Guess who is killing most people. It’s not war or terrorism or naxalism or riots or mobs or gangsters. It’s INFLATION. You will say I’m kidding inflation is just 1.51% in India and not very long ago RBI was worried with negative inflation. But believe me it’s true rising food prices have broken the back of common man in India.
Prices of important commodities are ruling high. Common man is suffering as now even the most basic needs are getting out of their reach. Pick up any newspapers and one can see prices of commodities like sugar, pulses, and wheat, are at historical highs; the highs which were not seen even the severest of droughts. The official inflation rate is still only 1.51% when retail prices have crossed Rs 34/kg, Rs 100/kg, Rs 1600/Quintal for sugar, tuar dal, and wheat 147 respectively.
This is the situation when warehouses of Bhartiya Khadya Nigam (Food Corporation of India) are full of wheat and when the government has removed all the import duties from the import of sugar and pulses import in wake of rising prices and expected poor supply. What are the reasons for such a surge in prices of these commodities? Well, following reasons come to mind:
First, given the poor rainfall this year (however, not that scanty at all), the total sugarcane and hence sugar production is expected to fall. In fact, the estimates for sugar production in 2009 stand at 45% decline which is also going to bring down global sugar production by 11%. However, the demand of the sugar is relatively price inelastic, i.e. no matter what the price is consumption is going to remain more or less same. Reduced supply, constant demand, from basic demand supply equilibrium we know that the prices are going to rise. But the sudden surge is not completely explained by this phenomenon as prices were not this high even in the festive season of Diwali.
In case of pulses, which is experiencing price rise for quite some time now (last year and a half or so), India always had supply demand mismatch atleast over the last decade. India’s current production levels are pegged at around 14 MT whereas demand is around 18 MT and the gap is filled with imports. No significant fall is expected in Indian pulses production. Infact, it is estimated to grow a little bit. Then, fall in global production of pulses or increase in global demand or both may be riding price rise of pulses. I think both of these effects are working together. But Indian which is anyway a under nourished society will suffer as pulses are cheapest source of protein.
The case of wheat is different. The production is increasing and government warehouses are full of wheat. The demand for wheat is also suddenly not increased that much to drive prices to the current historical levels. Then we can only speculate on the price rises of wheat.
Black marketing and hoarding is also one of the prominent reasons for rise in prices of essential commodities. This is evident form all those reports on raids on traders’ warehouses and confiscation of huge amounts of these commodities. There is also report from Press Trust of India, which you can read here, which says that sugar and pulses are stockpiled (in fact in real large quantities – 6.50 lakh tonnes of sugar and 2.01 lakh tonnes of pulses) on ports. This stockpiling is done by importers who have seen the skyrocketing of prices. As a matter of fact, these imports are exempted from any import duty by the government to control the prices. But at present, as we are seeing, exactly opposite is happening.
Third reason for price rises can be attributed to futures trading. Futures trading, which was essentially meant to benefit farmers through which they could hedge their risks of price volatility, is currently serving the cause of speculators. Speculation leads to increase in food prices by creating a demand which is not actually there, i.e. speculators’ demand is not consumption demand. The speculators create a kind of positive feedback loop in which they overreact to a trend there by shifting the prices more then they should in any particular direction. A more detailed explanation of how speculation affects prices can be found here. However, in the present scenario, i.e. recession and various government controls on derivative trading the impact of speculation is, as I understand, not too strong to explain Himalayan highs in food prices.
Another factor which plays role in rising food prices in developing countries is structural shift in nature of agricultural production as farmers in these countries shift from production of food crops to production of cash crops. However, this is more of a long term trend and is not sufficient in explaining current short term trend.
One question which is left unanswered is – did increased money supply play a villainous role here? I am not sure of that either as demand does not increases by much with increase in money at hand. In fact, this is the reason why farmers suffer in case of bumper crops. In such a case supply increases but demand does not even at the lowest of prices.
So, the overall scene seems pretty complex and so are policy implications of each of the factors playing part here. What can policy maker do in order to contain prices? (I’ll write about that in next post).
