Food Inflation – Trend, Causes and Need for An Evergreen Revolution

 

ABSTRACT

Purpose:

This study attempts to outline the trends of food inflation and its impact on the general price level in the Indian economy. The purpose of this paper is to study the magnitude and various causes of the food inflation.

Further, the paper aims to suggest policy measures towards the solution of problem of food inflation in India and the need for ‘EverGreen Revolution’ to tackle the need for increasing agricultural productivity and thus pricing of food crops.

Design/methodology/approach:

To verify the problem of food inflation, the paper mainly utilizes food price index of UN Food and Agriculture Organization (FAO) and qualitative information from various economics journals and research papers to highlight the domestic reaction/initiative/scenario in food price inflation regime.

Findings:

The challenges in achieving stability in food prices lye in the field of increasing productivity as well as effective supply chain management of agricultural produce. To solve the problem of rising food inflation, a coordinated multi-stranded approach is needed which can be designed in form of an EverGreen Revolution.

Practical implications:

Improving the situation of agriculture through the introduction of ‘EverGreen Revolution’ will help Indian government to bring about stability in food prices to a large extent. Stable trend in agricultural prices will thus help in bringing about a macroeconomic stability as Food prices play a major role in pulling up or pushing down the overall CPI during any given year. Moreover, an evergreen revolution when implemented effectively will bring about Food Security which will not only help to eradicate hunger, it will help to break the cycle of poverty.

Originality/value:

The paper presents comprehensive research work in the field of prices in the agricultural sector and highlights the various dimensions of the need for another green revolution. The paper also provides innovative policy measures and a new agri-eco model to solve the problem of low agricultural productivity, poor retailing and thus tackle the instability of food prices.

Keywords:

Inflation, Food Prices, CPI, WPI, Agriculture and food technology, EverGreen Revolution

Paper type – Viewpoint

ACKNOWLEDGEMENTs

I take immense pleasure in thanking Prof. ShashiKant, for having permitted me to carry out this research work.

While bearing full responsibility for any mistakes, the author wishes to thank to her supervisor Dr. S. Prakasam for reading the earlier versions of this paper and making a number of helpful comments and constructive criticisms.

I wish to express my deep sense of gratitude to my Internal Guide, Mrs. Vinita, for her able guidance and useful suggestions, which helped me in completing the research work, in time.

The helpful comments of the reviewers are gratefully acknowledged.

Finally, yet importantly, I would like to express my heartfelt thanks to my beloved parents for their blessings, my friends/classmates for their help and wishes for the successful completion of this research.

INTRODUCTION

A high and sustained economic growth in conjunction with low inflation is the central objective of macroeconomic policy. Low and stable inflation along with sustainable budget deficit, realistic exchange rate, and appropriate real interest rates are among the indicators of a stable macroeconomic environment. Thus, as an indicator of stable macroeconomic environment, the inflation rate assumes critical importance.

The causes of inflation, and the method by which inflation is transmitted through the economic system, are two of the important recurring theoretical issues in modern economics.

Inflation was the primary macroeconomic concern throughout 2010-11. It was driven by a combination of factors, both   structural   and   transitory. Based on drivers of inflation, the year 2010-11 can be broadly divided into three periods.

• In the  first period from April to July 2010, the increase in wholesale price index (WPI) by 3.5% was driven largely by food items and the fuel and power group, which together contributed more than 60% of the increase in WPI.
• During the second period from August to November, while WPI showed a lower increase of 1.8%, more than 70% of the increase was contributed by food and non-food primary articles and minerals.
• In the third period from December 2010 to March 2011, WPI increased sharply by 3.4%, driven mainly by fuel and power group and non-food manufactured products, which together contributed over 80% of the increase in WPI.

Thus, the inflationary pressures, which emanated from food, clearly became generalised as the year progressed.

According to the FAO, international food prices rose by 37% (y-o-y) in March 2011, reflecting both higher demand and weather related supply disruptions. The increase in global food prices was led by the prices of cereals (60%), edible oils (49%) and sugar (41%).

Large supply shocks emerge as an important source of inflation in EMEs. As pointed out by Fischer (1981), supply shocks may have major macroeconomic implications for EMEs like India. Notwithstanding the nature of the shock – i.e., temporary versus permanent – the size of the overall price impact hinges on the importance of the sector in question for overall consumer inflation. For instance, food sector has a relatively larger share in the CPI compared to advanced economies.

Consequently, a marked increase in prices of agricultural commodities not only raise short-run inflation owing to their high weight in CPI, but also can engender a sustained increase in the inflation rate if it raises expectations.

TREND

In the recent years, India has been struggling with high inflation in food items. Food(Primary) inflation accelerated from 5.6% in 2007-08 to 8% in 2008-09 & further to 20.6% in2009-10.In the current year these numbers had flared up to as high as 20% in the first half of the year.

Although the trend of food prices is now downward, the instability still leads to much macroeconomic instability and with the ever increasing population and hence demand for agricultural products never has grown multi-fold. Nevertheless, a fall in food prices is a good sign but still strong policy measures need to be adopted to maintain the trend while increasing agricultural productivity.

CAUSES

This is not the first time that the world economy has witnessed such sharp increase in the food prices. But, rather than this simplistic approach, it is likely that there are many other factors at work. So, it is important to study all these factors before to suggest policy measures.

EXOGENOUS FACTORS

Exogenous factors such as rise in global commodity prices, drought condition in the country have been significant contributors to the inflationary trend.

• International Food price inflation flared to 23% in 2008 & after coming down to -17% in 2009 in 2010 was up again to 7.2%
• The deficient South-West monsoon during 2009, with a short fall of 23% in precipitation, resulted in drought in several states.

STRUCTURAL FACTORS

However, it is increasingly being viewed by researchers & policy makers that there are structural elements embedded in the food inflation being witnessed in India.

Decelerating Production:

Annual Growth in food grain (cereals & pulses) production in the country has been decelerating from 2.8% in the 1980s to 1.6% in the 1990s and further to 1.2% 2000 onwards.

Growing population & per capita income:

India’s population is rising annually by 1.5% (2004-05 to 2009-10) and per capita income is showing robust growth of 6.9%(2004-05 to 2009-10) and the fact that the present level of average nutrition and food intake levels are way below prescribed levels has led to an accelerated growth in food demand.

Changing dietary patterns:

With increase in income levels, the consumption basket is getting diversified from carbohydrate dominated diet to include more proteins such as pulses, milk,poultry & fish and vitamin sources such as vegetables & fruits. The decomposition of food inflation indicates that during the recent period the key drivers of food inflation are non-cereals.

INSTITUTIONAL FACTORS

Besides, there are certain features of the food sector in India that perpetuate inflation.

1. Inadequate Storage Infrastructure: Food storage capacity in the country is very low and the quality of storage infrastructure is not suitable for keeping food beyond a few months. This is particularly true for semi-perishable and perishable foods. Because of this, much of the growth during a year of bumper production cannot be carried over to meet a shortfall in production in the next season. (EPW, 27 Feb 2010, Understanding the Nature and Causes of Food Inflation)

2. Constraints in Importing: In theory, in a scenario of domestic shortage, imports can be used to augment demand. In case of edible oil the theory works very well for India. India’s demand for edible oil far exceeds the production. Large public & private import houses regularly import edible oil and the size of the international edible oil market is quite big. This has been in instrumental in keeping prices of edible oil under control. However, this is not true for other commodities and many constraints are encountered importing:

a. Institutional Limitations: Lack of private import houses in case of certain commodities, heavy government regulation & control over imports, high import duties on grains, vegetables & fruits.

b. Nature of the Market: The classic case here is of that of pulses. The size of the international market is small relative to the growing demand of pulses in India. India already imports 30% of the total pulses internationally traded.

3. Hoarding & Speculation: From time to time episodes of hoarding & speculation come to fore. The availability of opportunity to indulge in these points towards failure of regulations & trade policies in respect of the sector.

Apart from the above mentioned reasons, there are many other factors worth mentioning that add to the already sky-high prices of food.

The food subsidy in India is poorly targeted. Many of the poor receive insignificant amounts of subsidy and depend on the market to access supplies. In spite of this, a reduction in the food subsidy is not in their interest as the reduction in subsidy increases the market price of food.

The inefficient storage and mal-functioning of PDS has also led to inflation of food commodities.FCI informed that 1.83 lakh tonnes of wheat, 3.95 lakh tonnes of rice, 22 thousand tonnes of paddy and 110 tonne of maize were damaged between 1997 and 2007. Thus, total 10 lakh tonne of food grains worth several hundred crores of rupees, which could have fed over 1 crore hungry people for a year, were damaged in FCI godowns during the last decade (Gupta, 2008).

The FCI said in the northern region the damage incurred was several lakh tonne and the PSU spent Rs 87.15 crore to prevent the loss besides spending over Rs 60 lakh to dispose off the damaged food grain. Similarly in the eastern India, the damaged incurred was 1.5 tonne of food grains while the FCI spent Rs 122 crore to prevent it from rooting. But the damaged lot was disposed off after spending another 1.65 crore.

In the southern India, the damage was 43,069.023 tonne despite spending Rs 25 crore. This damage food grain was disposed off after spending another Rs 34,867. While the damage in the Maharashtra and Gujarat mounted to 73,814 tonne, the FCI spent Rs 2.78 crore to prevent the loss. However, this lot was also disposed off later at a cost of Rs 24 lakhs. In Madhya Pradesh and Chhattisgarh, the damage incurred was 23,323.57 tonne of food grains and the amount spend to stop the damage was Rs 5.5 crore.

FIRST GREEN REVOLUTION

The green revolution in agriculture was characterized basically by a capital intensive technology in which exotic varieties of seed, existence (or creation) of assured irrigation, and use of modern inputs like chemical fertilizers play a crucial role.

The term “Green Revolution” came into use in the late 1960s to cover the then predicted consequences of the introduction of new, high-yielding varieties (HYVs) of cereals (especially dwarf wheats and dwarf rices) in association with chemical fertilizers, insecticides and pesticides; and also in association with controlled water-supply (usually involving irrigation) and new methods of cultivation. All of these were seen together as a “package of practices” to be adopted as a whole.

Wheat: Indian wheat production trebled between 1963-64 and 1971-72 from 9.9 million tonnes in the former year to 26.4 million tonnes in the latter year.

Rice: Rice has, generally speaking, had derived much less benefit from the “Green Revolution” than wheat; in fact, in many areas it was still a problem crop, whilst still the basic food-stuff. Thus, while wheat production was trebling in India (1963-64 to 1971-72), rice production only increased by about 16 per cent.

Millets, maize and other crops: The 6th five-year plan gave high importance to all the miscellaneous crops including pulses and along with ongoing green revolution helped improvement in their production.

SHORTCOMINGS OF THE FIRST GREEN REVOLUTION

1. The benefits of the Green Revolution tend to be unevenly spread, even where there is a high aggregate level of adoption of the HYVs and the associated inputs. The short answer, as a generalisation, is that bigger farmers do benefit most, smaller farmers (often with very tiny holdings) less, and landless labourers least of all (indeed they may even be worse off). The reasons are not far to seek, though they vary with crop, local social and land tenure structure, and other factors; for the bigger farmers are wealthier and more influential, and can afford, or acquire through influence, costly inputs like fertilisers, tube wells, and power-pumps.

2. An inevitable consequence of the Green Revolution has been increasing inequality in rural India. As the high-yielding varieties of crops require regular supply of irrigation and fairly large amounts of fertilisers, the advantage has been biased towards the large farms. These farms have also begun to substitute capital (eg., tractors) for labour. Since the new varieties are profitable there would be an increase in capitalist farming, an attempt by landlords to evict their tenants and cultivate the land with hired labour, and an attempt by large farmers to buy out small farmers as far as the land ceiling legislation will stretch.

3. The fruits of the ‘green revolution’ are pocketed mainly by the rich and prosperous farmers and the disparity between them and the have-nots, particularly landless labourers, has increased.

MAIN FRAMEWORK OF THE STUDY

New Agri-Eco System

India is badly in need of a second green revolution, according to Prime Minister, Manmohan Singh. But before we get immersed in evolving the model for the second green revolution, some of the challenges faced by Indian agriculture are worth mentioning here –

• Fragmented, small holdings
• No price discovery, research
• Existence of middlemen
• Lack of cold storage, warehousing
• Poor Logistics
• Retailing – large unorganized sector

To overcome the above mentioned challenges and hence, more importantly, to tackle the problem of food inflation, a new agricultural model is hereby proposed.

The model with no middlemen

Under the new Indian model envisaged by the author, land will remain in the hands of farmers, while corporate farms may take land on lease and also have their own lands for cultivation.  The organized retail players will be directed to invest in modern warehousing and logistics.

Retail

Both organized retail (currently holding 4% of total business) which may increase if government policy to allow FDI in multi-brand retail is implemented and un-organized retail will continue to play their respective roles. The unorganized retail won’t be affected by FDI, according to India Government. The end consumer benefits in terms of superior quality products at affordable prices as middlemen are eliminated.

Warehousing, Logistics

Warehousing, cold storage and logistics network needs huge investments and that is the vital missing link in the conventional system leading to huge crop losses. Here again, the organized retail along with government/ public sector agencies is expected to pump capital to augment capacity.

A better policy option would be to have the new overseas players mandated to invest a portion of their capital for augmenting our warehousing, supply chain, logistics through a public-private partnership model. The augmenting of logistics capacity will in turn benefit the entire stakeholders in the agriculture supply chain.

Requisites of EverGreen Revolution

Even the father of Green Revolution, Dr M S Swaminathan, is now pushing for an “EverGreen Revolution”, for increasing productivity without ecological harm.

Giving roadmap for this change, Swaminathan highlighted the need to start a land and water care movement through a switchover from resource guzzling to sustaining ways. He revealed that the NAC, headed by Sonia Gandhi, has recommended that maize be introduced in PDS along with other nutri-cereals like bajra, jawar, ragi and other millets.

He pointed out that it may not be possible to wean farmers away from paddy in the coming season, since, including alternative crops in the PDS would come only with the enactment of Right to Food Act. The procurement policy would determine land use by the farmer. Paddy cultivation would reduce by 2012, once these grains are included in PDS.Speaking to Times News Network, Prof Swaminathan said, “We must not look at a crop in isolation but in the respect of soil conditions, water, rotation of crops and use of pesticides. Unless that is done, we would be headed for a crisis situation. The need of the hour is a sustainable model of agriculture which in other words is evergreen revolution.”

The need for a second green revolution or more suitably, an EverGreen revolution is being felt because of the sharp and persistent increase in prices of food commodities, which if not tackled judiciously might lead to a nation-wide strong inflationary pressure to the magnitude of about 10%. Green revolution was conceived with the aim of increasing crop productivity. However, certain adverse consequences came to light owing to the excessive use of pesticides, depletion of ground waterlevel, pollution and crop monoculture. To touch the territories left outside the purview of first Green Revolution and correct all the problems magnified by it, a effectively formulated Second Green revolution in the form of a strategically spread EverGreen revolution is required.

The EverGreen Revolution will require:

1. Genetically modified (GM) seeds to double the per acreage production i.e. technology,

2. Private sector to develop and market the usage of GM foods i.e. efficient marketing of the ideas,

3. Linking of rivers as much as economically possible to bring surplus water of one area to others i.e. linking of the rivers.

4. Intervention of the private sector in the Supply Chain Management of Agricultural Produce.

REVIEW OF LITERATURE

As clearly stated in a study on “RISING FOOD PRICES: CAUSES AND CONSEQUENCES by OECD 2008”, the increases in agricultural commodity prices have been a significant factor driving up the cost of food and have led to a fuller awareness and a justifiably heightened concern about problems of food security and hunger, especially for developing countries.

In the same study, it is quoted that The commodity price developments witnessed recently are certainly unusual when viewed from the perspective of the last decade or so, but less so when seen in a longer historical context. Figure1  shows the evolution – in nominal and in real terms – of annual average world prices of wheat, coarse grains, rice and oilseeds from 1971 to 2007 with projections from 2008 to 2017.

While spot prices for April-May 2008 are not shown, for these commodities price levels greatly exceeded the expected annual average for 2008. Two points are clear: first, agricultural commodity markets are notoriously volatile; second, the current price spike is neither the only nor even the most significant one to occur in the last forty years.

Born in 1925 in Tamil Nadu and a graduate of Cambridge, Prof Swaminathan has an extensive CV listing memberships of learned societies, honorary positions and international awards. He is also a scientist with a remarkable research record and is widely accepted as the godfather of the “Green Revolution” – an effort to increase food production while protecting the environment.

According to HariSud, an Economist and a Thinker, the issue at hand is not today but what is likely to happen in next 10 years, if the agricultural production stayed sluggish. Hence Government of India is back into square one i.e. what needs to be done to trigger higher agricultural growth in India.

We may wish to call it the “Second Green Revolution”,but it should be a consistent high-end initiative with both Federal and State governments as full participants.

According to R Sthanumoorthy, agricultural sustainability forms an important component of the EverGreen revolution. Agricultural sustainability is defined as farming that makes the best use of nature’s goods and services while not damaging the environment (Altieri 1995; Conway 1997; Pretty 1998, 2002; Hinchcliffe et al. 1999; NRC 2000). It does this by integrating natural processes such as nutrient cycling, nitrogen fixation, soil regeneration and natural enemies of pests into food production processes. It minimizes the use of non-renewable inputs that damage the environment or harm the health of farmers and consumers.

It makes productive use of the knowledge and skills of farmers, so improving their self-reliance, and seeks to make effective use of people’s collective capacities to solve common resource management problems, such as in pest, water-shed, irrigation, forest and credit management.

CONCLUSION AND SUGGESTIONS

The importance of agricultural shocks for inflation in a country like India has been acknowledged in this study. The fact that food accounts for a larger share of the consumption basket complicates the conduct of monetary policy.

This is because the role of monetary policy is more lucid and its impact is more potent when inflation is mainly driven by demand shocks and when demand changes can be traced by indicators such as monetary growth or output gap. By contrast, the strong impact of agricultural shocks on inflation engenders questions about the appropriate target for policy. Moreover, in view of the relatively high weight of food in the CPI, agricultural shocks not only increase short-run inflation, but also can generate a sustained increase in the inflation rate if it raises inflationary expectations. As a consequence, India should endeavor to liberalize agriculture to reduce the volatility of food prices and such an endeavor is EverGreen Revolution.

The EverGreen Revolution of boosting food-grain output in India to 400 million tons in next 15 years is need of the day. Its achieving is not very difficult. Rather it is achievable if mindset on introducing newer technology is changed. India has to whole-heartedly embrace the new technology. Private sector is better suited to deliver results than government managed schemes. Governments on the other hand can play a key role in expediting irrigation schemes and managing water resources.

REFERENCES

• Saini, G.R. (1976), “Green Revolution and the Distribution of Farm Incomes”, Economic and Political Weekly, Vol. 11, No. 13 (Mar. 27, 1976), pp. A17-A22
• LammMcFall, R. (1979), “Dynamics of Food Price Inflation”,Western Journal of Agricultural Economics, Vol. 4, No. 2 (December 1979), pp. 119-132.
• Farmer, B. H. (1981), “The “Green Revolution” in South Asia”,Geographical Association,Vol. 66, No. 3 (July 1981), pp. 202-207.
• Domaç, Ilker ;YücelEray, M. (2005), “What Triggers Inflation in Emerging Market Economies?”, Review of World Economics / WeltwirtschaftlichesArchivVol. 141, No. 1 (Apr.,2005), pp. 141-164.
• Sud, Hari(March 25, 2007) ;“India’s Second Green Revolution”, ivarta.com/columns/OL 070325.htm
• “ Rising Food Prices-Causes and Consequences”- OECD, 2008 report
• Singh, Sumanjeet. (2009), “Global food crisis: magnitude, causes and policy measures”, International Journal of Social Economics ,Vol. 36 Nos 1/2, 2009, pp. 23-36
• Economy Mirror, Corporate Planning and Economic Studies Deptt., Issue No. 17 of 2010,31st December 2010.
• Raghavan, Sreekumar, (8th December, 2011), “India’s second green revolution based on a new agri-eco system”, commodityonline.com/news/indias-second-green-revolution-based-on-a-new-agri-eco-system—!-44264-3-1.htmlBy

Megha Makhija

Email: meghamakhija1-at-gmail.com