What is Causing Food Inflation in India?

While the Indian people suffer from incessantly rising food prices, the Government mandarins
are busy celebrating the Indian growth story at the World Economic Forum in Davos. The Deputy
Chairman of the Planning Commission, Montek Singh Ahluwalia, who was recently in the news
for suggesting that food inflation is occurring because people are becoming more prosperous in
India and eating more, has stated in Davos that not only are the recent increases in petrol prices
justified but diesel prices will also be decontrolled and increased in the near future. Ministers are
also suggesting that the solution to food inflation lie in allowing MNCs like Walmart and Tesco to
open supermarkets in India. These callous and cruel statements are symbolic of a Government,
which has dropped even its pretence of working for the aam admi.
As we prepare to launch the anti-price rise agitation from 3rd February, it is important to lay bare
the real reasons behind the raging food inflation in India, which is playing havoc with the
livelihoods of the people. The blame lies with the neoliberal policy framework of the Congress-led
Government, which needs to be fought and reversed.
Q: What is the current state of inflation in India?
A: The inflation rate in India as measured by the Wholesale Price Index (WPI) has been rising
continuously over the past three years. Inflation in food products has driven overall inflation.
WPI Inflation (year-on-year)
2006-07

2007-08

2008-09

2009-10

All Commodities

6.51

4.82

8.03

3.57

Food

7.99

5.97

9.07

14.52

Source: Office of the Economic Adviser, Ministry of Commerce and Industry, GOI.
As per the latest data, overall WPI Inflation stood at 8.4% in December 2010. In the week ending
15th January 2011, food inflation stood at 15.5%.
Q: The Central Government claims that food prices are rising in India due to higher
GDP growth reflecting increasing purchasing power of the people and growing
economic prosperity. Is this true?
A: Food demand in an economy like ours naturally grows over time. In order to keep pace with
population growth, food production also needs to grow. However, in India, food production and
availability have not grown commensurately. In 2008-09, annual per capita cereal availability in
India was only around 165 kg, which was that of the same level as in 2000-01. In contrast, per
capita cereal availability in China was over 290 kg in 2008-09, and in the US it was over 1000 kg.
Moreover, per capita cereal availability in India fell to 161 kg in 2009-10, despite high GDP
growth. Therefore food consumption for the entire population is certainly not witnessing any rise.
What is happening is that income and consumption growth is getting disproportionately
concentrated within the top 10 to 15% of the population, who are benefiting from GDP growth.
For the bulk of the Indian people, consumption levels are getting further squeezed. If 77% of the
Indian population is spending less than Rs. 20 per head a day as per the Arjun Sengupta
Commission report, one can well imagine what the consumption levels of the majority of Indians
are.

Widespread hunger and malnutrition is the reality of India. India continues to be home to around
25% of the worlds hungry population currently estimated at 925 million by the UN World Food
Programme. Nearly half of Indias children under three years of age continue to remain
malnourished, as per the National Family Health Survey, alongside half of pregnant mothers who
are anemic. Food price inflation is making matters worse for these sections by squeezing their
consumption levels.
Q: What are the main reasons underlying food inflation in India?
A: There are four main reasons. The immediate reason for the spurt in the prices of specific food
items, like onions today or earlier in the case of sugar and pulses, is hoarding. Trader cartels,
encouraged by an inept Government, are mainly responsible for this. Assured of inaction,
hoarders are creating artificial shortages and fleecing people from time to time.
Secondly, the growing penetration of big corporate in the food economy, international trade in
food items and speculative futures trading in agricultural commodities has weakened the
Governments capacity to control food prices. The share of corporate retail in food distribution
has tripled over the past four years. The Government has manipulated trade policies to allow big
traders to make huge profits through export and import of essential food items like wheat, sugar
and onions. On the other hand, the PDS has been weakened considerably through targeting. In
most states, the role of the ration shops, state agencies like the NAFED etc. and consumer
cooperatives in food distribution, has been whittled down. Therefore, the profit margins of private
traders have also increased, reflected in growing gaps between wholesale and retail prices as well
as farm gate and wholesale prices.
There are medium and long-term reasons too. Our agriculture is in a crisis. We are not producing
enough to meet the needs of a growing population. The peasantry continues to be in distress, with
2.5 lakh farmers committing suicide over the past 15 years. State intervention in raising
agricultural productivity has been weakened. The Government is more interested in handing over
this role to big agribusinesses and retail giants like Walmart and Monsanto in the name of a
second green revolution. That will further marginalize the small peasants.
Finally, the cuts in subsidies and price hikes of inputs like diesel and fertiliser are also
contributing to food inflation. The deregulation of petrol prices has led to very steep hikes in the
recent weeks.
Q: The Government claims that oil companies are making losses by selling fuel at
subsidised prices. What is the option but for raising prices?
A: The so-called under-recoveries of oil companies cited by the Government are notional losses.
In actual terms the oil companies are not making such losses. The international crude oil price is
currently ranging between 85 to 90 dollars per barrel, which comes to around Rs. 25 per liter (1
barrel = 159 liters and 1 dollar = 45 rupees). However, the retail price of petroleum ranges
between Rs. 58 to Rs. 63 per liter in the metro cities. This huge difference between crude oil
prices and the retail price of petrol is on account of taxes, over Rs. 30 per liter of which is
collected by the Central Government through customs and excise duties. If we take these taxes
into account, the Government earns much more in taxes on petrol and diesel than it spends on
fuel subsidies. If the Government cuts these indirect taxes, the fuel prices would not rise.
The Government does not want to cut these taxes, because otherwise it has to impose more direct
taxes on the rich and the corporate. Therefore the Government is passing the burden on to the
people. After petrol prices were deregulated in June 2010, petrol prices have been raised 7 times
by the oil companies, the last time being in January 2011, amounting to an increase over Rs. 10
per liter in 7 months. Increase in fuel prices have been adding to inflationary pressures.
Q: What should the Government do to control food inflation?

A: The present steps being undertaken by the Government are inadequate. What we need is a
long-term strategy to fight inflation. The first step should be to strengthen state intervention in
the food economy, both in food distribution and production.
The Government is dithering on the Food Security legislation. The Food Security Act should be
passed without further delay, which must ensure universal food security. The Government is
currently holding stocks of nearly 50 million tonnes of rice and wheat, which is way above the
buffer norms. 35 Kgs of food grains per month should be supplied through a universalized PDS at
Rs. 2 per kg and not limited to the arbitrarily determined BPL families. Moreover, other essential
commodities like sugar, pulses and edible oils should be supplied at fixed rates across the country
through the PDS.
The Government has been sitting on the recommendations of the National Farmers Commission
for the past five years. The Farmers Commission had made several suggestions to make farming
remunerative for the peasantry and step up public investment in agriculture, as well as
agricultural storage and marketing. Besides supporting farmers, Government agencies,
cooperatives and self-help groups should be supported to open more outlets to sell food items like
vegetables, milk etc. Raising agricultural productivity and modernisation of storage and
marketing of agricultural products cannot be left to the private corporate and MNCs. Inflation
cannot be controlled with liberalized trade and private profiteering in food items.
The influence of private corporate and traders in the food economy needs to be curbed. For this it
is essential for the Central Government to take the State Governments on board and coordinate
measures against hoarding and black-marketing. In this regard, it is also important to prohibit
commodity futures trading in food articles, because such trading facilitates speculation on food
prices.
Finally, the costs of agricultural inputs like fuel and fertilisers have to be controlled by the
Government. Deregulation of fuel and fertiliser prices will raise agricultural costs and contribute
to food inflation. The Government must continue to subsidise fuel and fertiliser and rationalize
the taxes on petroleum products. The decision to deregulate petrol prices need to be reversed.
Q: How does futures trading contribute to inflation? Why should it be prohibited?
A: Futures trading is linked to inflationary expectations in the economy. Futures are contracts
made between sellers and buyers for sale/purchase of a fixed quantity of a commodity at a fixed
price at a future date. What commodity futures markets do is to enable selling and buying of these
contracts on a daily basis, like in the stock market.
So, a future contracts of say 10 kg of sugar to be delivered in May 2011 at Rs. 30 per kg, can sell at
more or less than Rs. 30 per kg in January 2011. Someone, for example, buys the contract at Rs.
29 per kg today, because sugar prices are expected to fall in the coming months. However, in the
coming months international sugar prices can rise, may be because the sugar crop from, say
Brazil, fails this year. Then demand for sugar contracts in Indian futures market will also rise and
the person who bought sugar at Rs. 29 per kg can sell it in March 2011 at, say Rs. 35 per kg,
making a windfall profit of Rs. 6 per kg without having to either produce or consume a single
grain of sugar. Moreover, when sugar prices rise in the futures market in India, sugar traders
expect to make profits (a) by exporting sugar abroad (b) by hoarding sugar so that there is scarcity
in the domestic market, which eventually increases domestic sugar prices.
The commodity futures markets therefore achieve two things. First, they link domestic food prices
to the volatile international commodity markets. Second, they provide avenues for pure
speculators, who have nothing to do either with production or trade in food, to emerge as major
players and make capital gains by speculating on food prices.
With the advent of multi-commodity exchanges in India since 2002-03 and the commencement
of online trading, commodity futures trading have grown manifold. Like most countries across the

world, the people who are investing in these markets are not farmers, but big players of the
financial markets who are only interested in making speculative gains. The Government was
forced to suspend futures trading in some essential commodities like rice, wheat, sugar and some
pulses in 2007 due to the pressure from the Left Parties. However, futures trading in wheat and
sugar have once again been allowed by the Government.
India is a food deficient country. Our productivity levels are low and we are not producing enough
to meet the demands of a growing population. Moreover, our agricultural production is heavily
dependent on the weather and above or below normal rainfall (floods and drought), significantly
affects the supply of agricultural commodities. Storage capacity in India is also limited and many
food items cannot be stored because of lack of modern storage facilities. In this backdrop, futures
trading in food items distort the price signals and encourage speculation and hoarding, thus
contributing to food inflation. Therefore, in order to control food inflation, futures trading in food
articles need to be prohibited.