The provisional Wholesale Price Index numbers for the week ending February 23 exceeded 5%, confirming what millions of households across India already knew?the sharpest rise in the latest data came from food articles. Though the consumer price indices show an easing in inflation from 6-8% in August 2007 to around 5% in January 2008, high points remain in food articles.
High inflation in food has hit the headlines recently in many countries?China?s inflation is set to hit an 11-year high, thanks to food prices which rose 22% in February. US food prices have risen the highest since 1990, and the stories get worse in smaller nations. Signs of impending crisis have been known for a while. The FAO has been highlighting the tight stock position in wheat and other food commodities for more than a year now. India?s imports of wheat have already been in the news last year. Unfortunately, the situation is set to become grimmer this year as the United Nations World Food Programme has just issued an alert on food prices, with the prediction that this crisis is not expected to ease till 2010.
Globally, wheat, corn, soya, rice etcetera are all gaining new highs, and the price of grain is impacting prices of milk, meat, eggs and so on, as animal feed becomes more expensive. Western media is quick to blame inflation on demand from China and India. But there are other reasons for the elevated levels of prices, which should also be addressed for a sustainable long term solution. On one hand, pressures from crude oil are raising input prices for farmers and also pushing demand for biofuels, and on the other hand, drought conditions in countries like Australia and Ukraine have pinched the supply of grain. Global food reserves are down to their lowest in 30 years.
Back home, though the second advance estimate of agricultural production for 2007-08 has put foodgrain production at a record 219 million tonnes, the growth over last year stands at less than 1% and a decline is expected in wheat production. The Budget did place emphasis on inflationary pressures, as finance minister P Chidambaram noted that supply side management of food articles would be the most crucial task this year and the country is determined to be self-sufficient in food grains. The question that arises is whether this situation could have been avoided, or at the very least anticipated? We know we do not live in a perfect world and short-sightedness is a basic human flaw. But a look at the chart above on per capita food availability shows that we are way below the peak reached in 1991. The trend is quite clear and should have been to the government as well. Yields have been stagnant for a decade now and if it takes a crisis to relook at policy measures to raise farm productivity, the time is long overdue.
The picture, therefore, is quite bleak and it would be foolish to pretend otherwise.
Though the world has gone through high food inflation in the past?in the 1970s and in the mid-1990s, for example?there are some extra factors this time round that cannot be addressed easily. For instance, climate change and environmental degradation. Yet, just as the current crisis in global financial markets is calling for a more coordinated approach between central banks towards monetary policy and regulation measures, the food shortages need international cooperation, and this will push environmental factors into the spotlight, which will be crucial for solutions in the long term.
But in the short run, there will be a push for price controls?given the unequal burden on the poorest groups, and given the social and political pressures in India, these seem quite inevitable this year. Also a concerted effort at procurement and more effective distribution would help reduce the impact on these sections.
Yet, such measures are invariably accompanied by administrative inefficiencies, leakages, hoarding, speculation and the like. There could also be recourse to imports, but with the tight supply predicted, prices will be high, which will again add to inflation in the country.
An outside possibility does exist of a more benign scenario, if the price of crude oil slides back into the $60-a-barrel range, relieving the pressure on demand for biofuels and inflation in general. The probability of that happening, however, is anybody?s guess.
One consolation, if any, has been that the price of sugar has been dropping, though even that trend has reversed in international markets, thanks to lower stocks and speculation by hedge funds. Moreover, India does not expect another bumper crop in sugar this year. A sweet solution to food inflation will continue to elude us.
?The author is chief economist at Indicus Analytics. Email: sumita@indicus.net