GS Paper 3: Indian economy and issues related to planning; Effects of liberalisation on the economy, changes in industrial policy and their effects on industrial growth.
In news: According to a new report by Nomura Global Market Research, the 50 countries most vulnerable to food price surges in the coming months largely belong to the Emerging Market group. The top 50 together account for almost 60 per cent of the global population – reflecting the massive number of individuals and households that are vulnerable. India is ranked 44 in Nomura’s Food Vulnerability Index (NFVI) that compiled the vulnerability of 110 countries in the world.
Food price inflation
Food inflation is volatile. Agricultural prices tend to fluctuate because demand and supply are both inelastic and supply can vary due to the weather. However, despite the usual volatility, food prices seem to be showing a strong upward movement, reaching record highs in recent years. For example, in India, a booming economy has GDP expanding at 9% a year. Official inflation is around 7%, but, headline food inflation is more than double at 17.8%
Nomura’s Food Vulnerability Index?
The NFVI ranks countries on the basis of their exposure to large swings in food prices. To arrive at this estimate, Nomura looks at a country’s GDP per person, the share of food in household consumption and the net food imports. Typically, lower per capita GDP, higher share of food in household consumption and high net food imports would make a country more vulnerable to spikes in food prices.
Food price inflation in India
India has been ranked 44 out of 110 countries; a higher rank is worse. It is true that, at 4.6%, India’s retail inflation – that is the one based on Consumer Price Index – for October touched a 16-month high. Worse, most projections suggest that retail inflation will stay above the RBI’s target level of 4% until the end of the current financial year. At one level this is odd because there is a lack of demand in the economy as it is deceleration every passing quarter.
A big part of the reason for the spurt in retail inflation has been the jump in food prices. Food inflation grew by almost 8% – almost double the rate of overall retail inflation. Key items that contributed to this rise were pulses (inflation rate 12%) and vegetables (inflation rate 26%) and fish and meat (inflation rate 10%).
Forecast of food inflation in India
“India’s food price inflation has started to rise sharply after a multi-year decline – from an average of 8.5% y-o-y during 2012-15 to an average of 2.4% during 2016-19 (until September),” Nomura states but cautions that this trend is likely to reverse. It specifically points to two commodities – pulses and sugar, which have a weight of 6% and 3% in the CPI.
“The last 2-3 years of low food prices have resulted in lower production and this is setting the stage for higher inflationary pressures in FY20. Supplemented by rising inflation among cereals and proteins, Nomura expect food & beverages price inflation to rise to 3.7% y-o-y in 2020 from 2.8% in 2019”.
CPI and WPI inflation
Consumer price index (CPI) inflation, also known as retail inflation, in India accelerated to 3.99 per cent in September from 3.28 per cent a month earlier, primarily because of higher food prices. It was a level nearer to RBI's medium-term inflation target of 4% than any time in the last 14 months.
During the same time, wholesale price index (WPI) inflation fell to 0.33 per cent from 1.03 per cent in August. It was the lowest level in WPI in more than three years — due mainly to a fall in prices of fuel and manufactured goods. The previous low for this index was 0.1 per cent, seen in June 2016.
There have been more than a few times when this gap in CPI and WPI has been witnessed. There is a host of reasons for it, which include the difference in weightage assigned to different goods/items that make up the two baskets. For example, in the consumers basket, food has a much higher weightage than in the wholesale basket. This essentially means a rise in food prices will cause a bigger spike in the CPI basket than in the WPI one. Similarly, manufactured goods are given more weightage in the wholesale basket. Therefore, any movement in the price of such items will move the WPI more than it does the CPI.
Implications of food price inflation
It is important to bear in mind food price spikes tend to be temporary and often the result of local bottleneck shortages. While rising food prices tend to make headlines, later falls in prices tend to make less news. However, even temporary periods of rising prices can cause widespread hardship to those on the breadline. Agriculture is a market when relying on free market forces can cause much hardship. Though often difficult to implement, there is a necessity for guaranteeing supply and minimum prices of at least the basic food stuffs such as rice and wheat.
Also, the rise in food prices cannot just be put down to short term factors. A growing population and growing affluence will inevitably place greater demand on agriculture. If environmental pressures continue to grow the pressures on both supply and demand could lead to food prices becoming more common. It is true that gloomy Malthusian prophecies have often proved false. But, that doesn’t mean we can always count on increasing food supply to meet demand. There are diminishing returns to green technology, especially when the weather erodes away our fertile land.
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