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What Is Food Inflation?

Updated: April 30, 2011 3:42 pm

Some comments and headlines from the leading business dailies on April 8, 2011 are as follows:

‘Food inflation fell to a four month low of 9.18 per cent for the week ended march 26… this is the second week in a row that food inflation stayed in single digit as it stood at 9.50 per cent in the previous week.’

—Business Standard

Food Inflation eases on cheaper potato, milk and pulses: Further moderation expected

—Business Line

Food Inflation falls to four month Low

—Economic Times

Week after week, news items appear about how the food inflation is moving up or down. When food inflation is under control, that is within ten per cent, there is a general ‘feel good’ factor, but when it crosses the double digit, almost everyone from political parties to editorial writers, central and state governments express grave concern and intervention measures ranging from MEP for onions to banning export of milk powder, or easing import of pulses are announced. When food inflation rises even higher, as for example in December last year, the Essential Commodities Act is invoked, Income tax raids are organised and the Competition Commission also gets into the act for some action is warranted to curb food inflation. Paeans are written on how food inflation hits the poorest and the most vulnerable sections more than the middle classes as the poor spend a much higher proportion of their incomes on food. However the reasons for food inflation, the process of its calculation, and the steps taken to ease food inflation need to be dwelt at length for a clearer understanding of the subject.

                Food inflation is based on major commodity groups: fruits, eggs, meat and fish, vegetables, onions, potatoes, milk, oilseeds, pulses, rice and wheat, among others. Specific weights are assigned to the groups, and it is the cumulative total of all these that gives the comprehensive figure. The base year is 2004-05, and the weekly, monthly, quarterly and annual comparisons are drawn with reference to that year. As also the commodity-wise inflation. Thus we know that the maximum increase has been in the case of fruits (25 per cent), followed closely by meat, poultry and fish (13 per cent), seasonal vegetables (12 per cent), onions (9 per cent), potato (5 per cent), milk (4 per cent) rice (3 per cent) and wheat (.3 per cent) and pulses dipping by 5 per cent. Usually all the commodities do not rise at the same time and there are known seasonal peaks because agricultural commodities have specific seasons. This allows governments to calibrate policy instruments, especially with regard to export and import to ease the pressure on domestic prices. Sugar prices are regulated by imposing ‘export quotas’ and ensuring adequate stocks to meet any unforeseen circumstances.

Commodities like potatoes and onions are at their lowest during this period, and touch their peak from October- December. Basic cereals also show a downward spiral from March to June. However, this is the period when milk usually firms up as demand is up, but production is down. Thanks to the large capacities for creating milk powder in the co-operative sector, the inflation in the dairy sector can be kept under check, but the international prices of WMP (Whole Milk Powder), SMP (Skimmed Milk Powder) and butter oil make a substantial difference. The linkages among the sectors are also very interesting. Thus a good maize crop will bring down broiler prices as maize is an important ingredient in the poultry feed industry. Already broiler prices are down to their lowest level in this current year. It appears that wheat will also show a decline as market arrivals improve with the onset of harvesting, and the up scaling of procurement operations in different parts of the country.

Food inflation is a major contributor to the Wholesale Price Index and the Consumer Price Index, and governments all over the world are wary of food inflation spirals, especially as real prices of agricultural commodities had been dropping for three decades starting mid-seventies.

Global Trends

It must be mentioned here that our food inflation is directly impacted by the global trends. The FAO has reported a drop in the global food inflation for the first time in the last eight months on account of softening of sugar, edible oil and cereals. The FAO’s index dropped to an average 230 points in March, down by 3 per cent from its peak in February this year, but still substantially higher than the prices in March last year. The trend of decline affects prices in all the countries, especially those which depend on international trade for their domestic requirements. However, whether or not this trend will continue is slightly pre-mature, because even though cereal plantings have been higher, any disturbance or variation in the weather can cause stress to prices which depend on inventory and stock levels. Moreover, the demand levels are also going to be the highest ever on account of rising incomes and populations in the developing countries, and the increasing adoption of the ‘entitlement approach’ to food as a basic human right. This poses newer challenges, as farmers incomes and livelihoods have to be protected even as higher production and productivity are required for addressing the supply side. As agricultural production and food markets get globally integrated, WTO, WFP and FAO will have to sit together to discuss the modalities of getting a consensus on what in the first instance appear to be ‘major differences’ in approach. India should take the lead in this direction and bring these players together in the big fight against food inflation at the global level.

By Sanjeev Chopra

(The author is Joint Secretary, Ministry of Agriculture, Government of India. The views expressed are personal)

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