Trends in Food Price Inflation

• Of its two components, primary food price inflation touched a historic high in the revised series at 21.85 per cent in February 2010, thereafter declining to 9.4 per cent in November 2010 and once again rising to 13.6 per cent in December 2010.

The following chart shows the Trend of the Inflation in Food Items and Food Articles in the Last 2 years.

The economic Survey in a separate box says that Food inflation has been unexpectedly high in recent weeks—driven by surging prices of vegetables, fruits, dairy, oilseeds, and spices. It was unexpected because good rainfall in 2010 was expected to bring down prices, but it did not.
Though, it did for cereals (wheat, rice) and pulses, which together provide most of the energy and protein intake of households in India, especially of the poor. But the surging prices of other foods caused the overall food inflation to rise. There is critical importance of food in India’s setting—with high rates of malnutrition and household food spending accounting for above 40 per cent of total household expenditure (versus some 7-8 per cent in richer countries).
In the previous decade, there was a sudden surge in global food prices in 2006-08, which subsequently crashed with the global financial crisis. However, the prices again started surging since late 2009, and surpassed the 2008 peak—led by sugar, oils and fats, and cereals (but not dairy and meat). In this context, a study was done in July 2010 by Baffes and Haniotis, looking at the previous 2006-08 price rise. This study said that it was due to a generalized commodity price rise, especially in oil, itself caused by a world awash with liquidity and a falling dollar. The study says that it was not due to rising demand in emerging markets (such as China and India) or a shift to Biofuels or a trend rise (because price variability dominates any trend).
Is Food Price Inflation in India is driven by International Trends?
The Economic Survey says that some spillovers of global prices to Indian markets are inevitable. But world trade in agriculture is often very thin, as there are large trade restrictions and tariff wedges between domestic and international prices. So, in India, the domestic food prices , though cannot be fully insulated from global ones, yet volatility of global prices is far greater than that of domestic prices. The trends show that India’s prices have been much more stable, avoiding the highs and lows. Recently, the Cereal prices have been decreasing in India, as compared to the Global Prices.
Then, why there is unexpected rise in Food prices in India?
The sudden rising is seen in the prices of vegetables, spices, dairy, and similar products. One explanation, the survey tries to give is that the rising incomes in India are driving prices higher, as consumers are presumed to be shifting from low-value products to higher value ones (Engel’s Law).
However, there is a demand side explanation to these phenomena. There might be the generally high supply elasticity in such products that should prevent this. When some unexpected supply or demand shocks happen, it becomes often easier for commodity prices to spike temporarily, which is usually unrelated to fundamentals and driven sometimes by local cartelization or other conditions such as sudden flows of speculative capital into thin commodity futures markets.
The Survey gives example of Onion to explain this: Onion prices surged from Rs. 15 per kg to over Rs. 80 per kg over a matter of weeks, attributed popularly to the effects of extended rainfall and damaged crop in Nashik. However, onions are in fact grown all over India, and the all-India market is generally well-behaved and competitive—in that local prices converge to national ones. However, in the presence of unanticipated supply or demand shocks, local onion markets do fragment and become much more ‘ill-behaved’ and it is possible to observe sudden temporary spikes and divergence that is more consistent with local cartelization conditions, supported by cascading entry barriers along the supply chain (including the restrictions of the Agricultural Produce Marketing Act [APMC] and the restrictions and fees at mandis).
List of Topics : Economic Survey 2010-11