The Challenges of Food Inflation

-Duvvuri subbarao

Aditi gupta
Shiva jain
 What is
food inflation???
 WHAT IS FOOD INFLATION
Food inflation refers to high increase in food prices due
to high demand and inadequate food supply.
The current estimate of food inflation is 4.70%.
It is a major threat for the inclusive and sustainable
growth of the economy.
Management of food inflation-a complex challenge for
RBI
 Change in dynamics of Food Inflation

•In 2000s, average food inflation inflation fell.

•In 2008-09, average food inflation reach higher than the average food
inflation( in each of the past six decades).
•Rainfall was deficient in 2002, 2004 and 2009.  But, in the earlier years,
food inflation remained modest, 3% for three successive years during 2002-
05 and
shot up to double digits in 2009.
 Reasons for sustained price
pressures?
(i) shift in dietary habits towards protein foods;
(ii) pressure stemming from inclusive growth policies;
(iii) large increases in MSPs of food grains;
(iv) shocks from global food inflation
(v) financialisation of commodities
1. Shift in dietary habits towards protein
foods

Protein rich item’s inflation generally

exceeded both headline (WPI) inflation and
inflation in primary food articles.
 2.Pressure on Food Inflation Stemming
from Inclusive Growth
Policies aim at inclusive growth can stoke inflationary pressures at any rate in short term
 MNREGA :The guarantee of at least 100 days of wage employment which pushed up
rural wages resulted in wage price inflation spiral.
 According to NSSO nominal wages of worker increased much faster in
2nd half than 1st half of 2000’s.
 Increase in wages led to increase in per capita expenditure.

 The National Food Security Bill,2011

 High inflationary pressure was due to raise in demand for food grains when available
marketed surplus wasn’t increasing correspondingly.
 Higher food subsidy burden on the budget raised the fiscal deficit leading to higher
prices.
 3.Large increase in MSP’S of food
grains
• In recent years, significant increase in minimum support
price( MSP) of
several commodities pushed up food inflation.
• Hikes in MSP of wheat and rice have been more substantial in
recent years.
4.Shocks from major food inflation
 Reason for Demand side inflation
• Increasing population and income

 Reasons for Supply side inflation

• increasing urbanization
• diversion of land for bio-fuel production
• inadequate investment in research and technology
• spikes in costs of inputs such as diesel and fertilize
• disturbances arising from climate change
High food prices were amplified further by country specific policy
intervention
Export ban by certain countries
Import barriers and high subsidy to protect domestic producers by the
advance economies

Global food prices declined from early 1960s to early 2000s but this trend
reversed during 2003 and thereafter up until 2008 global financial crisis.
 OECD -FAO agricultural outlook 2011-20 indicates 40% rise in prices in
case of rice, 27% for wheat, 48% for maize and 36% for oil seeds.
 Global prices will spike even in situation of low global prices due to
high demand by India’s large population base.
 Financialisation of commodities

Price increases not only due to demand supply but because of

speculation and leads to price volatility.
Few commodities like milk, fruits and sugar experience
mbiguous relationship between commodity prices and future market activiti
 Addressing the challenges of food
inflation
1. Raise agricultural productivity

•Green revolution resulted in quantum jumps in productivity

especially of rice and wheat.
•By early 1980’s productivity of all major crops had peaked but
momentum have slowed thereafter
•Consequently per capita availability of food grains especially of
rice and wheat started declining
•During 2010-11 Punjab with highest yield in rice
produce 3.8 tons per hectare as against the world
average of 4.3 tons per hectare.
•Yield of oilseeds in Tamil nadu ,the highest in India at
2.1 tons per hectare is lower than the US average of
2.7 tons per hectare.
•We are still not sufficient in edible oil seeds and
pulses.
•Rising demand for fruits and vegetables are putting
pressure on food inflation.
Annual Average Agricultural Growth Rate
_______________________________
Plan Period Growth Rate
(percentage)
________________________________
6th Plan (1980 - 1985) 5.8
7th Plan (1985 - 1990) 3.0
8th Plan (1992 - 1997) 4.8
9th Plan (1997 - 2002) 2.5
10th Plan (2002 - 2007) 2.4
11th Plan (2007 - 2012) 3.2
(in first 4 years)
________________________________
 2.Price Policy Interventions
•Subsidies on inputs like fertilizer, electricity, irrigation
subsidies on output for the PDS system entail a large fiscal burden
and farmers does not have much of an incentive to raise productivity.

•augment capital formation in agriculture and creation of

rural infrastructure, higher productivity would raise income
of farmers while lowering the prices for the consumers.
Improve Supply Chain Management

•Supply chain is amajor source of price pressures.

(a) revamping the PDS to
check leakage of food subsidies
(b) allowing entry of FDI into multi-brand retailing.
• Government’s food management policy has two goals:
(a) maintaining buffer stocks to deal with food
shortages and thereby ensuring food security
(b) providing food at subsidized prices to the poor through the PDS.
The food stocks thus reflect procurement and depletions through
release for PDS.
Given high administrative costs of the PDS , several alt. have been suggested
Direct cash transfer, but the objective of PDS can be compromised.
Distribution linked to UID,
• but coverage is impossible.
•manipulating supply and prices, food dealers could extract a
share of the cash transferred to the beneficiaries.
Allowing FDI into multi brand retail

•Better supply chain management for perishable items

•super market-chains could lower costs and increase efficiency
because of scale economics.
Implementation of the
model Agriculture Produce Marketing Committee (APMC) Act 2003, which
provides for direct marketing, contract farming and setting up of markets in private
and cooperative sectors is a possible option to address this problem.
iv) Manage Competition for Land From Non-farm Activities

Land is collateral for credit and security in the event of natural hazard.
Gross Cropped Area (GCA) is the total area sown once as well as more than once in a particular ye
When the crop is sown on a piece of land for twice, the area is counted twice in GCA.
On the other hand, Net Sown Area is the area sown with crops but is counted only once
Net sown area declined and gross crop intensity increased over the years.
cultivable land not used for agricultural purposes increased which may be indicative
of increased diversion of agricultural land for non-agricultural purposes.
The possibility of declining arable land available for cultivation underscores the
mportance of increasing productivity
The possibility of declining arable land available for cultivation underscores the
mportance of increasing productivity
Third, water is going to be as precious as land in
he long-run, and costs of irrigation will increase significantly, not only in terms of
he actual cost of access to the irrigation facility,
Fourth, dry land farming would have to receive greater attention, but there
will be greater competition even for dry lands from urbanization and infrastructure.
monetary policy need not react to supply shocks. This premise is based on the
assumption that the supply shocks are purely temporary. This assumption does not
always hold. In the real world, oftentimes supply shocks are structural and lead to a
permanent trend upward shift in prices.

challenge for a central bank is to determine if the supply shock is

temporary or permanent. If it is permanent, then the change in relative prices
caused by it can result in higher general inflation, in the first round by the higher
input costs, and in the second round through the impact on inflation expectation
and wage bargaining.

in the case of a negative supply shock, monetary

policy confronts the dilemma of stabilising output versus containing inflation.

If on the other hand, the supply shock persists, or due to

strong demand conditions, the supply shock transmits to other components of
general inflation, then monetary policy has to respond.
Inflation is a regressive tax and hurts the poor the most. The impact can be
particularly severe in a country like India with a population of 1.2 billion, a per

capita income of less than $1500 and a large share of food .

A lasting solution to
food price pressures lies in a supply response that raises agricultural production and
productivity, improves supply chain management and sets the right incentive
framework for both producers and consumers. The outlook on food inflation in the
short to medium term will be determined by the speed and quality of such a supply
response by the Government.

****