Persistent food inflation worrying

Food inflation (FI) has been quite stubborn and higher than over-all inflation in nine out of the last 10 years.

The sharp rise in prices of pulses (arhar and urad) and onion in the last few months caused considerable hardship to many households. Although food inflation has come down since August 2014 and is presently quite low at 4 per cent based on consumer price index (CPI), the recurrent sharp spikes in prices of few commodities is a major concern to policymakers. 

Food inflation (FI) has been quite stubborn and higher than overall inflation in nine out of 10 years in the last decade. It has accelerated significantly after 2009 which was a severe drought year. Initially, this was attributed to the poor agricultural performance on account of drought and inappropriate trade policy. However, the problem persisted even after improvement in food production, tightening of foodgrain exports and liberalising of imports.

The interesting feature is that no single commodity showed uniformly high inflation in all these years. Different commodities contributed to food inflation in different years. In 2014, it was potato and pulses that showed sharp rise in prices. In 2013, vegetable prices witnessed sharp increase and in 2012 it was cereals.

This indicates that there may not be a major structural problem with any one single commodity. Commodity-specific strategies, with a judicious mix of supply and demand side policies, are needed to address food inflation. Aspects related to technology, price, procurement and trade need to be factored in. Different strategies are needed for storable and perishable commodities.

For example, to address the recent price rise in pulses, the Government of India is considering several measures – new programmes to increase pulses production, hike in the minimum support price (MSP), and procurement by the government agencies and imports by government agencies.

The existing National Food Security Mission on Pulses has yielded satisfactory results in raising production from 15 million tonnes in 2007-08 to about 19 mt by 2013-14. This increase is significant when we consider that the increase in 57 years, from 1950-51 to 2007-08, is only 7 mt! Therefore, it may be advisable to strengthen the existing programme rather than beginning a new programme.

The option of using genetically modified varieties of pulses may be explored to boost production further. The MSP is effective only if backed by effective procurement. Therefore, effective procurement is a sine quo non for assured price support to farmers. Timely imports are necessary in case of domestic production shortfalls to augment supply. Futures markets may be developed further to help in providing the right signals for import decisions. However, streng-thening the supply side alone will not be able to tame food inflation. The case in point is that of rice. Production of rice is quite robust with overflowing stocks.

There is effective MSP and more than 30 per cent of the cereal production is being procured by the Food Corporation of India in the last five years. India is also the top exporter in the world with about 30 per cent of the world rice exports in 2014. Yet, rice is one of the major commodities contributing to India’s food inflation in the last decade.

This is mainly because of lopsided stock management policies. India has built up huge stocks but does not have a rational stock liquidation policy. Excessive procurement and stocking in the last few years have reduced market availability of rice, thus leading to a sharp rise in prices.

Stock liquidation
The cereal inflation cooled after stock liquidation to the tune of 15 mt and this shows the adverse effect of excessive procurement and stockholding on the market prices. Therefore, it is important to dovetail production, price, procurement, stock-release and trade policies for storable commodities.

The strategy for perishable products needs to be different. The seasonality and perishability of fruits and vegetables requires that usage of processed and frozen products needs to be promoted. A major portion of the processed fruits and vegetables market is almost totally export-oriented because of lack of adequate domestic demand.

Onions account for about 93 per cent (in volume) of the total export of fresh vegetables from India. The other major items of export are potato, tomato, brinjal, beans, carrots, chillies, capsicum etc. These are precisely the items that result in frequent price spikes in Indian markets.

It is reasonable to assume that some of the price volatility can be reduced if Indians are encouraged to consume processed and frozen vegetables. This may require cultural reorientation and awareness campaigns since Indians prefer fresh vegetables and fruits. Strict quality checks also need to be put in place.

It is estimated that more than 20-23 per cent of the total production of fruits is lost due to spoilage at various post harvest stages. Processing will also help reduce this spoilage. Growth in the fruit and vegetables processing industry is constrained by infrastructural, processing and managerial shortcomings. These bottlenecks need to be addressed too.
 
(The writer is Associate Professor, Institute of Economic Growth, University of Delhi)