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What is Causing Food Inflation in India?

Thu, 2011-02-03 12:13 | CPI(M)
While the Indian people suffer from incessantly rising food prices, the Government
mandarins were busy in the recent period, celebrating the Indian growth story at the
World Economic Forum in Davos. The Deputy Chairman of the Planning Commission,
Montek Singh Ahluwalia, who was earlier in the news for suggesting that food inflation
is occurring because people are becoming more prosperous in India and eating more,
stated in Davos that not only are the recent increases in petrol prices justified but diesel
prices will also be decontrolled and increased in the near future. Ministers are also
suggesting that the solution to food inflation lie in allowing MNCs like Walmart and
Tesco to open supermarkets in India. These callous and cruel statements are symbolic of
a Government, which has dropped even its pretence of working for the aam admi.
As we prepare to launch the anti-price rise agitation from 3rd February, it is important to
lay bare the real reasons behind the raging food inflation in India, which is playing havoc
with the livelihoods of the people. The blame lies with the neoliberal policy framework
of the Congress led Government, which needs to be fought and reversed.
Q: What is the current state of inflation in India?
A: The inflation rate in India as measured by the Wholesale Price Index (WPI) has been
rising continuously over the past three years. Inflation in food products has driven overall
inflation.
@font-face { font-family: Georgia; } P.MsoNormal { MARGIN: 0cm 0cm 0pt; FONT-
FAMILY: "Times New Roman"; COLOR: black; FONT-SIZE: 12pt } LI.MsoNormal
{ MARGIN: 0cm 0cm 0pt; FONT-FAMILY: "Times New Roman"; COLOR: black;
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Section1 }
WPI Inflation (year-on-year)
Section1 }
2006-07 2007-08 2008-09 2009-10
All 6.51 4.82 8.03 3.57
Commodities
Food 7.99 5.97 9.07 14.52
"Times New Roman"; COLOR: black; FONT-SIZE: 12pt } DIV.Section1 { page: Secti }
Source: Office of the Economic Adviser, Ministry of Commerce and Industry, GoI
Section1 }
As per the latest data, overall WPI Inflation stood at 8.4% in December 2010. In the week
ending 22nd January 2011, food inflation stood at 17.05%.
Q: The Central Government claims that food prices are rising in India due to higher
GDP growth reflecting increasing purchasing power of the people and growing
economic prosperity. Is this true?
A: Food demand in an economy like ours naturally grows over time. In order to keep
pace with population growth, food production also needs to grow. However, in India,
food production and availability have not grown commensurately. In 2008-09, annual per
capita cereal availability in India was only around 165 kg, which was that of the same
level as in 2000-01. In contrast, per capita cereal availability in China was over 290 kg in
2008-09, and in the US it was over 1000 kg. Moreover, per capita cereal availability in
India fell to 161 kg in 2009-10, despite high GDP growth. Therefore food consumption
for the entire population is certainly not witnessing any rise.
What is happening is that income and consumption growth is getting disproportionately
concentrated within the top 10 to 15% of the population, who are benefiting from GDP
growth. For the bulk of the Indian people, consumption levels are getting further
squeezed. If 77% of the Indian population is spending less than Rs. 20 per head a day as
per the Arjun Sengupta Commission report, one can well imagine what the consumption
levels of the majority of Indians are.
Widespread hunger and malnutrition is the reality of India. India continues to be home to
around 25% of the world’s hungry population currently estimated at 925 million by the
UN World Food Programme. Nearly half of India’s children under three years of age
continue to remain malnourished, as per the National Family Health Survey, alongside
half of pregnant mothers who are anaemic. Food price inflation is making matters worse
for these sections by squeezing their consumption levels.
Q: What are the main reasons underlying food inflation in India?
A: There are four main reasons. The immediate reason for the spurt in the prices of
specific food items, like onions today or earlier in the case of sugar and pulses, is
hoarding. Trader cartels, encouraged by an inept Government, are mainly responsible for
this. Assured of inaction, hoarders are creating artificial shortages and fleecing people
from time to time.
Secondly, the growing penetration of big corporates in the food economy, international
trade in food items and speculative futures trading in agricultural commodities has
weakened the government’s capacity to control food prices. The share of corporate retail
in food distribution has tripled over the past four years. The Government has manipulated
trade policies to allow big traders to make huge profits through export and import of
essential food items like wheat, sugar and onions. On the other hand, the PDS has been
weakened considerably through targeting. In most states, the role of the ration shops,
state agencies like the NAFED etc. and consumer cooperatives in food distribution, has
been whittled down. Therefore, the profit margins of private traders have also increased,
reflected in growing gaps between wholesale and retail prices as well as farmgate and
wholesale prices.
There are medium and long-term reasons too. Our agriculture is in a crisis. We are not
producing enough to meet the needs of a growing population. The peasantry continues to
be in distress, with 2.5 lakh farmers committing suicide over the past 15 years. State
intervention in raising agricultural productivity has been weakened. The Government is
more interested in handing over this role to big agribusinesses and retail giants like
Walmart and Monsanto in the name of a ‘second green revolution’. That will further
marginalize the small peasants.
Finally, the cuts in subsidies and price hikes of inputs like diesel and fertiliser are also
contributing to food inflation. The deregulation of petrol prices has led to very steep
hikes in the recent weeks.
Q: The Government claims that oil companies are making losses by selling fuel at
subsidised prices. What is the option but for raising prices?
A: The so-called ‘under-recoveries’ of oil companies cited by the Government are
notional losses. In actual terms the oil companies are not making such losses. The
international crude oil price is currently ranging between 85 to 90 dollars per barrel,
which comes to around Rs. 25 per litre (1 barrel = 159 litres and 1 dollar = 45 rupees;
note that international crude prices have recently risen over 100 dollars per barrel
following the political crisis in Middle East). However, the retail price of petroleum
ranges between Rs. 58 to Rs. 63 per litre in the metro cities. This huge difference
between crude oil prices and the retail price of petrol is on account of taxes, over Rs. 30
per litre of which is collected by the Central Government through customs and excise
duties. If we take these taxes into account, the Government earns much more in taxes on
petrol and diesel than it spends on fuel subsidies. If the Government cuts these indirect
taxes, the fuel prices would not rise.
The Government does not want to cut these taxes, because otherwise it has to impose
more direct taxes on the rich and the corporates. Therefore the Government is passing the
burden on to the people. After petrol prices were deregulated in June 2010, petrol prices
have been raised 7 times by the oil companies, the last time being in January 2011,
amounting to an increase over Rs. 10 per litre in 7 months. Increase in fuel prices have
been adding to inflationary pressures.
Q: What should the Government do to control food inflation?
A: The present steps being undertaken by the Government are inadequate. What we need
is a long-term strategy to fight inflation. The first step should be to strengthen state
intervention in the food economy, both in food distribution and production.
The Government is dithering on the Food Security legislation. The Food Security Act
should be passed without further delay, which must ensure universal food security. The
Government is currently holding stocks of nearly 50 million tonnes of rice and wheat,
which is way above the buffer norms. 35 kgs of foodgrains per month should be supplied
through a universalized PDS at Rs. 2 per kg and not limited to the arbitrarily determined
BPL families. Moreover, other essential commodities like sugar, pulses and edible oils
should be supplied at fixed rates across the country through the PDS.
The Government has been sitting on the recommendations of the National Farmers’
Commission for the past five years. The Farmers’ Commission had made several
suggestions to make farming remunerative for the peasantry and step up public
investment in agriculture, as well as agricultural storage and marketing. Besides
supporting farmers, Government agencies, cooperatives and self-help groups should be
supported to open more outlets to sell food items like vegetables, milk etc. Raising
agricultural productivity and modernisation of storage and marketing of agricultural
products cannot be left to the private corporates and MNCs. Inflation cannot be
controlled with liberalized trade and private profiteering in food items.
The influence of private corporates and traders in the food economy needs to be curbed.
For this it is essential for the Central Government to take the State Governments on board
and coordinate measures against hoarding and black-marketing. In this regard, it is also
important to prohibit commodity futures trading in food articles, because such trading
facilitates speculation on food prices.
Finally, the costs of agricultural inputs like fuel and fertilisers have to be controlled by
the Government. Deregulation of fuel and fertiliser prices will raise agricultural costs and
contribute to food inflation. The Government must continue to subsidise fuel and
fertiliser and rationalize the taxes on petroleum products. The decision to deregulate
petrol prices need to be reversed.
Q: How does futures trading contribute to inflation? Why should it be prohibited?
A: Futures trading is linked to inflationary expectations in the economy. Futures are
contracts made between sellers and buyers for sale/purchase of a fixed quantity of a
commodity at a fixed price at a future date. What commodity futures markets do is to
enable selling and buying of these contracts on a daily basis, like in the stock market.
So, a future contracts of say 10 kg of sugar to be delivered in May 2011 at Rs. 30 per kg,
can sell at more or less than Rs. 30 per kg in January 2011. Someone, for example, buys
the contract at Rs. 29 per kg today, because sugar prices are expected to fall in the
coming months. However, in the coming months international sugar prices can rise, may
be because the sugar crop from, say Brazil, fails this year. Then demand for sugar
contracts in Indian futures market will also rise and the person who bought sugar at Rs.
29 per kg can sell it in March 2011 at, say Rs. 35 per kg, making a windfall profit of Rs.6
per kg without having to either produce or consume a single grain of sugar. Moreover,
when sugar prices rise in the futures market in India, sugar traders expect to make profits
(a) by exporting sugar abroad (b) by hoarding sugar so that there is scarcity in the
domestic market, which eventually increases domestic sugar prices.
The commodity futures markets therefore achieve two things. First, they link domestic
food prices to the volatile international commodity markets. Second, they provide
avenues for pure speculators, who have nothing to do either with production or trade in
food, to emerge as major players and make capital gains by speculating on food prices.
With the advent of multi-commodity exchanges in India since 2002-03 and the
commencement of online trading, commodity futures trading have grown manifold. Like
most countries across the world, the people who are investing in these markets are not
farmers, but big players of the financial markets who are only interested in making
speculative gains. The Government was forced to suspend futures trading in some
essential commodities like rice, wheat, sugar and some pulses in 2007 due to the pressure
from the Left Parties. However, futures trading in wheat and sugar have once again been
allowed by the Government.
India is a food deficient country. Our productivity levels are low and we are not
producing enough to meet the demands of a growing population. Moreover, our
agricultural production is heavily dependent on the weather and above or below normal
rainfall (floods and drought), significantly affects the supply of agricultural commodities.
Storage capacity in India is also limited and many food items cannot be stored because of
lack of modern storage facilities. In this backdrop, futures trading in food items distort
the price signals and encourage speculation and hoarding, thus contributing to food
inflation. Therefore, in order to control food inflation, futures trading in food articles
need to be prohibited.
***
@font-face { font-family: Tahoma; } @font-face { font-family: Arial Unicode MS; }
Section1 } OL { MARGIN-BOTTOM: 0cm } UL { MARGIN-BOTTOM: 0cm }
JOIN PROTESTS AGAINST PRICE RISE: FEBRUARY 3-9,
2011
DEMANDS:
1. SCRAP APL/BPL AND UNIVERSALISE THE PUBLIC
DISTRIBUTION SYSTEM; DISTRIBUTE EXCESS
FOODGRAIN STOCKS IN FCI GODOWNS AT BPL RATES.
2. TAKE FIRM MEASURES AGAINST HOARDING.
3. PROVIDE REMUNERATIVE PRICES TO FARMERS AND
INPUTS AT REASONABLE COST TO BOOST
PRODUCTIVITY IN AGRICULTURE.
4. END THE DEREGULATION AND ROLL BACK PRICE
HIKES IN PETROLEUM PRODUCTS; RATIONALIZE THE
TAX STRUCTURE ON PETROLEUM PRODUCTS.
5. PROHIBIT FUTURES TRADING IN FOOD ITEMS AND
ESSENTIAL COMMODITIES.
6. DON’T ALLOW FOREIGN CAPITAL IN RETAIL TRADE.
Section1 } Retail Prices of Some Essential Commodities in Delhi: 2008 to 2011
(Rs./kg)
Section1 }
Retail
Price
Retail Retail Retail
(end- Price (end- Price (end- Price (end-
January January January January
Item 2011) 2010) 2009) 2008)
Rice 23 23 22 17
Wheat 15.5 16 13 13
Atta 17 18 14 14
Chana Dal 35 38 35 35
Arhar Dal 69 84 50 42
Moong Dal 68 81 45 36
Masoor Dal 54 62 62 39
Sugar 34 42.5 23 17
Milk (Rs./litre) 25 22 21 20
Groundnut Oil 135 113 109 121
Mustard Oil 79 71 77 69
Vanaspati 77 57 54 67
Tea Loose 149 156 144 107
Salt Pack (Iodized) 13 12 11 10
Potato 8 9 8 8
Onion 33 23 21 9
"Times New Roman"; COLOR: black; FONT-SIZE: 12pt } P.MsoBodyText { FONT-
STYLE: italic; MARGIN: 0cm 0cm 0pt; FONT-FAMILY: "Times New Roman";
COLOR: black; FONT-SIZE: 9pt; FONT-WEIGHT: bold } LI.MsoBodyText { FONT-
COLOR: black; FONT-SIZE: 9pt; FONT-WEIGHT: bold } DIV.MsoBodyText { FONT-
COLOR: black; FONT-SIZE: 9pt; FONT-WEIGHT: bold } SPAN.BodyTextChar
{ FONT-STYLE: italic; FONT-FAMILY: Georgia; COLOR: black; FONT-WEIGHT:
bold } DIV.Section1 { page: Section1 }
Source: Price Monitoring Cell, Ministry Of Consumer Affairs, Food and Public,
Distribution, GoI
Average:
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• Food Inflation
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Comments
by bal (not verified) on Wed, 2011-02-23 20:56
Hoarding as the reason of

Hoarding as the reason of price hike as claimed by this article is ridiculous . Don't you
think if that were the reason for this price rise, why morality of hoarders would take
downturn worldwide in 2010 or 11, but were in good shape in years before? That is not
say no one is hoarding. But hoarding contributes a insignificant fraction to the total price
distortion.
Economists and scientists have identified longer-term changes -- global warming, global
lack of productive farmland and China and India's economic growth for cause of global
food price hike. On global warming side, some of the reasons of the high food price are:
severe droughts in China and Russia, floods in Australia, deep freeze in Mexico.
Try to think outside your ideological echo chamber. Its not that hard.
• reply
by brajesh (not verified) on Thu, 2011-02-24 15:06
@mr. bal
you seem to have got slightly confused. when food prices started rising in India 2007
onwards, the Indian government claimed that it was because of global rise in food prices.
however, despite global commodity prices crashing after the financial crisis of 2008, food
inflation persisted in india in 2009 and 2010, which exposed the hollowness of the
official claims. hoarding has certainly played a role in rising food prices in India, as did
the bad crops owning to drought and floods. the Union Finance Ministry recently
conducted income tax raids on wholesale traders of food items across the country,
reflecting that even in Indian official circles, which cannot be accused of being
communist/socialist, hoarding is considered as a problem. so there is nothing specifically
ideological about the reasoning.
as for your own reasoning, global warming is too long term a reason for explaining recent
food inflation in india. lack of farmland may account for global rise in cereal prices -
given the diversions for bio-fuels - but this does not hold true for india yet. you seem to
be missing the most important reason identified by many economists; the crisis of peasant
agriculture brought about by decades of neoliberalism, which has made farming unviable
for small farmers. that is why farm productivity is not growing in countries like india,
even as population increases, leading to falling per capita food availability. it is perhaps
your own ideological blinkers which prevents you from seeing this as a reason.
• reply
by A. Mani on Thu, 2011-02-24 22:07
Re: Hoarding as the reason of

@bal , please read the article before commenting - the article does not say hoarding is
THE reason, it says it is one of the immediate reasons. The reasons suggested by you are
vague and without necessary references.
This article lays more stress on futures trading.
See also http://mrzine.monthlyreview.org/2011/ghosh250111.html
• reply
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