The Hindu Business Line : Food inflation

New Delhi would do well to recognise the threat of continuing high food prices and the adverse effect they have on the already low purchasing power of the poor.

The ‘food versus fuel’ debate in the international arena is hotting up like never before with strong countries such as China and Russia beginning to take serious note of galloping food prices that are hurting consumers. Diversion of traditional food crops such as corn/maize, wheat and oilseeds (in the form of vegetable oils) for production of biofuels (ethanol and biodiesel) and the inability to expand crop output is causing world market prices to spiral out of control. Weather aberrations in certain growing regions have added to the uncertainty and resulted in demand-supply mismatch.

Taking advantage of this, speculative funds are flowing into the agricultural commodity markets worldwide. Investors are increasingly lured to the grains markets by the impressive prices. Worldwide, the share of speculative activity in the agricultural markets, in general, and grains market, in particular, is traditionally higher than in energy or base metals. The extent of price escalation can be gauged from the fact that world vegetable oil prices have doubled in the last two years to about $1,000 a tonne. Wheat ($400 a tonne) and corn (over $220 a tonne) prices too have nearly doubled. A strong energy market has pushed up ocean freight rates, making imports so much more expensive. Meanwhile, industrialised countries — mainly the US, European Union — continue to grant huge subsidies to promote biofuels. Under the circumstances, relief from high world food prices is not likely any time soon. In response, China, for instance, has unveiled a new policy initiative that seeks to curb industrial use of food products (corn for ethanol, for example) even as subsidies to boost grains (wheat and rice) production are raised. China has also made prior government approval necessary to raise prices of food items. To counter rising food prices and contain growing consumer unrest, Russia has imposed price controls at the retail level. Several food-importing countries are examining actions to stave off the politically inconvenient price threat. It is this global status that Indian policy-makers should bear in mind.

There seems to be a smug feeling in New Delhi that inflation is under control. Pressure to reduce the interest rate is already mounting, in response to the recent steep US Fed rate cut. The Rabi crop prospects, especially for wheat, have improved recently following welcome precipitation, but the overall outlook for major crops — pulses, coarse grains, oilseeds — is not bright enough to make a significant dent on prices. Data of the last five years reveal that production of major food crops — wheat, rice, pulses, oilseeds — is surely not keeping pace with domestic demand expansion. New Delhi would do well to recognise the threat of continuing high food prices and the adverse effect they have on the already low purchasing power of the poor.

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