The wholesale food prices in India touched a 10-year high with food inflation coming at 19.95% for the week ended December 5, 2009. This article looks back into the spiraling food inflation in 2009, its implications, reasons and solutions.
The table below gives the retail prices for some of the key agricultural commodities in four Indian metros. As seen below the prices of all key agricultural commodities have risen sharply. Significant price increase has been observed in basic commodities like arhar dal, sugar, potatoes and onions. The key reason cited for the spiraling food price inflation is the bad monsoon in India. To a certain extent that has a lot of weight but some the less talked about reasons is worth pondering on,
* In 2008, it was estimated that India loses Rs 58,000 crore worth of agricultural food items due to lack of post harvesting infrastructure such as cold chains, transportation, and storage facilities. If the government ensured proper storage facility, food inventory would have been more than sufficient leading to prices remaining under control.
* The farmers are largely dependent on the four-month monsoon season during which the country gets 80% of the year?s total rainfall. The reason is that 60% of the country?s total cropped area is not irrigated. The government has been talking about inclusive growth and stress on rural India but continues to be a case of all talk no action. The suicide of 10,000 plus farmers across India is a case to point.
* The per hectare agricultural yield in India is half that of China. This again points of inefficiency and the failure to help the farmers adopt latest technology in order to increase the crop output.
Had the estimated losses of Rs 58,000 crore not have occurred, India?s fiscal deficit would certainly have improved by more than a few notches and the lower food prices would certainly have been an icing on the cake. However, looking into the very near term, some ways to ease food prices would be:
Crackdown on hoarders and black marketers could help prevent prices from rising further. This step might not significantly reduce prices but will ensure that prices don?t escalate further.
* The government should allow the private sector to import and store the primary agricultural commodities at zero import duty. This will help ease the prices to a large extent.
* The government also needs to unload the wheat inventory it has in its storage locations. This will have an immediate impact on the prices.
Impact of food inflation
The high food price inflation is having a significant impact on the Indian consumer in general and the Indian middle class in particular. The second chart gives the way the Indians spend.
As evident from the chart, nearly 43% of the personal disposable income goes into food products. Unfortunately, this is the segment which is experiencing highest inflation. A high food inflation ensures that consumers have to cut back on their spending (on non-necessary items). This in turn will impact the consumption part of the GDP growth.
Another important point to note is that a majority of Indians still don?t invest in equity markets. They prefer going for fixed deposits which are currently yielding only around 7-8% annually. On the other hand, inflation for an average household is easily around 12-15% (given the higher education, health and housing cost).
Thus, a large section of the population is losing out on their purchasing power without realising about it. For those who realise this, there is only one option?to speculate in the stock markets and try to get returns which beat the annual inflation rate. In this also, most of us know how many retail investors actually make money in the markets.
Considering these factors, it is very important for the government to try and control the inflation or at least try and ensure that these circumstances do not arise again in the future. It is only that the government needs to be more proactive rather than being reactive.
The writer is a derivatives analyst