While finance minister Pranab Mukherjee is welcome to cheer the recent drop in food inflation to 9.3%, Indian policy makers have yet to formulate a coherent strategy to address the issue. In this regard it is worth looking at the actions taken by China to tackle its food inflation problem. Chinese food inflation is running at just over 10% and is the key driver of overall inflation, which hit 4.9% in January. In both India and China, the most recent round of food inflation has been driven by increases in prices of fruits and vegetables.
But that?s where the similarities end.
Where Indian policy makers continue to debate a food security Bill, and struggle to fix a broken public distribution system and curb post-harvest losses, Chinese officials have put in place a raft of policies to boost food supply even if it comes at the expense of continued rises in food prices. China?s supply-targeted policies will not necessarily nip food inflation in the bud, but they will succeed in easing market tightness and avoiding the damaging spikes in prices of agricultural commodities that can feed into inflation expectations and spark hoarding, panic buying and other market-distorting behaviour.
China?s approach to ensuring adequate supplies of pork?a mainstay of the Chinese diet?provides a good example of these policies in action. China is the world?s biggest producer and consumer of pork?Chinese consume more pork than the rest of the world combined. After a surge in pork prices that led the last round of Chinese food inflation in 2007-08 on the back of surging animal protein demand and an outbreak of blue ear disease that decimated pork stocks, Beijing revamped its policies towards the sector to ensure adequate supply.
I had an opportunity to observe the impact of these policies firsthand on a visit last month to a hog farm in central China?s grain belt. The pig farm was in Henan, one of China?s poorer provinces, and produced 33,000 hogs a year, a number that is set to triple over the next three years. The farm is one of China?s top 100 pork producers and sells ?non-toxic? pork?the feed, mostly corn, is not organic but the pigs are not given chemicals or hormones. (So strict are the hygiene controls that no visitors are allowed to see the pigs.)
As the farmer explained, he received a range of subsidies from the government that added up to almost 7% of total costs. These included bonuses for breeding sows, use of certain feeds, and for the total number of pigs produced?the bigger the operation, the more subsidies it attracted. The funds for expansion come from the Agricultural Bank of China, a policy bank, and the farmer only has to pay the portion of the interest above 5% per annum.
These subsidies are a part of the government?s push to promote consolidation of the industry away from backyard production and towards bigger farms, using better feed to produce higher-quality pork. The government also protects farmer margins by allowing them to pass on input prices and by placing a floor on pork prices. Although corn prices increased by more than 25% in 2010, for example, the farmer was able to pass these on to his buyer, a processor in Shanghai who then sold the meat to the local government. The government supports pork prices by purchasing meat for the national frozen pork reserve when the pork/feed price ratio falls below a certain level.
In addition, the government is working to streamline the supply chain and transport logistics for pork and other agricultural commodities, including fruits and vegetables. For example, the pigs travel 1,000 km by highway from Henan to Shanghai for processing, but are allowed to use special tollways and are exempt from paying any tolls, passing unhindered through the ?military green lane?.
These policies to incentivise maximum production and assure adequate supplies of food items will reduce the kind of price volatility that has upset inflation expectations and caused political headaches in both China and India in recent years. However, the flipside to the Chinese government?s supply-focused approach is that it will have to accept continued food price inflation. And China?s policy makers can afford to do so because of rapid income growth. Beijing has targeted income growth of 25% over the next five years. In that context, overall inflation of 4-5% and food inflation of less than 10% is not a major concern, rather it is an inevitable consequence of the kind of rapid growth China is enjoying.
So, for China, a policy to assure food supply and reduce food price volatility is enough. Not so for India. Not only does India not have the high levels of income growth needed to defuse the political impact of continued food inflation, it also does not have in place policies to ensure food supplies are adequate and where they need to be to meet demand, let alone actually reduce food inflation on a sustainable basis. In the fight to manage food inflation the score is China 1, India 0.
The author is global markets director of the research service, Trusted Sources
