Food Inflation Trends and Causes

Topics: Inflation, Agriculture, 2007–2008 world food price crisis Pages: 8 (2755 words) Published: February 3, 2012
Food Inflation Trends and Causes

In our country almost 40% people are living below the poverty line and high inflation makes it extremely difficult for them to maintain the livelihood. Though Inflation hits the poorer the most, it also affects the middle class of our society significantly. For past few months Indian economy has been witnessing consistent spiralling food prices. Country got some respite with the food inflation rate declining to 6.60 percent for the week ended November 26, from 8.00 percent in the previous week. According to the data released by Ministry of Commerce & Industry the 52 –week average inflation has come down to 10.45 percent. The annual rate of food inflation is measured in wholesale price index or WPI and currently the base year is 2004-05. Food inflation has been the primary driver of general inflation and this downward trend for past weeks is giving hope amidst the difficult economic situation. This improvement can be credited to better monsoons this year and improvement in supply and distribution of certain commodities. And also,as per the latest crop estimates, the food grain production in 2010-11 reached a record level of 241.6 million tonnes and is expected to touch 245 million tonnes. On examining the food inflation trend for past 3 years India has faced spells of high inflation many times. On a closer look the major factors leading to inflation are different every time. Global scenario had a role to play in the high inflation rates during 2008-09. Along with that the domestic policies related to money supply also accelerated the inflationary trend. But for past one year RBI has been very strict with the monetary policies changing the rate for 13 times since march 2010. This indicates thatthe roots of food inflation lie in the supply side constraints both from the production and distribution side. In this paper we will first look at the factors driving the recent food inflation and then few measures taken by Government to contain it. Recent food inflation in India can be primarily attributed to the following factors: a)Stronger Inclusive growth:

Govt. policies most notably MGNREGS and National Food Security Bill have also contributed to the rising food inflation. MGNREGS, since it was introduced in August 2005, has resulted in a significant growth of rural wages. This has led to an increase in average per capita expenditure in the rural areas much of which was spent on food items. The National Food Security Bill which aims to ensure subsidized food entitlement to almost 75% of rural population and 50% of urban population has resulted in increased food grain procurement by the government. This has caused a demand pressure for food grains while there has been no significant rise in the supply side of food grains. Both these factors have contributed to increasing food inflation spurred by increasing demand.

b)Increase in Minimum Support Prices (MSP) for Food Grains: Recent years have seen a steady increase in MSP for major agricultural products. This is consistent with the steady increase in wages which are input costs to various agricultural activities. Increasing MSP for food grains has further increased the food prices and led to rising food inflation. c)Inefficiencies in Supply Chain:

Though procurement of food grains has remained fairly steady over the years and our reserves have stayed way over our prescribed buffer limits, we have been unable to meet the demand fluctuations. This is due to inefficiencies in releasing food grains when required. Also storage and cold chain facilities to store adequate food items like food grains, pulses as well as perishables like vegetables need to be revamped. d)Change in Dietary patterns towards a Protein rich diet:

With increasing per-capita Income stemmed by strong growth over the last few years, India has witnessed a change in dietary pattern. The proportion of carbohydrate rich food staples has seen a decline as compared to Protein...
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