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Food Price Rise in India

By gyanvikas Apr 01, 2011 2645 Words
MBA 617 Assignment 1
Food Price Rise in India
Akshaya Pandey, Chandan Jha, Gyan Vikas, Tarun Rawat
Food price rise in India
Last couple of months have seen sharp increases in food prices in India. The inflation in prices of basic food materials has raised alarms for the government as well as for common people. According to figures released by commerce industry on 18th Feb 2010, the annual inflation in food prices rose to 17.97% for the week ended on February 6, as compared to 17.94% in previous week. In spite of promises from the Agriculture Minister Mr. Sharad Pawar and Finance Minister Mr. Pranab Mukharjee, government has failed to bring down the prices. Rise in sugar price in last couple of months is one such example. There has been a sharp fall in sugar production in India. Ironically, this has happened in a nation which is the largest consumer of sugar in world. The government is hoping for a record production of wheat this year and slight reduction in sugar prices in coming months. But, a lot depends on various factors responsible for this volatility in food prices. Millions of people have to cut their food consumption so that they can coax it with their monthly budget. All of this is the result of the backdrop of various policy decisions made by the government and rise in the role played by the agro – business and financial companies in Indian Food Market. The price rise of some essential items over 52 weeks as reported in Times of India is: Potato: 40.57 %, Pulses: 41.24 %, Cereals: 12.15 %, Rice: 9.90 %, Milk: 14.16 %, Wheat: 15.47 %, Vegetables: 20.97 %, Fruits: 8.67 % [1]. The whole sale price index of food prices is increasing at the highest rate since last 11 years. This turnaround can be attributed to imbalance between demand and supply. On one hand, we have increasing population, income growth and increased consumption while on the supply side we find lower production due to natural disasters, declining trend in arable land, unavailability of good irrigation water and rising production and transport costs due to its association with oil prices. The saddest point is that it is coinciding with highest GDP growths each quarter. The common argument given for price rise is that Indian Population has risen at a much faster than Food Production. This inability of Food Production to keep pace with population rise has resulted in Demand – Supply mismatch, causing a rise in prices. However, this phenomenon cannot be explained by such simplistic reasoning. In this article, we are making an effort to analyze various factors responsible for this phenomenon. We will identify various forces involved in this crisis and actors influenced by this. Farmers are the most directly associated people with food. They are in the beginning of this food supply chain. Government plays the role of a facilitator and provides a partial interface between producer and consumers through its schemes such as PDS, MSP etc. It acts as a policy maker with its decisions having a far reaching impact on Food Production & Food Price within the country. With the changing policy framework, a new dimension has been added to the Indian food market in the form of corporations & large retailers. They are playing an increasing role in the production & procurement of food and are now a major force to reckon with. With the introduction of Commodity trading and derivatives, the food prices are now closely linked to the Financial Institutions and Traders. Rising input prices:

Cost of production in agriculture is an important factor in rising food prices. With increasing inflation, input items are getting costlier day by day. Consider Fertilizer which is an international commodity. The subsidized retail price for chemical fertilizers has remained unchanged since February 2002. But, the use of fertilizer has increased several percentage points since then and it is visible in the amount of fertilizer that government has to import from outside to cater to this demand: Source: The Hindu, Business Line [2]

To ensure balanced use of all fertilizers, government is now proposing nutrient based subsidy instead of current product based subsidy. If the purpose of this step is to promote balanced use of fertilizer then there is no point of objection. But, if it is a step towards deregulation of fertilizer prices then it is going to be a big blow on Indian agriculture. Similar is the case of water irrigation in agriculture. The use of ground water for irrigation has increased several times in last couple of years which has resulted in depleting sources of ground water. This over exploitation is in coordination with poor and irregular rainfall in various parts of country. There has been not much effort to harvest this rainwater. There is a desperate need of improving the efficiency of our water and irrigation resources. Another factor that has contributed to the price rise is fluctuations in oil prices, which affects agricultural costs directly and indirectly in several ways. This is because of the growing significance of energy as an input in the cultivation process itself as well as in transporting food. Greater mechanization of agriculture in the form of tractors, harvesters and threshers requires more oil to run these machines. The spread of irrigation, especially groundwater exploitation, requires energy in the form of diesel or electricity to run pump sets. The impact of the rise in energy costs is more now than before because in India, government has not given the kind of protection that farmers of developed countries like US have. Instead it has reduced protection and subsidies on agriculture. This means that high costs of energy directly translate into higher costs of cultivation, and, therefore, higher prices of output. All this directly impacts the price of food grains. Agriculture is not an independent sector. The terms of trade between agriculture and non – agriculture sectors are important in determining the cost of production. Now that these terms are getting costlier, it is obvious that the price of end product, food, has to rise. Area under food crop cultivation:

Land is a non – expandable source. One can try for increase its efficiency but, cannot increase its size. Growing population and industrialization has increased pressure on land utilization in India. The table below shows area under cultivation of food grains: All-India Area, Production and Yield of

Food grains from 1950 - 51 to 2007-08
along with percentage coverage under Irrigation
Area - Million Hectares
Production - Million Tonnes
Yield - Kg./Hectare
Year
Area
Production
Yield
% Coverage
Under Irrigation
1
2
3
4
5
1950-51
97.32
50.82
522
18.1
1961-62
117.23
82.71
706
19.1
1971-72
122.62
105.17
858
24.5
1981-82
129.14
133.30
1032
29.6
1990-91
127.84
176.39
1380
35.1
2000-01
121.05
196.81
1626
43.4
2007-08*
124.44
230.67
1854
NA
* Advance Estimates as released on 09.07.2008
Source: Agriculture Statistics at a glance2008, Ministry of Agriculture, GoI, New Delhi [3] The population of India has grown more than 300 % since independence but, area under production has increased by only 28%. It has not been able to sustain the ever increasing demands of growing population. Moreover, there has always been pressure from industrial sector and proposed SEZs in country. The same source also says that there has been negative growth of 0.480 % / year in gross cropped area in the area 2004 – 05. This diminishing food grain area in country is going to raise serious concern in longer run. Another important aspect of this is shifting of agriculture patterns in country. More farmers are now shifting towards non – food agriculture because of its high return. Also, the tastes of consumers are shifting towards processed food from traditional food. In Maharshtra, people are preferring wheat roti over traditional bhakar roti (a kind of jwar) while farmers are shifting towards producing cotton. This rising imbalance is leading towards increase in food item prices. Distance between food production and food consumption:

This is a very small factor in food price rise but plays an important role. Food that is produced in one part of country travels across several hundreds of kilometres to reach its consumer. This is mainly attributed to varying taste and income level of the consumer. Because of increase in income, consumer’s demand of different food items is also increasing. To cater to this demand food has to cross several state borders and then reach to consumer. Hence, its price increases from what it was there in its native state. It is important to promote localization of food production and food consumption to stop this trend. At the local level, it is important to improve safety mechanisms for poor people. In the time of rising prices, the poor should have access to subsidized food. Weakening of Public distribution system in India:

The Public Distribution System (PDS) has been one of the most crucial elements of the food policy and food security system in the country. But the Indian Government has been deliberately weakening the public distribution system under World Bank pressure to benefit the agribusiness corporations. India witnessed a shortage of wheat in 2005-2007 because systematically the food grain (wheat and rice) buffer stocks were lowered through below target off take of grains by the government from the farmers. In order to make a case for wheat import under US pressure, the government went slow on the procurement of wheat in 2005-07 and deliberately kept the government’s purchasing price low to allow multinational corporations to enter the trade. In 2006, Cargill India, the Australian Wheat Board, and two Indian based companies with a lot of foreign equity, ITC and Adani Export, procured 30 lakh tonnes of wheat. In 2003-04, the government procured 16.8 million tonnes of wheat which went down to 14.8 million tonnes in 2004-05 and it further reduced to 11.1 million tonnes in 2005-2006 and last year it was just 9.2 million tonnes.11 The government deliberately created a situation of food insecurity in the country by allowing multinational corporations to move into agribusiness and large procurement. [4] Commodities Trading in Food Market:

In 2003-2004, the Government of India has allowed the Futures Trading in Commodities. It was a part of Liberalization policies being pursued by the Government. The Rationale behind its introduction was Auction in these “free markets” would enable open-market price discovery of commodities through buying and selling on the exchanges. Thus, it would enable farmers to participate and realize better prices for their products. It was also hoped that Hedging instruments such as Futures & Forwards Contracts would act as “Price Stabilizers”. [5] However, unregulated commodity exchanges allowed all investors, including hedge funds, pension funds and investment banks, to trade commodity futures contracts without any position limits, disclosure requirements, or regulatory oversight [6]. Also the shrinking of food procurement under PDS scheme and shrinking buffer crops in the government coffers encouraged private speculators to speculate on the prices of the food crops. The large scale rigging & speculation in these prices can be judged by the fact that the values of trade in these exchanges were more than seven times the values of agricultural commodities in the country. To compound the problems, the small and marginal farmers, for whom these measures were taken, are not able to take part in these due to high membership costs & large lot-sizes. The net result of it was that both cultivators and food consumers lost out through extreme price instability. The cultivators get low prices for their products before it passes into the hands of corporate houses & traders. The only gainers were the financial intermediaries who were able to profit from rapidly changing prices. Globalization of India:

With India’s membership in the WTO, Indian agricultural policies underwent significant changes. Agriculture became more integrated into the world commodity market and conformal to the liberal policy regime advocated by the IMF. The Export oriented agriculture is gradually reducing the area of food cultivation, as more and more land is being used for cash crop production rather than on subsistence crops. Though, the effects of these structural changes was not being felt earlier, the sinister impact of same is being felt over last couple of years with the shortage of food crops resulting in the price rise. Also, lower restrictions on Exports & Imports have made India vulnerable to Global Price rise in Food Commodities. Contract Farming:

Contract farming has been expanding steadily in India; at present, it is practised practically in all products of Indian agriculture. Some of the more prominent examples are:
 Tomato cultivation in Punjab, Haryana and Rajasthan
 Sunflower cultivation in Andhra Pradesh and Karnataka
 Fruits and vegetables in Tamil Nadu, Maharashtra and Andhra Pradesh. Take an example of PepsiCo foods which requires over 40,000 tonnes of tomatoes annually for making tomato paste which mainly serves the demand of affluent customers. There has been a shift in the Market structure. As a result agribusiness companies are having more control over all aspects of cultivation and distribution, from supplying inputs to farmers to buying crops and even in some cases to retail food distribution. Usually, better quality crops are collected by corporations and inferior ones reach market. Huge shift in supply chain from directly to consumer to a new route via companies is causing shortages in local market hence, resulting in food prices. Hence, Agribusiness firms and Retailers have played a big role in the recent food crisis. Conclusion:

The major reasons for the current price rise can be traced to the Policy Framework of the government such as Dismantling of PDS, Urban Centric Policies such as indiscriminate creation of SEZ’s. Also, the entry of large firms such as PepsiCo, HLL in contract farming has resulted in fewer crops available for the markets. The silver lining is that these changes are not irreversible. There is still time for the Policy Makers of the country to reflect back on their decisions and make mid course correction. For example, the contract farming enables the farmers to earn better return from his produce, thus encourages him to continue production. But the government must ensure adequate mechanisms to ensure that he is not hand twisted by the large corporations. Also, since contract farming is limited to the large farmers and small farmers get marginalized and finally, in pursuit of better returns they switch over to other non – food farm products. The need of hour is to provide protection to them so that they become more inclined towards food – farming. The policy structures such as Public Distribution Systems, FCI and Minimum Support Prices need more support from government rather than being dismantled. This will also ensure that government has enough buffer stocks which can be used to keep prices in check in times of shortage. Corrective measures are also needed to keep a check on food hoarding by large corporations and traders. References:

[1] Source: ToI, Feb 11, 2010
http://timesofindia.indiatimes.com/biz/india-business/Food-price-inflation-rises-to-1794-/articleshow/5559797.cms [2] Source: The Hindu, Business Line http://www.blonnet.com/2010/02/23/stories/2010022353162000.htm [3] Agriculture Statistics at a glance2008, Ministry of Agriculture, GoI, New Delhi http://dacnet.nic.in/eands/latest_2006.htm

[4] Food Crisis Exposes Failings of India’s Agricultural Reforms- Afsar

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