In recent times, food inflation has been perhaps the most challenging problem faced by Indian leaders and policy makers. The trends of inflation of food prices computed on a year on year basis are as shown in fig. 1.
Figure 1: Inflation figures for Food Articles, Foodgrains, Rice and Wheat (Base: 1993-94) Food inflation in India can be estimated by movement of composite food index in WPI. The food index consists of two sub components, namely primary food articles and manufactured food products. The overall weight of the composite food index in the WPI is 24.31 per cent, comprising primary food articles with a weight of 14.34 per cent and manufactured food products with a weight of 9.97 per cent. The WPI food inflation has moderated to 8.59 per cent in December 2010 after reaching its peak of 20.22 per cent in February 2010.
Of its two components, primary food price inflation touched a historic high in the revised series at 21.9 per cent in February 2010, thereafter declining to 9.4 per cent in November 2010 and once again rising to 13.6 per cent in December 2010. Both primary and manufactured food inflation has been analyzed by selecting specific cases of wheat and sugar.
Primary food price inflation: Analysis into the High Inflation of Wheat Prices
In spite of a positive wheat output for three consecutive rabi marketing seasons (RMS) from 2007-08 (April to March) to 2009-10 and negligible wheat exports during the same period, the WPI inflation rate of wheat was ruling high for the most part of the period from April 2008 to August 2010. The overall average wheat inflation rate recorded from April 2008 to August 2010 was 8.41%.
The primary cause for high wheat inflation appears to be the bullish market sentiment emerging from the low wheat buffer stocks position from January 2005 onwards. The factors responsible for higher market prices during RMS 2007-08 were the continued low levels of buffer stocks, substantial increase in MSP and larger wheat imports between July 2006 and March 2007 at higher international prices.
Figure 2: Wheat Output in MT
Figure 3: Exports and Imports of Wheat
Mismanagement Of Stocks and Procurement
On account of wheat stocks being at precarious levels below the prescribed buffer norms, the government was compelled to increase wheat procurement during 2008-09 and 2009-10. Two reasons can be attributed to this:
1. The first is the complete mismanagement of the food grain economy by the government. (Refer Fig. 4)
2. Aggressive intervention by the private players such as Hindustan Liver, Reliance and Cargil India in the grain market. The key reason for the emergence of this situation appears to be the inadequacy of the MSP offered for wheat during RMS 2006-07 and 2007-08 in relation to the ruling open market price of the grain which, in turn, induced the farmers to sell their crops largely to private players.
Figure 4: Data About Wheat Stocks and WPI Food Inflation Rate, FCI
Figure 5: Minimum Support Prices for Wheat
Consequences Of The Mismanagement
(a) High Wheat Inflation: Between January 2006 and August 2007, the WPI inflation rate of wheat measured, on a monthly basis, was in the range of 7.21% to 19.58% with a period average of 11.70%. (b) Decline in TPDS Allocation: The precarious buffer stock position throughout 2006 and 2007 resulted in a sharp fall in the allotment of wheat under TPDS and welfare schemes in 2006-07 and 2007-08. (c) Decrease in Wheat Consumption: As the combined effect of inadequate wheat procurement, weak buffer stock, high wheat prices and reduction in TPDS allocation and off-take, consumption of wheat declined between 2005 and 2007.
Manufactured food price inflation: The High Inflation Of sugar Prices
Following a decline in sugar cane production in 2007-08, domestic sugar production declined by 2 mt in 2008-09 over the previous year. Surprisingly, despite this production...