23 Jan 10 The food prices blame game

Today’ news reported that the Congress has put the issue of food price rise on the shoulders of the agriculture minister and the minister in turn has shifted the blame on to Mother Nature. Who is responsible? And who needs to take what steps to get us out of this?

Of all the economic imbalances that economies go through, inflation is the most dreaded one in India. Food inflation, in particular pinches the poor who constitute key vote banks.

So why has the current government allowed itself to be caught doing close to nothing about it?

There are a large number of factors that have created the current situation. So here is a list of the key ones that everyone is talking about:

Supply side

  • No advances in production – Production of foodgrains in India at the end of the current agricultural year in June 2010 is reportedly not much higher than the total production of 209.8 million tonnes in the year 1999-2000.  Drought of 2009-10 is partly responsible for this
  • Increase in minimum support prices to farmers
  • Increase in costs of inputs including labour, thanks to NREGS
  • Increased spread between wholesale and retail prices in recent years (It is not really clear why this has happened)
  • Pure and simple Mismanagement – Sugar is one case –Complete failure to predict trends in cane and sugar production. More recently, imported sugar was reportedly held up at the port awaiting release order for over two months. Another is the non release of stocks of food grain by the government – it is reportedly holding 50 million tones in stock!
  • Hoarding – The left has put the blame here and the prime minister has promised to crack down on it. However, as some analysts have pointed out, hoarding certainly can’t explain the increase in prices of perishable items like vegetables, fruits, eggs, etc. Also, pulses cannot really be hoarded for a long time, as all housewives know; they are prone to spoiling very easily due to insects and pests.

On the demand side, a key factor is the rise in population and incomes.

RBI, the traditional guardian of the inflation rate, is helpless here. The pressures are mainly from the supply side. Clearly, a failure to undertake agriculture reforms and gross mismanagement seem to have got us into this hard place. Whose door does this lie at?

Varsha Chitale

Varsha led the competitive intelligence practice at ValueNotes. As part of her drive to educate India Inc. on the merits of competitive intelligence, she often conducted webinars and seminars on CI for senior executives of Indian companies.

  • Rekha
    Posted at 08:35h, 05 February Reply

    Fundamental reforms in agriculture in India are required to tackle the food shortage.
    An extract from a related article by me –
    Over the last five years, the prices of cereals, pulses, sugar, tea, milk, vegetables and edible oil have more than doubled…
    Of all the resources devoted to agriculture, around 75% have gone in subsidies in food and fertilizer and less than 25% into longer term investments to bring improvements in agriculture. Government needs to take concrete steps investing more in developing techniques for increasing farm productivity and less in subsidies.

  • Varsha
    Posted at 04:50h, 02 February Reply

    Thanks for your comment Milind. Certainly, farmers in India are as “rational” as those anywhere in the world. I have been told that one should not take that for granted – We actually read a research paper way back in college that tested whether farmers in India behaved rationally!

    Anyway, that apart, I ran into nice article in “India Today” yesterday that precisely talks about what politics does to agriculture in India. You might find it interesting. “The world over and in textbooks of basic economics, price is defined as a function of supply and demand. In India, there is a third variable. It is called politics….” http://indiatoday.intoday.in/site/Story/81428/Cover%20Story/Why+prices+won%27t+fall.html

  • Milind Bhanoo
    Posted at 19:39h, 01 February Reply

    Whether it is one political party in power or another, it is difficult to imagine a different outcome. So, politics aside, there must structural reasons unique to India, that disable the mechanism that regulates supply. Farmers in India, a shrewd bunch the world over, seem unable to reallocate resources and increase output when prices go up.
    What am I missing?

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