Column: Beating down food inflation

Written by Ashok Gulati and Shweta Saini | Updated: Jun 17 2014, 07:24am hrs
The Consumer Price Index (CPI) data released by the government for May 2014 has brought a small sigh of relief to policymakers in the sense that the rate of food price inflation (CFPI) has not accelerated. But it still continues to be high at 9.56% (May 2014 over May 2013). For all of FY14, food inflation (CFPI) remained at 11.3%, which was only a notch lower than 12.2% registered in FY13, but higher than the 10.9% in FY12. The three year average rate of food inflation has been 11.5%, which has been a killer, and UPA II had to pay a heavy price for that electorally.

It is natural for the Modi government to learn a lesson from this and try and beat food inflation down to below 5%, lest it erodes the high hopes people have put in the new government. But it is going to be a daunting task, given that the current year rainfall is likely to be 7% below normal and the El Nio hitting sometime in late July-early August. All this may worsen the situation on food price front. The prime minister, thus, rightly met with the relevant ministries earlier this month to review the governments preparedness to deal with sub-normal rainfall. Both, the finance minister and RBI Governor, are also well aware that they need to keep a lid on high fiscal deficit and overflow of money supply in the market to contain inflation. But food inflation is a little tricky, and high interest rates may not help much in that direction.

Before we put forth our suggestions on what best can be done to tame food inflation, it would be wise to understand its structure and complexity a little better, especially over the last say three years. Only a better diagnostics of this problem can lead to some sustainable solutions.

During FY12 to FY14, the worst performance, in terms of prices of food items, was that of vegetables, with an average annual rate of inflation of 17.4%, followed by fruits at 15.3%. Eggs, fish, meat, milk and milk products, and oils and fats, all hover around 13%, cereals at 9.9%, pulses at 5.6% and the lowest rate of inflation is registered in sugar at 2.9%.

Fruits and vegetables (F&V), eggs, fish and meat (EFM), milk and milk products (MMP) are all highly perishable, high-value agri-products (HVA) and more nutritious, whose demand grows with rising incomes. But, in contrast, per capita consumption of cereals has been gradually declining over years, much in line with Engels law on consumption. What this means is that the demand pressures are mounting faster on perishable HVA than on cereals. Together, the overall weight of three components of HVA (F&V, EFM, and MMP) in CFPI is about 42% while cereals have a weight of 34%. But our food policy seems to be tilted towards cereals than HVA, presumably because the poor still depend more on cereals for calories than on HVA. In any case, if one has to beat food inflation below 5%, what could be the policy choices in the short to medium run

Let us first talk about cereals, which affect the poor the most. India has had record production of cereals and also exported more than 40 million tonnes (mt) of cereals just in last two years. The government godowns are overflowing, with the wheat and rice stocks touching 71 mt as on June 1, 2014more than double the July 1 buffer stock requirement of 31.9 mt. Two policy actions can help bring down cereal inflation quickly: (a) unload 15-20 mt of cereals from government stocks to open market through e-auctions with a reserve price of last MSP plus 5%. The auctions can start from July-August as procurement of wheat will be over by June end and government can save on carrying cost of this excessive stock; (b) have a 5% export duty on common rice (not basmati) to recover some of the subsidy given for water, power, and fertiliser, inherent to rice exports (exporting 1 kg of common rice means a virtual export of 3000-5000 litres of water). It may also be good to set up a high-powered committee and take bold action to revamp the entire food security complex in the wake of National Food Security Act: from procurement and stocking to distribution of subsidised cereals through PDS within the next three months. If one can reduce the leakages from PDS alone, which hover around 40%, and shrink operations of FCI by introducing cash transfers, it will go a long way to tame cereal prices in the short- to medium-term, and give a big relief to the poor.

The inflation of around 13% in edible oils and fats is primarily imported. India imports more than 60% of edible oil consumption, and domestic prices are directly linked to what happens globally. Our import duties are quite low (2.5% on crude and 10% on refined oil). So, not much can be added here in terms of policy choices in the short run. In the long run, however, a strategy to promote cultivation of oil palm on at least 1-2 million hectares in India will have to be conceived and implemented seriously.

The real challenge is in perishable HVA: F&V, EFM and MMPs. In the very short run, to augment their supplies one can use the import route and reduce import duties, which generally are above 30% to about 15%. Some aberrations like chicken legs attracting 100% duty, skimmed milk powders 60% duty (beyond in-quota tariff of 15% for 10,000 tonnes), apples at 50% duty, need to be rationalised first. But in medium- to long-term, one has to streamline the value chains of these perishable commodities.

There are many studies, which show that the currently fragmented value-chains have high margins for commission agents, wholesalers, and retailers. Their combined margins typically range from 30-50% of the price. On top of this, there are wastages ranging from 15-30%. These margins and wastages can be drastically reduced if one invests in building efficient and compressed value chains, where the organised retailers or processors buy directly from farmer producer organisations. For this to take off, APMC Act will have to be changed to allow direct-buying from farmers, but also organised retailingby private or cooperatives, domestic or foreignwill have to be promoted. The task is huge, requiring thousands of crore of investments in logistics, organising farmers, and creating back-end infrastructure. Innovative policies can help mainstream vendors and

kirana stores into this organised retail network, where the government can also throw in capital subsidy as well as group health insurance programmes for those willing to be part of these organised food value chains. Unless the government views this as an opportunity to create millions of jobs, which are off-farm, yet near-farm, in building value-chains for these perishables, the relief from high prices may not be in sight soon.

The National Dairy Development Board (NDDB) was created to streamline such value-chains in milk, a la the AMUL model. The government supported it through liberal infusion of money, and today we have some system in milk, though it still touches only 20% of total milk production in the country. NDDB also ventured into F&V, via Safal experiment, which has not been as great a success as milk. But now the need is for intervention at least 20 times larger, and government money is scarce. Here in lies an opportunity to bring in the private sector. By streamlining laws and giving some tax incentives, they can be encouraged to build effective value-chains for food that prevent wastage, and improve realisations for farmers and lower prices for consumers, and creating millions of near-farm jobs in the process. Can our policymakers rise to this challenge Because the time to do this is now!


Gulati is Chair Professor and Saini a Consultant at the Indian Council for Research on International Economic Relations