The Hindu Business Line : Controlling food price inflation http://www.thehindubusinessline.com/2010/02/23/stories/201002235014...

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Controlling food price inflation
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Food price inflation is one of the most critical economic problems in the country today, and the
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ability to control prices of food articles quickly and effectively is one of the main bases on which
Corporate
people will judge the performance of this Government. C. P. Chandrasekhar and Jayati Ghosh
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examine the recent pattern of inflation in important food items and consider the possible causes,
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including the growing distribution margins.
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As usual when the Union Budget is presented, all eyes will be on the Finance Minister and his speech Stra
will be thoroughly scanned for all the implications on the economy. But this time, there is one mou
Investment
particular reason why ordinary citizens will be specially focussed on the Budget: the hope that the
World Wh
Government is finally going to act decisively to contain food price inflation.
eWorld pric
Brand Line It is not surprising that questions of food security and the right to food have become such urgent
Mentor political and social issues in India today. Rapid aggregate income growth over the past two decades Rem
Life has not addressed the basic issue of ensuring the food security of the population. proj
Brand Quest net
The New Instead, nutrition indicators have stagnated and per capita calorie consumption has actually declined,
Manager suggesting that the problem of hunger may have got worse rather than better. So, despite apparent The
BL Club material progress in the last decade, India is one of the worst countries in the world in terms of hunger
Smartbuy among the population, and the number of hungry people in India is reported by the UN to have Soc
Books increased between the early 1990s and the mid-2000s.
Gallery
These very depressing indicators were calculated even before the recent rise in food prices in India,
Stocks which is likely to have made matters much worse. Indeed, the rise in food prices in the past two years
has been higher than any period since the mid-1970s, when such inflation sparked widespread social
Quotes unrest and political instability.
SE Diary
Scoreboard What is especially remarkable is that food prices have been rising even when the general price index
Open-End Mutual (for wholesale prices) has been almost flat; thus, when the overall inflation rate was only 1-2 per cent
Fund in the past year, food prices increased by nearly 20 per cent.

Sharp rise in prices

Foreign Exchange
Table 1 indicates the price increase in cities averaged across the major regions, for rice, atta and
Rates sugar, which are among the most essential food items in any household. It is evident that the price
increase has been so rapid as to be alarming especially over the past two years, with rice prices
increasing by nearly half in Northern cities and more than half in Southern cities.

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The Hindu Business Line : Controlling food price inflation http://www.thehindubusinessline.com/2010/02/23/stories/201002235014...

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Atta prices have on average increased by around one-fifth from their level of two years ago. The most
Frontline
shocking increase has been in sugar prices, which have more than doubled across the country. Other
The Hindu
food items, ranging from pulses and dal to milk and vegetables, have also shown dramatic increase
eBooks
especially in the past year.
The Hindu
Images There are many reasons why food prices have risen at such a rapid rate, and all of them point to
major failures of state policy. Domestic food production has been adversely affected by neoliberal
economic policies that have opened up trade and exposed farmers to volatile international prices even
as internal support systems have been dismantled and input prices have been rising continuously.

Inadequate agricultural research, poor extension services, overuse of groundwater, and incentives for
unsuitable cropping patterns have caused degeneration of soil quality and reduced the productivity of
land and other inputs. Women farmers, who constitute a large (and growing) proportion of those tilling
the land, have been deprived of many of the rights of cultivators, ranging from land titles to access to
institutional credit, knowledge and inputs, and this too has affected the productivity and viability of
cultivation.

Poor distribution

But in addition to production, poor distribution, growing concentration in the market and inadequate
public involvement, have all been crucial in allowing food prices to rise in this appalling manner.
Successive governments at the Centre have been reducing the scope of the public food distribution
system, and even now, in the face of the massive increase in prices, the Central Government is
delaying the allocation of foodgrains for the Above Poverty Line population to the States.

This has prevented the public system from becoming a viable alternative for consumers and
preventing private speculation and hoarding. In addition, allowing corporates (both domestic and
foreign companies) to enter the market for grains and other food items has led to some increase in
concentration of distribution.

This has not been adequately studied, but it has many adverse implications, including the fact that
farmers will benefit less from period of high prices even as consumers suffer, because the benefit will
be garnered by middlemen.

Thus it has been found that the gap between farm gate and wholesale prices is widening. A similar

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The Hindu Business Line : Controlling food price inflation http://www.thehindubusinessline.com/2010/02/23/stories/201002235014...

story is evident from the gap between wholesale and retail prices, as evident in the charts. In rice, the
gap between average wholesale and retail prices widened considerably — even doubled — across
the four major zones of the country, as shown in Chart 1.

In wheat (Chart 2), the pattern is more uneven but the retail margins are very large indeed, as
expressed by the difference between the wholesale price of wheat and the retail price of atta (which is
the most basic first stage of processing).

Sugar is slightly more complicated, as marketing margins appear to show different trends in different
regions and also tend to be significantly lower than the other major crops.

The dramatic increase in sugar prices is more a reflection of massive policy errors over the past two
years, in terms of supply and domestic price management and exports and imports.

Marketing margins

So what exactly is happening? It appears that there are forces that are allowing marketing margins —
at both wholesale and retail levels — to increase.

This means that the direct producers, the farmers, do not get the benefit of the rising prices which
consumers in both rural and urban areas are forced to pay. The factors behind these increasing retail
margins need to be studied in much more detail.

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The Hindu Business Line : Controlling food price inflation http://www.thehindubusinessline.com/2010/02/23/stories/201002235014...

The role of expectations, especially in the context of a poor monsoon that was bound to (and did)
affect the kharif harvest adversely, should not be underplayed. But that refers only to the most recent
period of rising prices, whereas this process has been marked for at least two years now.

In addition to this, there is also initial evidence that there has been a process of concentration of crop
distribution, as more and more corporate entities get involved in this activity. Such companies are
both national and multinational.

On the basis of international experience, their involvement in food distribution initially tends to bring
down marketing margins and then leads to their increase as concentration grows. This may have
been the case in certain Indian markets, but this is an area that clearly merits further examination.

Many people have argued, convincingly, that increased and more stable food production is the key to
food security in the country. This is certainly true, and it calls for concerted public action for
agriculture, on the basis of many recommendations that have already been made by the Farmers'
Commission and others.

But another very important element cannot be ignored: food distribution. Here too, the recent trends
make it evident that an efficiently functioning and widespread public system for distributing essential
food items is important to prevent retail margins from rising.

Food security

So one major element of the Finance Minister's speech that will certainly be noticed is the outlay he
proposes for the Food Corporation of India.

The UPA government has already pledged to enact a Food Security Bill, but that needs to be
universal in coverage (rather than confined to Below Poverty Line population) and provide enough
volumes to meet minimum requirements.

A universal system of public food distribution provides economies of scale; it reduces the transaction
costs and administrative hassles involved in ascertaining the target group and making sure it reaches
them; it allows for better public provision because even the better-off groups with more political voice
have a stake in making sure it works well; it generates greater stability in government plans for
ensuring food production and procurement.

But even before such a law is passed, it is clear that emergency measures are required to strengthen
public food distribution, in addition to medium-term policies to improve domestic food supply.

A properly funded, efficiently functioning and accountable system of public delivery of food items
through a network of fair price shops and co-operatives is the best and most cost-effective way of
limiting increases in food prices and ensuring that every citizen has access to enough food.

In a context in which the inflation is concentrated on food prices, measures such as raising the
interest rate are counterproductive because they affect all producers without striking at the heart of

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