Food inflation in India

Author: Jayati Ghosh, JNU, New Delhi

Food access is probably the most urgent political issue in India today. This is not surprising as the country has experienced one of the most sustained periods of food price hikes since the early 1970s, when it was associated with massive socio-political unrest.

In any case, the lack of food security was already a major failure of the development process, especially the recent period of rapid growth. Nutrition indicators (already among the worst in the world) have stagnated and per capita calorie consumption has actually declined in the past decade, suggesting that the problem of pervasive hunger in India may have become worse.

In the past two years, wholesale prices of food have risen by nearly 40 per cent, and retail prices have gone up even faster. This has been much faster than the non-food inflation rates. In the past year, inflation has moved across food items, with wheat, sugar, edible oils and vegetables experiencing price spikes at different times, but always within very high average food inflation.

Top policy makers in the country have been shockingly inadequate in their response, reacting first with disbelief, followed by a frequently repeated but thus far unsubstantiated conviction that prices would come down very soon. Then the massive increase in the price of essential commodities was welcomed as a sign of greater material prosperity in the country and the success of ‘pro-poor’ schemes of the government reflected in increased demand for food.

Could it be that the economists who are running the country apparently believed that food demand should not increase much even in periods of significant aggregate income growth, and among a population that has some of the worst nutrition indicators in the world? Is that why they did not see any need to work towards increased supply of food, and have been so surprised by even a slight increase in demand?

As it happens, demand for food has been growing much slower than could be anticipated by both income and population growth. Much of that has to do with the distribution of that growth, which has disproportionately denied benefits to the poor who would naturally consume more food. But even so, it is really the conditions of supply — reflecting the continuing policy neglect of agriculture as well as the nature of distribution and the pressures on the market from speculative activity — that have driven food prices up.

This recognition may be why the official arguments have changed somewhat recently. Most recently the officially stated position has been to blame inadequate existing distribution chains — focusing on their inefficiency, rather than any speculative pressures that could also affect supply. But if the traditional supply chains in food items are so faulty and deficient, why did they not create such massive food price spikes earlier? Why was food inflation relatively low in the period until 2006, despite equally rapid GDP growth and the same system of distribution that is now being faulted?

Greater openness has played a big role in exposing Indian food markets to the global price volatility that has been increasingly driven by speculative financial activity in commodity futures. But this is only part of the story. Food prices in India certainly increased when global prices rose. But even when global food prices were falling, in the period June to December 2008, there was continued food inflation in India. And the recent increases in food price in India is more home grown, reflecting the failure of domestic food management, in which temporary shortages have translated into major price spikes.

To remedy this, obviously the medium term strategy requires addressing the problems of agriculture and making food cultivation financially viable for farmers. But distribution is also important. A critical role can be played by a public distribution system in moderating food price spikes and dampening inflationary expectations and tendencies of hoarding. That is why the proposed new Food Security Act that will soon be brought to Parliament is so important — but the current form renders it worse than useless. Only a distribution system that ensures universal access to some basic food items at affordable rates will have any chance of ensuring genuine food security for most of the Indian population.

Jayati Ghosh is Professor of Economics at Jawaharlal Nehru University, New Delhi and Executive Secretary of the International Development Economics Associates (IDEAS). Professor Ghosh is a member of the National Knowledge Commission advising the Prime Minister of India.

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