In the past few months, food prices have been rising quite sharply. The WPI index for primary food was rising by over 6% in March and April, though it has moderated in recent weeks. But it continues to rise at a pace that is higher than average overall inflation.
The increase in food prices at the end of winter is an annual affair and is due to seasonal factors?as the supply of winter vegetables run down and uncertainty about the monsoon and the kharif harvest drive the price of cereals upwards. However, this year there is a second element in evidence. It is that prices of certain food items have been rising and to an extent that simply cannot be explained by seasonal elements alone.
So, is the price increase due to a decline in production or a rise in demand? For items like fruits, vegetables, eggs, milk and fish, there seems to be no reason to believe there?s been a decline in production. It basically means that rise in demand has been the contributing factor. Anecdotal evidence tends to support the hypothesis of rising urban demand spurring on prices in these areas (despite the avian flu scare). In which case, farmers are basically receiving a greater incentive to produce and all-in all, this outcome is probably a desirable one.
However, foodgrain prices are rising at an average pace of nearly 9% year-on-year, and that surely has much to do with shortfalls in output, as is being indicated by the ministry of agriculture. The situation is quite acute in the case of wheat. And in combination with the fact that official stocks have gone from bursting at the seams to being under-provided as per the buffer stock norms, is driving grain prices upward.
If the 2006 south-west monsoon turns out not to be good, which is certainly possible, given the Indian Meteorological Department forecast, we are looking at the prospect of modest kharif and rabi harvests for the second year in a row. It is a likely consequence of that which is being reflected in the current strong prices of foodgrain.
If the rain gods are kind and the kharif prospects begin to look bright in July and August, foodgrain prices will drop. If not, food-led inflation could become one more headache for the government.
A decision to import wheat to make up for the expected large shortfall between the target and actual procurement for winter wheat could perhaps be a point to start with. However, one must ask why the output has fallen short? Is it because farmers have shifted to more remunera-ive crops? If so, that is a favourable outcome. If yield per acre on existing acreage has fallen, it would be terrible. And it would be even more depressing if the statistics on which we rely are not reliable.
?The writer is economic advisor to Icra