the latter half of the past decade. To gauge and ascertain the concrete factors, we first look into the
empirical literature that exists in this regard.
1366 Global Business Review 19(5)

Causes and Consequences of Food Inflation: The Indian Context

A large number of empirical and analytical studies have been undertaken in the past to assess the contri-
bution of various domestic and global factors, and demand and supply side factors that affect the rates of
food inflation in India.
Gaiha and Kulkrani (2005) have assessed the role of minimum support prices (MSP) in determining
the extent of food inflation. Their study concluded that there exists a positive effect of the combined
wheat and rice MSP on the WPI for food products. While Kumar, Vashisht, and Kalita (2010) have
evidenced the role of rising gap in per capita income as the structural reason for rising food prices. They
have even shown that this factor, along with stagnant per capita availability of food commodities,
further the price hike and adversely affect the poor population of the country.
Chand (2010) has investigated the increase in domestic prices due to the increasing share of food
crops being diverted to export markets as high global prices make exports more lucrative. This is because
not only do exports skew the amount entering into the domestic market, but they also result in transmis-
sion of some of the increase in international prices to domestic prices.
In another study, Dua and Gaur (2010) have investigated the determination of inflation in an open
economy forward-looking as well as conventional backward-looking Phillips Curve for eight Asian
countries including India for the period 1990–2005. Using the instrumental variables estimation tech-
nique, the authors have found that the output gap positively and significantly explains the inflation rate
in almost all the countries under consideration, including India.
Mishra and Roy (2012) have also tried to identify various long-term and short-term factors that drive
the prices of food products. Their study is based on the analysis of four different categories of food prod-
ucts classified on the basis of each product’s inflation rate and weights in the inflation basket, namely
low inflation and low weight, high inflation and high weight, low inflation and high weight, and high
inflation and low weight. Based on this, they have identified six different commodities—cereals, milk,
edible oil, fruits, vegetables and sugar. Among the various long-term drivers, the authors have found out
‘the widening demand–supply gap’ as the most common for almost all the commodities under considera-
tion. On the other hand, changes in MSP, adverse supply shocks emanating from change in weather,
stockpiling and so on, have been qualified as amongst the major short-term factors contributing to the
recent price hike.
Gulati and Saini (2013) have used a linear regression framework and have showed the relevance of
three factors, namely, fiscal deficit, rising farm wages and transmission of the global food inflation, as
the main factors that together explained about 98 per cent of the food inflation that existed in India
during 1995–1996 to December 2012. In yet another study, Tiwari and Shahbaz (2013) have shown that
WPI acts as a leading indicator of CPI and, hence, of inflation in an economy. In other words, the study
suggested that controlling the factors affecting WPI can help in maintaining a control on CPI.
Sonna et al. (2014) have assessed the role of rural wages, consumption expenditure for proteins and
food, index of agricultural input cost, WPI (food), CPI (agricultural labour), rainfall and production
weighted MSP for rice and wheat as determinants of food inflation in India for the period 1998–1999,
Quarter 1 to 2012–2013, Quarter 4. Employing the vector error correction method (VECM), their study
has shown that among others, higher rural wages, pushed further by hikes in MSP of rice and wheat, and
input cost inflation, are major factors that result in persistent food inflation in India during the period of
analysis.
More recently, Bhattacharya, Rao and Gupta (2015) have tested the role of different demand and
supply side factors that have contributed to the surge in food inflation post 2007 in a structural vector auto-
regression (SVAR) framework. The period has been specifically chosen after determining the most recent
phase of inflation on the basis of the methodology adopted in Bai and Perron (1998) and modified in
Huria and Pathania 1367

Zeileis, Shah, and Patnaik (2010). Accordingly, they have found out that the most recent phase is 2008
onwards. On the basis of NSSO household survey database, the authors have found out that a rise in
demand, relative to the supply of a commodity, leads to an upward pressure on commodity prices.
Additionally, they have also found out that agricultural wage inflation has become the universal driver
of food inflation, more specifically in the post-MGNREGA (Mahatma Gandhi National Rural
Employment Guarantee Act) era. Fuel inflation, which adds to the cost of production, has also been
highlighted as one of the drivers of food inflation in India.
On the basis of the available literature and the trends and structure of food inflation in India,
the following section details the theoretical framework of the present study.

Causes of Food Inflation in India: Building the Theoretical Framework

As already evident from the previous subsection, the country has experienced a surge in food inflation
during the latter half of the recent decade. Also, it has been evident that the most recent phase of inflation
had started in the year 2008, with inflation persisting at fairly high levels—it even remained at double
digits for some periods in between. Accordingly, the study has been conducted to analyse the major
determinants of food inflation for the six years starting from 2008. The terminal period has been decided
on the basis of the availability of the required dataset, and hence, the period of study is from 2008 to 2013.
The review of the literature highlights the relevance of three major factors that determine the extent
of food inflation, namely rising agricultural wages, fluctuations in fuel inflation and global food inflation.
Rising agricultural wages are believed to be putting severe pressure on production cost of food products
while raising the benchmark ‘reservation wage’ in the economy, that is, the lowest rate that workers are
prepared to accept for jobs across sectors. This factor is particularly relevant in the period post 2008,
when with the implementation of the MGNREGA, the rural wages were believed to experience a hike.
Thus, it may be quite plausible that the increase in wages post 2008 might have increased the cost of
production on the one hand and an increase in demand on the other, thereby leading to food inflation,
hence, necessitating the need for empirical verification.
As an input to agriculture, fuel plays a crucial role and, thus, any rise in its price should also have a
direct and positive impact on prices of food products. From being employed as an input to power various
agricultural machinery, to its role in supplying food from farmers to the wholesalers, retailers and the end
consumers, the role of fuel prices in determining food prices cannot be neglected. In India, like most of
the EMEs, fuel prices are administered to a large extent. However, owing to the liberalization of these
administered prices, there have been inflationary pressures over different periods.
Figure 3 plots the trend in fuel inflation, corresponding to fluctuations in food inflation. A first glance at
the figure indicates the co-movement of the two time series, namely indices of food inflation and fuel infla-
tion. Both the indices have risen since 2008, with few drops during 2010–2012. Thus, this co-movement
necessitates the empirical verification of the causal association between the two indices.
Another important role in the determination of domestic inflation is played by the changes in global
food prices. As evidenced in literature, they affect domestic prices via international exchange of commodi-
ties. Any hike in global prices makes exports of agricultural commodities more attractive, thus diverting
supply away from the domestic market, leading to a rise in domestic prices of the essential commodity.
With global integration of the Indian economy, this share of agricultural trade to agricultural GDP has
steadily increased from about 5.2 per cent in 1990–1991 to 19 per cent during 2013–2014. Therefore, it
is imperative to verify the magnitude via which global prices impact domestic food inflation.
1368 Global Business Review 19(5)

Figure 3. Time Plot of WPI (Food Grains) and Index of Fuel Inflation
Source: Drawn by authors based on data extracted from the Office of Economic
Advisory, DIPP Statistics.

Furthermore, in addition to these variables, there is an important factor which has not been explicitly
quantified in empirical studies, but which plays a pivotal role in determining the extent of food inflation.
The role of intermediaries, which leads to the creation of a wedge between the farmers’ prices and the
market prices offered to the end consumers is what is being neglected in the past studies. Since the
supply chain of the Indian agricultural market comprises of various intermediary stages between
the initial production and the final stage of selling products to the end consumers, it is indeed necessary
to quantify the role of intermediaries in determining the inflationary pressures. In fact, this issue has also
been raised by the government of the country, who is trying to devise steps to reduce these distortions in
the food market (Reuters-India, 2014).
In a perfectly competitive set-up, assuming the absence of government intervention under exogenous
expectations, Lahiri (2012) has modelled the role of middlemen in creating food inflation. The model has
shown the behaviour of big retailers, how they decide on the amount of hoarding on the basis of their
future expectations and how they ultimately reach the end price to be charged from the consumers.
To quantify this set-up, the present study improvises on the available empirical literature in the Indian
context, by including an additional variable, that is, the gap between the wholesale and retail prices of
food grains, which contributes to an increase in the food prices. The variable has been defined as a proxy
for capturing the role of intermediaries and has been quantified as the difference between retail and
wholesale prices of food grains, derived as a percentage of wholesale prices.
Thus, the final model that has been defined includes four different determinants of food grain infla-
tion, namely price wedge, agricultural wages, global food inflation and fuel inflation, with the first one
being the most important variable of interest under consideration. Econometrically, the model can be
specified as follows:

FGI t = b 1 PWt + b 2 AWt + b 3 GI t + b 4 FI t + E t, (1)

Huria and Pathania 1369

where FGIt represents inflation in food grains over time t, PWt refers to price wedge, AWt represents
agricultural wages over time, GIt refers to the index of global food inflation, FIt represents the index for
fuel inflation and Et represents the residual term.

Data and Methodology

After setting up the theoretical base, the empirical strategies have been defined in line with the charac-
teristics of the data. The following two subsections detail the data sources and the econometric method-
ology that have been employed to conduct the analysis.

Data
The database for the variables specified in the final model has been designed by extracting data from
various sources. For capturing inflation in food grains, WPI for the commodity has been used.
The choice between WPI and CPI has been a debatable issue since the past few years. Until the year
2011, Reserve Bank of India (RBI) used the WPI to quantify inflation. However, post-2011, with the
coming up of new and unified CPI, the scenario has changed. Although technically to quantify the
impact of price wedge on food grain inflation, we should have used CPI, but due to the non-availability
of a comparable database pre and post 2011, we have used the next best alternative; that is, the inflation
in food grains has been proxied by the values of WPI for food grains for the years 2008–2013.
These values have been extracted from the Office of Economic Advisory, Department of Industrial
Policy and Promotion (DIPP).
Next, price wedge has been defined as the ratio of the difference between retail and wholesale prices
to wholesale prices, in order to capture the role of intermediaries. This is because Directorate of
Economics and Statistics (n.d.), Department of Agriculture and Cooperation, Ministry of Agriculture,
maintains commodity-wise wholesale and retail level prices for selected centres in India, but no time
series of farmers’ prices has been documented so far. After culling out the data for each of the 12 com-
modities included in the basket of food grains, their weighted average has been taken to compute the
final figure for the wholesale and retail counterparts for each month, with weights being assigned as per
the WPI.
The monthly data on agricultural wages has been extracted from RBI’s (n.d.) official statistics for the
time duration under consideration, while that of global food inflation has been computed from the data-
base developed and maintained by the Food and Agriculture Organization (FAO, n.d.).
Finally, the data on fuel inflation has been computed as the summation of three different price indices
defined for coal, kerosene and electricity (agricultural). The monthly data along with their weights have
been taken from the official website of the Office of Economic Advisory, DIPP and accordingly, the
index has been defined for fuel inflation.
Henceforth, all the data series have been deseasonalized to remove the presence of any seasonal
component, since agriculture is a seasonal activity in India and elsewhere.

Methodology
This subsection broadly explains the econometric methodology that has been employed to check for
the relevance of the aforesaid relationship.
1370 Global Business Review 19(5)

Stationarity Checks
As a preliminary exercise to check whether each of the earlier defined monthly series is stationary or not,
time plots for each of them have been drawn. Furthermore, to confirm the presence or absence of non-
stationarity, three different unit root tests have also been performed. Since Dickey–Fuller test does not
account for the issue of serial correlation, augmented Dickey–Fuller (ADF) test has been used. The other
two tests were Phillips–Perron (PP) test (1988) and KPSS test as proposed by Kwiatkowski, Phillips,
Schmidt, and Shin (1992). For the first two tests, namely ADF and PP tests, the null hypothesis indicates
the presence of a unit root as against an alternative of a stationary process, while, for the KPSS test, the
series is considered to be stationary under the null. If the majority of the tests confirm the presence of
unit root, then the series is non-stationary in nature.
ARDL Approach to Cointegration and Error Correction Model (ECM)
Cointegration implies a set of dynamic long-run equilibria, where the weights used to achieve station-
arity represent the parameters of the equilibrium relationship between the variables of interest. A series of
studies undertaken by Pesaran and Shin (1996), Pesaran and Pesaran (1997), Pesaran and Smith (1998)
and Pesaran, Shin, and Smith (2001) have introduced a technique referred to as the ‘autoregressive
distributed lag (ARDL)’-bound test for checking cointegration. This technique has some advantages
over Johansen cointegration technique, which is considered as the most accurate method to apply in
case the series under consideration is integrated of order 1 or I(1). Not only is the ARDL model more
statistically significant approach to determine the cointegration relation in small samples (Ghatak &
Siddiki, 2001); moreover, it can be applied whether the regressors are I(1) and/or I(0). This means that
the ARDL approach avoids the pretesting problems associated with standard cointegration, which, in
turn, require that the variables be already classified into I(1) or I(0) (Pesaran et al., 2001). Studies by
Shahbaz and Rahman (2012) and Shahbaz, Islam, and Butt (2016) have also employed this technique to
determine long-term association between their variables of interest.
As defined by Pesaran and Pesaran (1997), the ARDL approach follows a two-step method. In the
first step, the existence of any long-term relationship among the variables of interest is determined using
an F-test. Second, the analysis involves estimation of the coefficients having the long-run relationship,
followed by the estimation of the short-run elasticity of the variables with the error correction representa-
tion of the ARDL model. By applying the ECM version, the speed of adjustment to equilibrium is deter-
mined. Accordingly, the ARDL model can be represented as follows:
k
z (L, p) y t = | b i (L, q i) x it + dl w t + u t(2)
i=1

where
z(L, p) = 1 – z1L – z2L2 – .....zpLp
and
bi(L, qi) = 1 – bi1L – bi2L2 – ..... – biqiLqi,     i = 1,2,...,k
In the above equation, yt represents the dependent variable, xit denotes the independent variables, L is a
lag operator and wt is the S × 1 vector of deterministic variables, including intercept terms, dummy
variables, time trends and other exogenous variables.
Simultaneously, the optimum lags are selected according to the well-known Akaike information
criterion (AIC) and the Schwarz–Bayesian criteria (SBC). The long-run coefficients and their asymptotic
standard error are then computed for the selected ARDL model.
In the next step, the ECM version of the selected ARDL model can be obtained by rewriting Equation
(2) in terms of the lagged levels and first difference of yt, xit, …, xkt and wt as follows:
Huria and Pathania 1371

k pt - 1 k qt i - 1
Dy t = - z (1, pt ) EC t - 1 + | b i0 Dx 1t + dl Dw t - | { * y t - j - | | b ij * Dx i, t - j + u t, (3)
i=1 j=1 i=1 j=1

where the error correction term is defined as follows:

k
EC i = y t - | it i x it - }l w t. (4)
i=1

In the above equations, φ*, δ’ and βij* are the coefficients which, are related to the short-run dynamics of
the model’s convergence to equilibrium, and ϕ (1, tt ) denotes the speed of adjustment.

Analysis and Results

The step-wise econometric analysis based on the methodology discussed in the previous subsection is
detailed below.
As a preliminary analysis, the time plots of all the variables were drawn to check whether there exists
any break(s). This has been specifically done so as to see whether any of the sequences has a structural
break. However, the visual inspection does not verify any such observation. After this, the following
sequential procedure was followed:

Unit Root Analysis

The correlogram of each of the time series suggests that except for price wedge, each series is non-
stationary in nature. To verify the results derived from graphical inspection, three different tests were
performed, namely, the ADF test, the PP test and the KPSS test. Tables 1a, 1b and 1c, respectively, report
the results of these tests.
The tables contain all the variables selected for the analysis. All, except the monthly series of price
wedge, are integrated of order one (I(1)), while the price wedge is integrated of order 0 (I(0)). Thus,
in order to check for the presence of long-term relationship, Johnson’s cointegration approach cannot be
applied because all the variables are not I(1). In such a case, the most appropriate technique is what is
referred to as the ARDL approach to cointegration, for reasons mentioned in the previous subsection.

ARDL Approach of Cointegration

As a prerequisite, first we need to determine the appropriate lag length for the selected variables under
analysis. Lag exclusion tests and lag selection criteria have been employed at each lag. Accordingly, the
chi-squared (Wald) statistic for the joint significance of all endogenous variables at that lag is reported
for each equation separately and jointly. While, for the monthly data, it is natural to take 12 lags at the
first place, but given the size and number of observations, we have assumed 11 lags. We also found that
the 11th lag is jointly significant, and therefore, we cannot exclude any of the lags until lag 11.
This has been further verified by using the lag length criteria, which computes various alternative
criteria to select the order. The modified LR statistics are then compared to the 5 per cent critical values
starting from the maximum lag, and decreasing the lag one at a time until we first get a rejection. Four
alternative test criteria were employed, namely AIC, Schwarz information criteria (SC), Hannan–Quinn
1372 Global Business Review 19(5)

Table 1a. ADF Test of Unit Root

Variables Without Trend With Trend First Difference

WPI (FOOD) 0.9109 0.5900 0.0000a
Fuel inflation 0.0000 0.6508 0.0000a
Agricultural wages 1.0000 0.9800 0.0000a
Price wedge 0.0000a 0.0000a —
Global food inflation 0.2294 0.3485 0.0000a
Source: Authors’ estimates.
Notes: The cells contain p-values corresponding to the test statistic. aindicates that the
variable is stationary. The test was reconducted to extended differenced lags.

Table 1b. PP Test of Unit Root

Variables Without Trend With Trend First Difference

Food WPI 0.9139 0.7581 0.0013a
Fuel inflation 0.9612 0.6865 0.0000a
Agricultural wages 1.0000 0.9875 0.0000a
Price wedge 0.0000a 0.0000a —
Global food inflation 0.3834 0.6829 0.0000a
Source: Authors’ estimates.
Notes: The cells contain p-values corresponding to the test statistic. aindicates that the
variable is stationary. The test was reconducted to extended differenced lags.

Table 1c. KPSS Test of Unit Root

Variables Without Trend With Trend First Difference

Food WPI 1.071988 0.143379 0.098001a
Fuel inflation 1.1064 0.185105 0.098022a
Agricultural wages 1.2723 0.285629 0.069058a
Price wedge 0.104436 0.086867 —
Global food inflation 0.238208 0.124967 0.093635a
Source: Authors’ estimates.
Notes: The cells contain calculated values for the test statistic. The critical value for with-
out trend is 0.4630 and for with trend is 0.1460. aindicates that the variable is
stationary. The test was reconducted to extended differenced lags.

information criteria (HQ) and final prediction error (FPE). And, the majority of them confirmed that the
optimal lag length should be 10.
As the next step, to detect the short-run as well as the long-run relationship among food inflation,
price wedge and other variables, ARDL test for cointegration was performed. The equation defining our
model is given by (1). Thus, following Pesaran et al. (2001) and Bahmani-Oskooee and Nasir (2004), the
equation representing the first stage of the ARDL process can be represented as follows:

D FGI t = a 0 + | k = 1 b k D FGI t - k + | k = 0 c k D PW t - k + | k = 0 d k D AW t - k +
10 10 10

| 10k = 0 e k D GI t + | 10k = 0 fk D FI t + d 1 PW t - 1 + d 2 AW t - 1 + d 3 GI t - 1 +(5)

d 4 FI t - 1 + d 5 FGI t - 1 + residual
Huria and Pathania 1373

Estimation results for this equation are represented in Table 2.

To check whether the fitted model is stable or not, the test for stability check was performed.
The stability test requires that the CUSUM line must lie within the 95 per cent confidence interval,
for the underlying model to be stable. Figure 4 checks for the stability condition.
The figure confirms that the model is stable, since the blue-coloured cumulative sum (CUSUM) line
is lying between the areas captured by the two red dotted lines drawn at the 5 per cent level of signifi-
cance. Furthermore, to check for the issue of serial correlation, Breusch–Pagan LM test was performed,
which confirmed the absence of serially correlated errors.
After estimating the model coefficients and checking for stability and serial correlation, the ARDL
technique of cointegration was applied. In the first step, we captured the usual F-statistic for testing the
null hypothesis (of no cointegration) defined by (H0: δ1 = δ2 = δ3 = δ4 = δ5 = 0) among the levels of the
included variables in the models. The output Table 3 summarizes the results of this step.

Table 2. Test of Cointegration

Dependent Variable: D (WPI)

Variable Coefficient Std Error t-Statistic Prob.
D(WPI(-1)) −0.279189 0.126349 −2.209658 0.1577
D(WPI(-2)) 0.835784 0.122425 6.826910 0.0208
D(WPI(-3)) −0.351043 0.129023 −2.720784 0.1127
D(WPI(-4)) 0.086661 0.274954 0.315185 0.7825
D(WPI(-5)) 0.293124 0.147731 1.984181 0.1857
D(WPI(-6)) −0.319165 0.122587 −2.603587 0.1213
D(WPI(-7)) −0.993476 0.165973 −5.985774 0.0268
D(WPI(-8)) −0.223991 0.150633 −1.486999 0.2754
D(WPI(-9)) 0.606440 0.134791 4.499111 0.0460
D(WPI(-10)) −0.569242 0.094416 −6.029102 0.0264
D(FUEL) −0.985565 0.108352 −9.095983 0.0119
D(FUEL(-1)) −2.343224 0.391639 −5.983115 0.0268
D(FUEL(-2)) −2.157105 0.396624 −5.438669 0.0322
D(FUEL(-3)) −2.834428 0.433342 −6.540853 0.0226
D(FUEL(-4)) −1.837318 0.415288 −4.424198 0.0475
D(FUEL(-5)) −0.742946 0.278971 −2.663163 0.1168
D(FUEL(-6)) −0.453379 0.124613 −3.638280 0.0679
D(FUEL(-7)) −0.795312 0.117934 −6.743684 0.0213
D(FUEL(-8)) −0.633279 0.112257 −5.641317 0.0300
D(FUEL(-9)) −0.074799 0.110961 −0.674104 0.5697
D(FUEL(-10)) −0.220108 0.088353 −2.491245 0.1304
D(GFI) −0.289700 0.031748 −9.125098 0.0118
D(GFI(-1)) 0.259685 0.048076 5.401558 0.0326
D(GFI(-2)) 0.310793 0.047589 6.530745 0.0227
D(GFI(-3)) 0.037966 0.061647 0.615855 0.6007
D(GFI(-4)) 0.108341 0.043971 2.463909 0.1327
D(GFI(-5)) 0.097967 0.022248 4.403340 0.0479
D(GFI(-6)) 0.067047 0.021896 3.062071 0.0921
D(GFI(-7)) 0.207220 0.027044 7.662253 0.0166
D(GFI(-8)) 0.180579 0.040594 4.448458 0.0470
(Table 2 continued)
1374 Global Business Review 19(5)

(Table 2 continued)
Dependent Variable: D (WPI)
Variable Coefficient Std Error t-Statistic Prob.
D(GFI(-9)) 0.144405 0.045257 3.190788 0.0858
D(GFI(-10)) 0.057262 0.028470 2.011299 0.1820
D(PRICE_WEDGE) 2.550831 4.776028 0.534090 0.6467
D(PRICE_WEDGE(-1)) 8.124737 6.926213 1.173042 0.3616
D(PRICE_WEDGE(-2)) 7.909583 8.424219 0.938910 0.4469
D(PRICE_WEDGE(-3)) 8.393152 10.01167 0.838337 0.4901
D(PRICE_WEDGE(-4)) 29.59118 11.60330 2.550238 0.1255
D(PRICE_WEDGE(-5)) 28.42306 11.81479 2.405718 0.1379
D(PRICE_WEDGE(-6)) −0.849188 11.83570 −0.071748 0.9493
D(PRICE_WEDGE(-7)) −4.271045 10.33037 −0.413446 0.7194
D(PRICE_WEDGE(-8)) −9.796382 8.317918 −1.177744 0.3601
D(PRICE_WEDGE(-9)) −21.60475 5.785524 −3.734278 0.0648
D(PRICE_WEDGE(-10)) −12.78029 4.419465 −2.891820 0.1017
D(AGRI_WAGES) 1.818283 0.405447 4.484643 0.0463
D(AGRI_WAGES(-1)) 3.569403 0.766616 4.656049 0.0432
D(AGRI_WAGES(-2)) 3.764269 1.077839 3.492421 0.0731
D(AGRI_WAGES(-3)) 3.868160 1.106652 3.495371 0.0730
D(AGRI_WAGES(-4)) 3.622991 1.161006 3.120561 0.0892
D(AGRI_WAGES(-5)) 3.794837 1.116934 3.397549 0.0768
D(AGRI_WAGES(-6)) 3.244789 1.013543 3.201433 0.0853
D(AGRI_WAGES(-7)) 3.662847 0.896888 4.083951 0.0551
D(AGRI_WAGES(-8)) 4.843623 1.089904 4.444082 0.0471
D(AGRI_WAGES(-9)) 2.428870 0.763577 3.180908 0.0862
D(AGRI_WAGES(-10)) 0.855492 0.634025 1.349303 0.3097
WPI(-1) −0.508342 0.084863 −5.990156 0.0268
FUEL(-1) 1.765679 0.292416 6.038247 0.0263
GFI(-1) −0.474736 0.088465 −5.366353 0.0330
PRICE_WEDGE(-1) 2.667888 0.763589 3.4938 0.0890
AGRI_WAGES(-1) −0.967053 0.196144 −4.930319 0.0388
R-squared 0.999345 Mean dependent var. 1.332469
Adjusted R-squared 0.980346 S.D. dependent var. 1.780597
S.E. of regression 0.249628 Akaike info criterion −1.420990
Sum squared resid. 0.124628 Schwarz criterion 0.620675
Log likelihood 102.3402 Hannan−Quinn criteria −0.620843
Durbin–Watson stat. 2.612660
Source: Authors’ estimates.

The calculated F-statistic was then compared to the critical value tabulated by Pesaran et al. (2001).
These critical values are calculated for different regressors and whether the model contains an intercept
and/or a trend. According to Bahmani-Oskooee and Nasir (2004), these critical values include an upper
bound and a lower band, covering all possible classifications of the variable into I(1), I(0) or even
fractionally integrated. The null hypothesis of no cointegration is rejected if the calculated F-statistic is
more than the upper bound. If the computed F-statistic is smaller than the lower bound, then the null
Huria and Pathania 1375

Figure 4. Test for Stability of the Specified Model

Source: Drawn by authors.

Table 3. Estimating Step 1 of ARDL Approach

Wald Test
Equation: Untitled
Test Statistic Value Df Probability
F-statistic 19.45663 (5, 2) 0.0496
Chi-square 97.28315 5 0.0000
Null Hypothesis: C(55) = C(56) = C(57) = C(58) = C(59) = 0
Normalized Restriction (= 0) Value Std. Err.
C(55) −0.508342 0.084863
C(56) 1.765679 0.292416
C(57) −0.474736 0.088465
C(58) 2.667888 9.165972
C(59) −0.967053 0.196144
Restrictions are linear in coefficients.
Source: Authors’ estimates.

hypothesis cannot be rejected. And, if the calculated statistic falls in between the lower and the upper
bound, then the result is inconclusive.
As tabulated (Table 3), in the present case at 5 per cent level of significance, the computed F-value,
that is, 19.46, is greater than the Pesaran’s critical value for the upper bound, which is 3.48. Also, the
Wald chi-square statistic is significant at 1 per cent. Thus, the result evidences the existence of cointegra-
tion, that is, long-run association between the regressand and the regressors.
In the second step, we estimate the coefficients having long-run relationship, followed by the estima-
tion of the short-run elasticity of the variables with the error correction representation of the ARDL
model. The same model as specified in Equation (1) was employed again to estimate the residuals, which
were then used as the error correction term in performing the second step of the model. The equation
defining this step can be expressed as:

D FGI t = a 0 + | k = 1 b k D FGI t - k + | k = 0 c k D PW t - k + | k = 0 d k D AW t - k +
10 10 10

(6)
| 10k = 0 e k D GI t + | k10= 0 fk D FI t + nECT + residual,
1376 Global Business Review 19(5)

where ECT represents the error correction term, the coefficient of which was found out to be negative
and significant, meaning thereby that the model is consistent. As before, again the stability test has been
performed, and the model was found out to be stable in nature as graphed in Figure 5.
Similarly, the LM test was performed again, which confirmed the absence of serial correlation.
Furthermore, unit root tests were performed on the errors to check whether the series is stationary or not.
The tests confirmed the absence of unit root. To check for short-run causality, a joint significance test of
all the coefficients of lagged variables for each of the regressor was then performed. The results of the
test are summarized in Table 4.
Thus, price wedge, which is the main variable of interest, has been shown to have both long-run and
short-run impact on food grains inflation, thereby highlighting the significance of the role that inter-
mediaries play in determining the hike in prices of food grains. Additionally, all other independent variables
were also found to have both short-run and long-run relationship with the dependent variable, and the
signs of their coefficients were as expected.

Figure 5. Stability Check

Source: Drawn by authors.

Table 4. Test of Joint Significance

Variable P-value
Fuel inflation 0.0499a
Global food inflation 0.0688b
Price wedge 0.0946b
Agricultural wages 0.0633b
Source: Authors’ estimates.
Note:  a
denotes significance at 5% and
b
denotes significance at 10% level.
Huria and Pathania 1377

Conclusion
Although the former agrarian economy has been transformed into a service sector-driven nation, still the
Indian agriculture market holds a significant share in determining the overall level of economic develop-
ment of the country. The recent upsurge in the food prices experienced by the country since the latter half
of the 2000s has made it imperative for the policymakers to identify the crucial factors that affect food
prices within the economy.
Against this backdrop, the present article adds to the existing empirical literature by determining the
role of supply chain distortions in exacerbating the final price of food grains, a commodity that holds the
highest weight in the WPI for food. The need to study this relationship arose from the nature of the Indian
market, which comprises of a large number of intermediary stages between the supply of a product by
the farmers and its purchase by the end consumers. The price difference that the intermediary stages
create has been considered to represent the supply chain distortion in the agricultural sector. Based on the
availability of the data, the price wedge between the retail and wholesale price of food grains, derived as
the percentage of wholesale prices, has been taken as the proxy to quantify this role of intermediaries.
Along with other important variables affecting inflation, namely global food inflation, fuel inflation
and agricultural wages, as evidenced from the existing literature, an ARDL approach to cointegration has
been employed to check for the long-run and short-run dynamics. The test quantified that the price
wedge plays an important role in determining the magnitude of food inflation, and in fact, it impacts the
WPI for food both in the short run and in the long run.
Thus, it is necessary for the government to undertake concrete short-term and long-term steps to put
a check on soaring food grain prices. A step focusing on trimming down the intermediary stages and
bringing the farmers and consumers in close proximity with each other may improve the prices received
by the farmers, those paid by the consumers, and may ultimately control the food grain inflation.
Additionally, it will also help in stabilizing inflation fluctuations.

Acknowledgement
The authors are grateful to the anonymous referees of the journal for their extremely useful suggestions to improve
the quality of the article. Usual disclaimers apply.

Declaration of Conflicting Interests

The authors declared no potential conflicts of interest with respect to the research, authorship and/or publication of
this article.

Funding
The authors received no financial support for the research, authorship and/or publication of this article.

Note
1. For details of the ARDL approach and its mathematical derivation, refer Pesaran and Pesaran, 1997.

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