What You Should Know About Food Inflation

(Published in The New Indian Express, School Edition, dated August 29, 2011, retrieved from http://expressbuzz.com/school/what-you-should-know-about-food-inflation/308513.html)

Inflation is the increase in the price of goods and services in a country’s economy. This is measured taking various factors into account. When we speak of food inflation, this means the price of food articles such as vegetables, oil and spices is rising. The rate of food inflation was very high at the beginning of this year, and has come down recently.

But the rate of inflation is still fluctuating, and the prices of some goods, such as sugar, have doubled over the past three years. In fact, experts say this is the first time since the early 1970s that food prices have shot up so steeply and stayed high for so long. Compared to inflation rates of non-food items, those of edible goods have soared. So the issue is a crucial one.

How is Food Inflation Calculated?

The rate of food inflation is the percentage of increase in the price of food articles, compared to the previous week, month or year. Right now, the year 2004-2005 has been taken as the base year for calculating inflation.

In India, inflation is based on the Wholesale Price Index (WPI), which would be the price of a basket containing the food items taken into consideration. But, this is not the amount you would pay for a basket of those goods - it is the amount the shopkeeper would pay the supplier for them. You’re likely to pay a higher price for the same food items.

The WPI figure is announced every Thursday, for the week ending the Saturday before the previous one. For example, the inflation rate for the week ending July 30 is announced on August 11. This announcement is very important, as it can affect the stock market.

What Causes Food Inflation?

There are many conditions under which food prices can shoot up. One of the most common is mismatch between demand and supply. When demand is more than supply, there is a shortage of goods. This can be caused naturally by a poor monsoon, which leads to low yield of crops. This also has the effect of leaving farmers in debt, forcing them to push up prices so that they can afford labour, rent and upkeep. With the cost of fuel and fertilisers going up too, maintaining a farm is expensive!

But, shortage may even be caused artificially by hoarding. Traders may store non-perishable goods in go-downs and simulate a shortage. Once the prices go up, they sell the goods and make huge profits. Though this is illegal, it has been known to happen, especially with food items that don’t spoil easily, such as onions, sugar and pulses. Worryingly, a kilogram of onion today costs four times what it did 3 years ago, and the prices of sugar, arhaar dal, moong dal and masoor dal have doubled at some point in the last three years.

Another factor that affects supply is population growth. With more people to feed, agricultural production has to increase correspondingly. But economists have said this is not much of a factor in India, as people don’t seem to be consuming more food. The cereal available per person has stayed almost the same over the past ten years, while the calorie intake per person has dropped.

Problems in distributing food can pose a major problem. The Public Distribution System (PDS) consists of ration shops, state-run consumer cooperatives and the National Agricultural Cooperative Marketing Federation (NAFED). Certain economists have said India lacks modern storage facilities, and so food items – especially perishables – cannot be stored safely for long periods of time. This, again, causes a shortage in supply, as the food will spoil and be wasted if it is not distributed quickly.

Some people are worried about the entry of supermarket chains, which will affect the profits made by small shop owners, who in turn drive up the prices of their food items to make up the loss.

Stock market activity, such as futures trading, can also affect food prices. As more retail chains get into the food business, and more food items make it to the export-import list, trading in the commodity futures markets is increasing.

Now, this is how a futures contract works – a buyer and seller can strike a deal to trade in a fixed amount of a particular commodity at a particular price, at a future date. For example, the buyer may want to purchase wheat at Rs. 16 per kg in November 2011. This gives the seller some security, in case the price of wheat goes down, as he will make a profit. But, if the price of wheat goes up to Rs. 20 per kg, the buyer will still purchase it at Rs. 16 per kg, and can sell the contract for a higher price. If he were to buy and sell 100 tonnes of wheat, he would make a profit of Rs. 4 lakh.

What’s important here is that the futures market in India is exposed to fluctuation in international prices, as many of these goods are imported and exported. So, if the price of wheat goes up elsewhere in the globe, the demand for wheat contracts in India would increase, and the buyer can make a larger profit.

As there is a big risk involved, and huge gains can be made, there is a chance that speculators may manipulate the market, and hike up prices. Not only people involved in the production and trade of food, but others looking to make financial gains can speculate in these markets. In 2007, the government suspended futures trading in essential items like cereal, sugar and pulses, but has allowed it again.

How Does Food Inflation Affect You?

The problem with any kind of inflation is that as the cost of a product goes up, the value of money goes down, as each rupee buys less than it used to. When purchasing power goes down, you will spend more and save less money every month.

But food inflation has dangerous consequences. With essential items like cereal and vegetables getting more expensive, a large section of the population cannot afford to eat. According to the National Family Health Survey, almost half of India’s children under the age of 3, and about half the pregnant women are not getting enough nutrition.

What is the Government Doing?

For several months, policy makers said the food inflation was temporary, and would drop soon. Last year, Finance Minister Pranab Mukherjee said it would take some time to step up domestic supply, and the government would try to bridge the gap by importing food items. He said opening up the market, in addition to subsidies on goods like edible oil for the Below Poverty Line (BPL) population, would have a ‘moderating effect’.

However, food inflation continued to remain high. Later, Deputy Chairman of the Planning Commission, Montek Singh Ahluwalia, suggested that the supply couldn’t meet the demand because people are becoming richer and eating more. But now, the government has begun to focus more on the deficiencies of the distribution system.

An efficient PDS can tackle the problem of hoarding and keep futures trading under control by putting a check on inflationary expectations. The government plans to introduce the Food Security Act, with the aim of ensuring easy access to essential items at a reasonable cost. The Bill is likely to be discussed in December.

However, some economists are worried about the effectiveness of the Food Security Bill in its present form.

FEATURES OF THE FOOD SECURITY BILL

Subsidised food grain to be provided to nearly 90 percent of the population

Mid-day meal scheme and community kitchens to be introduced

Cooked meals for pregnant women and lactating mothers up to six months after childbirth

The Unique Identification System will be used to ascertain the identity of the individual

Increase in subsidies on various food items

CAUSES FOR CONCERN IN THE FOOD SECURITY BILL

There is a cap of 75 percent of households in rural areas and 50 percent of households in urban areas for entitlement to benefits.This may not cover all of India’s needy.

The fixed monthly quota of 35 kg of foodgrains per family has been modified to 7 kg per individual, and families with fewer people may lose out. Also, 7 kg is only half what was originally proposed in the Right to Food Bill.

Above Poverty Line (APL) families may be affected as the price of foodgrains has not been fixed. The Bill recommends that they be 50 per cent of the minimum support price (MSP) given to farmers for wheat and rice. If the MSP is increased as the farmers are demanding, it will have an adverse effect on APL families.

The prices suggested by the Centre for cereals are the same or higher than those prevailing in some states under schemes for BPL families.

The costs of distribution will be borne by the state, and this will affect poorer states, which are likely to have more BPL families to take care of too.

It deals mainly with distribution of food grains, and does not take into account other kinds of nutrition, such as protein supplements, pulses, oil and vegetables

YEAR-ON-YEAR FOOD INFLATION

YEAR	2006-07	2007-08	2008-09	2009-10	2010-11
RATE OF INFLATION	8%	5.6%	8.6%	14.5%	11:4%

FOOD INFLATION RATES THIS YEAR

WEEK ENDING	FOOD INFLATION RATE
July 30	9.90%
July 16	7.33%
July 9	7.58%
July 2	9.44%
June 25	7.61%
June 18	7.78%
June 11	9.13%
June 4	8.96%
May 28	9.01%
May 21	8.06%
May 14	8.55%
April 30	7.70%
April 23	8.53%
April 16	8.76%
April 9	8.74%
March 26	9.18%
March 12	10.05%
March 5	9.42%
February 26	9.52%
February 19	10.39%
February 12	11.49%
February 5	11.05%
January 29	13.07%
January 22	17.05%
January 15	15.57%
January 8	15.52%
January 1	16.91%

Source: Office of the Economic Adviser, Ministry of Commerce and Industry, GoI

(Note: This is not opinion. This is an explanatory article for the school edition of The New Indian Express.)