Food Inflation in India: Causes, Solutions

Includes: EPI, IFN
by: Disruptive Investor
The wholesale food prices in India touched a 10 year high with food inflation coming at 19.95% for the week ended December 5, 2009. This article looks back into the spiraling food inflation in 2009, its implications, reasons and solutions.
The table below gives the retail prices for some of the key agricultural commodities in four Indian metros. This is just to give an idea of how the prices have moved in the last one year.

Food Price Inflation
Clearly, the prices of all key agricultural commodities have risen sharply. Significant price increase has been observed in commodities like arhar dal, sugar, potatoes and onions.

The key reason cited for the spiraling food price inflation is the bad monsoon in India.

However, I have some other reasons (not so much talked about) for the spiraling food price inflation in India.
  • In 2008, it was estimated that India loses INR 58,000 crore worth of agricultural food items due to lack of post harvesting infrastructure such as cold chains, transportation, and storage facilities. If the Government ensured proper storage facility, food inventory would have been more then sufficient leading to prices remaining under control. I am not sure if the Government is still doing enough to have proper food storage facilities in the country.
  • The Indian farmers are largely dependent on the four-month monsoon season during which 80% of the year's total rainfall takes place. The reason is that 60% of the country's total cropped area is not irrigated. The Government has again been talking about inclusive growth and stress on rural India. These facts don't point to any meaningful efforts to help farmers in a country where over 10,000 farmers have committed suicide over the last decade.
  • The per hectare agricultural yield in India is half that of China. This again points of inefficiency and the failure to help the farmers adopt latest technology in order to increase the crop output.
These things have not been taken care of in the past and even when discussed, nothing substantial has been done in order to overcome these challenges. I hope steps are taken in the near future to ensure minimal food wastage, high crop productivity and increase in irrigated land. I would like to add here that if the INR 58,000 crore of food crop is not wasted on an annual basis, India's deficits could be wiped out in less then a decade without any other measures being taken.

However, looking into the very near term, some ways to ease food prices would be:

  • Crackdown on hoarders and black marketers could help prevent prices from rising further. This step might not significantly reduce prices but will ensure that prices don't escalate further.
  • The Government should allow the private sector to import and store the primary agricultural commodities at zero import duty. This will help east the prices to a large extent.
  • The Government also needs to unload the wheat inventory it has in its storage locations. This will have an immediate impact on the prices.

Impact of Food Inflation on Indian Consumers

The high food price inflation is having a significant impact on the Indian consumer in general and the Indian middle class in particular. The chart below gives the way the Indians spend.

As evident from the chart above, nearly 43% of the personal disposable income goes into food products. Unfortunately, this is the segment which is experiencing highest inflation. A high food inflation ensures that consumers have to cut back on their spending (on non-necessary items). This in turn will impact the consumption part of the GDP growth.

Another important point to note is that a majority of Indians still don't invest in equity markets. They prefer going for fixed deposits which are currently yielding only around 8-10% annually. On the other hand, inflation for an average household is easily around 12-15% (even education, health and housing cost are going up).
Thus, a large section of the population are losing out on their purchasing power without realizing about it. For those who realize this, there is only one option - to speculate in the stock markets and try to get returns which beat the annual inflation rate. In this also, most of us know how many retail investors actually make money in the markets.

Considering these factors, it is very important for the Government to try and control the inflation or at least try and ensure that these circumstances do not arise again in the future. As mentioned above, there are several ways of curbing food inflation. It is only that the Government needs to be more proactive rather then being reactive.

Disclosure: No Positions