Column: Taking the bite out of food prices

Updated: Jan 3 2014, 15:14pm hrs
Rising food prices have dominated discussions not only in the corridors of the power but also in every household in the last few years. Food inflation, hovering around 4% during FY01FY08, jumped to double-digit figures during FY09FY13, and is continuing at this high pace. In 2013,on a year-on-year basis, food price inflation, which was 10% in the month of June jumped to more than 18% in October. Inflation for most vegetables was very severe and seemed beyond all control. The case of onions was the worst, affecting all households. It became a political agenda during the recent assembly elections in five states. Onion prices set an all-time high in November. However, suddenly in mid-December, onion prices dropped leading the government to reduce the minimum export prices to promote exports to stabilise prices. The government is also trying to control hike in prices of food commodities through monetary policies. Though monetary policy is important in taming inflation, the question whether food inflation can be controlled through such policies arises, as food commodity prices are not very sensitive to interest rates.

The pattern emerging from the past shows that it is unlikely that food prices rise because of any single factor; rather the hike is often due to many factors operating in a systematic manner. Almost half the expenditure of an average household in India is on food. So, with increase in spending due to rise in income, the upward push on prices intensifies. With rising incomes and unfolding globalisation, consumption patterns are also diversifying; the per capita consumption of rice and wheat is slowly declining and this is moving towards high-value food commodities, especially pulses, milk, fruits, vegetables, eggs and meat.

Also, the expansive reach of the MGNREGA has substantially increased the wage rates of agricultural labourers, and has been widely cited as one of the drivers for increasing demand for food commodities and raising their prices. The lack of proper infrastructure and cold-storage facilities results in huge post-harvest losses of perishable commodities and adversely affects their supplies. Contrastingly, the government has been stocking foodgrains in amount way higher than required, even after taking into account the requirement under the National Food Security Act. This restricts foodgrain movement in the open market and adds additional pressure due to glitches in the supply, thereby pushing the prices north.

To control inflation of foodgrains, especially rice and wheat, the government should consider releasing some of its huge accumulated stock in the domestic market. This will help ease the prices of rice and wheat to some extent. Cash transfers will help limit leakages in the public distribution system (PDS) and also save storage costs. In case of vegetables and other perishable commodities, the government should opt for short-term imports to ease domestic prices. In the long run, the government should review import and export of all essential commodities on a regular basis and impose controls on exports and ease restrictions on imports, including tariff reduction, to improve domestic supplies.

The government should increase its efforts towards bolstering agricultural productivity with higher investment in agricultural R&D to develop or further improve technologies such as high yielding seeds and efficient irrigation systems. These will contribute in bridging the growing demand and supply gap, and meet increasing demand due to rising incomes (including wages), and ease prices of food commodities.

Investment through the private sector in the back-end supply chain and development of market institutions needs to be encouraged. Increased investment in infrastructure, such as cold-storage, refrigerated vans, processing units to reduce wastage, etc, will help in improving supply of perishable commodities in distant and remunerative markets where demand is high. This will open up opportunities for increasing production of perishable commodities. Foreign direct investment will increase centralised procurement of agri-products directly from farmers and improve market efficiency by reducing marketing and transaction costs. This will bring in new areas of assured market and technology inputs and thus create affordable prices for the consumers.

The bottom line is that there is an immediate need to overcome supply-side constraints. There is a need to streamline agricultural policies towards high-value food commodities, managing the grains market, increasing investment in research, developing infrastructure and working towards a stable trade policy. Blending these measures will surely help in taming food inflation in the long run.

P K Joshi & Devesh Roy

Joshi is directorSouth Asia and Roy is a research fellow, International Food Policy Research Institute (IFPRI)