Sometimes the key to a mystery is so obvious as to seem irrelevant. That is the situation with the current confusion about out-of-control food inflation, caused primarily by vegetables and livestock products. Its recent marginal easing up might offer some reprieve to the Delhi Pooh Bahs, as anticipated by Ila Patnaik (The Indian Express, January 13, 2011), but offers no solace to the harried buyer, who has no choice but to fork out ever higher sums for not just daal-chawal but increasingly for aloo-pyaaz and ghee-shakkar.
The usual suspects have been rounded up, but none among them appears to be the perpetrator. The government economic brains trust has talked of cartelisation (Kaushik Basu), market imperfections (MS Ahluwalia), and wholesalers have been raided to unearth stocks, as if you could hide mounds of onions and tomatoes, if they could keep at all! The traders? strike threat could only worsen the situation while onions and tomatoes continue to elude the hawk-eyed policymakers and their eager sleuths.
The reason is simple: they just aren?t there, not in quantities near what we want. So, like the IPL franchisees wanting to fill their rosters with at least 70 reliable Indian cricketers from a small pool, the vegetable buyer has to face unheard-of prices. Widespread rains at the end of the monsoon and well beyond it in production areas have led to lost early winter sowing and delay in the arrival of fresh produce all over the country.
Two features characterise the fresh produce market: high price elasticity of supply and high income elasticity of demand. The former implies that even relatively small and temporary disruptions to supply cause disproportionately high increases in price. Given the short production cycle?six to eight weeks?price spikes due to supply constraints could occur several times a year. Lately, we have experienced high intra-year rainfall fluctuations leading to wide variations in prices. We had double-digit food inflation last June-July, also caused by vegetables. Similar bursts of high prices occurred in 2009, 2008 and 2007.
The current situation is more worrisome. It has hit the consumer lulled into believing that all was well following a copious monsoon. It has also come in a sudden spurt: tomatoes were Rs 8/kg in early November; they are Rs 40/kg or more six weeks later. Onions went up similarly, from Rs 12/kg to Rs 60/kg. Even more paradoxical is the distortion in relative prices: fresh peas, only seasonally available and considered an ?upper class? commodity, are selling at the same price (Rs 20/kg) as the lowly brinjal, normally sold at around Rs 5/kg! That is how large and differentiated the short-term production impact has been.
The income effect on vegetable demand and prices has caused the sustained upward trend over the last five years or more. Economics terms vegetables, livestock products and sugar as superior foods, as they all have high positive income elasticities of demand. Their demand rises faster than per capita incomes, as we want more of them as we grow richer. Both Patnaik and Ahluwalia have acknowledged this.
With per capita incomes rising at 7% a year on top of a population growth of 1.5% in the last five years, vegetable supplies needed to grow at 9% annually to meet the demand. Vegetable production grew from 101 million tonnes in 2004-05 to 136 million tonnes in 2009-10. While this growth is faster than that in crop production, it is only at about 5% a year. Hence vegetable shortages have increased as have the prices. A similar story unfolds in the livestock products segments as well.
Market imperfections have contributed little to this situation. In fact, the fresh produce market is far more efficient than those for most commodities. Solutions such as the creation of a cold chain to extend the shelf-life of products and reach of markets are unaffordable; studies indicate that the cost of distribution through such a chain would rise manifold, given their energy intensivity.
The short answer is to increase production faster than the rise in demand. Unit costs and prices have fallen in consumer durables and telephony even as demand has exploded, because the number of suppliers has risen and cost-saving technologies have become available.
This would not be the case for onions, tomatoes and other produce. Seasonal and soil considerations restrict the production base. The generally slow pace of technology dissemination and adoption has been further affected by misguided and perhaps unwarranted ecological zealousness. Brinjal is widely seen as the cotton-equivalent of horticulture, due to its susceptibility to a wide variety of pests. Yet the agriculture ministry clearance to Bt brinjal is held in abeyance (perhaps indefinitely) by the environment minister on the basis of his personal soundings. Norman Borlaug and Dr Swaminathan have pleaded the case of genetically modified crop planting material, albeit carefully evaluated and monitored, as the likeliest way to achieve rapid and sustained productivity increases.
Here lies the rub: our simple story of vegetables, alas, has no happy ending in sight, given the blinkered vision of the policymakers. The finance minister?s optimism regarding control of this vegflation is thus whistling in the dark, even in the short run.
?The author is chief executive, Management Analytics Pvt Ltd.