What is Causing Food Inflation in India?

Thu, 2011-02-03 12:13 | CPI(M)

While the Indian people suffer from incessantly rising food prices, the
Government mandarins were busy in the recent period, celebrating the Indian
growth story at the World Economic Forum in Davos. The Deputy Chairman
of the Planning Commission, Montek Singh Ahluwalia, who was earlier in the
news for suggesting that food inflation is occurring because people are
becoming more prosperous in India and eating more, 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 22nd January 2011, food inflation stood at 17.05%.

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 world’s hungry population currently estimated
at 925 million by the UN World Food Programme. Nearly half of India’s
children under three years of age continue to remain malnourished, as per the
National Family Health Survey, alongside half of pregnant mothers who are
anaemic. 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 corporates in the food economy,

international trade in food items and speculative futures trading in
agricultural commodities has weakened the government’s 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 farmgate 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 litre (1 barrel = 159 litres
and 1 dollar = 45 rupees; note that international crude prices have recently
risen over 100 dollars per barrel following the political crisis in Middle East).
However, the retail price of petroleum ranges between Rs. 58 to Rs. 63 per
litre 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 litre 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 corporates. 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 litre 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 foodgrains 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 corporates and MNCs. Inflation cannot be controlled with
liberalized trade and private profiteering in food items.

The influence of private corporates 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.

***

JOIN PROTESTS AGAINST PRICE RISE: FEBRUARY 3-9, 2011

DEMANDS:

1. SCRAP APL/BPL AND UNIVERSALISE THE PUBLIC

DISTRIBUTION SYSTEM; DISTRIBUTE EXCESS FOODGRAIN
STOCKS IN FCI GODOWNS AT BPL RATES.
2. TAKE FIRM MEASURES AGAINST HOARDING.
3. PROVIDE REMUNERATIVE PRICES TO FARMERS AND
INPUTS AT REASONABLE COST TO BOOST PRODUCTIVITY IN
AGRICULTURE.
4. END THE DEREGULATION AND ROLL BACK PRICE HIKES IN
PETROLEUM PRODUCTS; RATIONALIZE THE TAX
STRUCTURE ON PETROLEUM PRODUCTS.
5. PROHIBIT FUTURES TRADING IN FOOD ITEMS AND
ESSENTIAL COMMODITIES.
6. DON’T ALLOW FOREIGN CAPITAL IN RETAIL TRADE.

Retail Prices of Some Essential Commodities in Delhi: 2008 to

2011 (Rs./kg)
 Retail Price Retail Price Retail Price Retail Price
(end- (end- (end- (end-
January January January January
Item 2011) 2010) 2009) 2008)
Rice 23 23 22 17
Wheat 15.5 16 13 13
Atta 17 18 14 14
Chana Dal 35 38 35 35
Arhar Dal 69 84 50 42
Moong Dal 68 81 45 36
Masoor Dal 54 62 62 39
Sugar 34 42.5 23 17
Milk (Rs./litre) 25 22 21 20
Groundnut Oil 135 113 109 121
Mustard Oil 79 71 77 69
Vanaspati 77 57 54 67
Tea Loose 149 156 144 107
Salt Pack (Iodized) 13 12 11 10
Potato 8 9 8 8
Onion 33 23 21 9