Column: Bringing food inflation below 6%

Written by Ashok Gulati | Ashok Gulati | Shweta Saini | Updated: Dec 25 2013, 11:25am hrs
The double-digit food inflation remains stubbornly high, causing anguish amongst people and unease amongst policymakers and analysts. This year, in particular, vegetables, spearheaded by onions, went through the roof. And the second spoiler was cereals inflation. Both can be halved, and overall food inflation can be contained within 6% in the next 3-6 months, if we do the following two things aggressively.

First, open up the gates of FCI for anyone to pick up any amount of wheat at R1,400/quintal and rice at R2,000/quintal from any state godown, wherever it is available across India, no questions asked. This will immediately bring down the cereals inflation to less than 5%, and help the government to liquidate at least 5-10 million tonnes (mt) of cereals from a surplus stock of at least 20 mt kept in government godowns without serving much purpose. It will also save the government from high carrying-cost of these stocks. Second, at least in UPA-ruled states, announce that fruits and vegetables are de-listed from the APMC Acts. This would mean that anyone can buy fruits and vegetables directly from the farmers, without any license, commissions and market fees, and can sell to anyone. This will have the salutary effect akin to de-licensing the industry in the early days of economic reforms. APMC markets have become places for high rent-seeking by a few license holders, in collusion with the system, and this nexus must be severed for larger public good.

These two measures can give quick results. But for a long-term solution to food inflation, we must have a better diagnosis of the problem over a somewhat longer period. Looking at it over the last 15 years, say since 1998-99 to 2013-14, we find that the average rate of food inflation during the NDA period (1998-99 to 2003-04) was 4%, which went up to 6% during UPA-1 (2004-05 to 2008-09) and surged to 10.5% during UPA-2 (2009-10 to 2013-14, as per data available till November 2013). So, the real problem emerged during the UPA-2 period. What went wrong

Our econometric analysis of data reveals that three factors were primarily responsible for this:

(a) sharp hikes in fiscal deficit from 2008-09 onwards (by more than 100% in a single year over 2007-08);

(b) high global prices of food, which got triggered in 2007-08 and then later remained high backed by global fiscal stimulus, increased financialisation of commodity markets, especially in Chicago Board, and ramped up programs of bio-fuels, especially in US;

(c) rising nominal farm wages in India, which increased by an average rate of 18% per annum (real wages increased by 6.8% per annum) during the last five years, largely driven by pull factors of economic growth but also helped by push factors of MNREGA.

The Finance Minister promises that even in an election year, he will not cross the target set for fiscal deficit (4.8% of GDP). In the next two-three years, fiscal deficit will have to be brought down to acceptable levels of less than 3% of GDP. It will remain a daunting task for any FM, but the direction is clear. Luckily, the global prices are moderating. Having touched the peak in 2011, the FAO food price index is somewhat on a decline. Prices of edible oils, sugar, pulses and coarse cereals are all lower this year than the last. If we can stabilise our exchange rate, there is no reason for food inflation to go up in these commodities due to global factors. Finally, even farm wage increases are decelerating. The October 2013 data over the corresponding month in 2012 shows that the farm wage growth has moderated to 14% from 19 %. In the days to come, this is likely to moderate even more. So, there are strong prospects that in the coming months food inflation can be contained to well within single digits, even below 6%, if we keep the fiscal policy tight.

What about the minimum support prices (MSP) of wheat and rice Some analysts (most notably, the prolific columnist of this paper, Surjit Bhalla) think that high increases in MSPs have caused food inflation. Let us clarify a few points here: First, MSPs are effective mainly in wheat and rice, and that too in a few statesPunjab, Haryana, Andhra and lately, Chhattisgarh and Madhya Pradesh. In the rest of the country, market prices often go below MSP. To cite an example, even in the last season paddy prices in Bihar were 15% to 20% below MSP. Second, in an open-economy environment, simple rules of pricing will hold that our MSPs should be closer to export parity prices (fob: free on board) in commodities for which we have surpluses and are net exporters; and closer to import parity prices (cif: cost, insurance and freight) for commodities that we are importing. In wheat, the fob prices from the last two tenders in November-December 2013 were between $280-290/tonne against our MSP of $226/tonne for the next year wheat crop; and similarly, the fob prices for rice hover between $390-420/tonne against our MSP of less than $320/tonne. Also, if one compares our MSPs of these commodities with those of competing countries in South and South East Asia (as shown in the accompanying graph), we are very much at a lower bound. Pakistans MSP for wheat hovers around $282/tonne and China offers $389/tonne. Similarly, our rice MSP (derived by dividing the paddy MSP by 0.66, which is the conversion factor from paddy to rice) is closer to Vietnams MSP ($297/tonne) and way below that of China, which ranges between $444/tonne to $494/tonne for Indica and Japonica rice. Thailand offers way higher MSP for rice ($695/tonne), which we feel is not sustainable, and is leading to accumulation of rice stocks in Thailand. Overall, we strongly feel that our MSPs of wheat and rice have been well within reasonable range of rational pricing principles in an open-economy environment. This was also echoed by the FM in his inaugural speech to the Delhi Economic Conclave a few days back.

So, in brief, the action has to be on three fronts to rein in food inflation: contain fiscal deficit aggressively; liquidate grain stocks boldly; and break the oligopoly in mandis by de-listing fruits and vegetables from APMC Act. This three-pronged attack, we believe, can bring food inflation below 6%, in the next 3-6 months. Can our policymakers bite the bullet

Gulati is chairman, Commission for Agricultural Costs and Prices, and Saini is consultant at ICRIER.

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