Consumption data do not support the view that demand is driving up food prices.
A major economic challenge facing India in the recent years has been stubbornly high food prices.
It began with rising prices of manufactured food products, such as dairy products, sugar and oil cakes from January 2008, followed shortly by primary food articles, namely foodgrains, fruits, vegetables, milk, egg, meat, fish, spices, tea and coffee.
The inflationary pressure on food products remained high from January 2008 to July 2010 and again from April 2011 to March. Food articles continue to face upside risk to prices even today. As per the latest figures, the WPI inflation rate of food articles stands pegged at 10.74 per cent in May this year.
Role of Food Habits
One popular explanation given for the high food prices experienced over recent years is the rising demand for high-value agriculture products like pulses, milk, livestock, fishery, vegetables and fruits which, in turn, is attributed to rising per capita income and the consequent diversification of Indian diets.
As the supply response to growing demand in the high value agriculture products has been weak, their prices continue to remain high, thereby providing a structural character to food inflation. This reasoning has gained wide acceptance in government and policy circles, including the Reserve Bank of India. Interestingly, even the high global food inflation experienced in recent years was linked to the changing Indian food habits.
The most popular manifestation of this connection was the controversial remark made in 2008 by none other than the then US President, Mr George W. Bush. His argument was that rising economic prosperity in countries such as India has triggered increased demand for “better nutrition” which, in turn, led to higher global food prices.
Missing Evidence
Notwithstanding its mass appeal, this demand side version of India’s food inflation saga does not stand up to closer scrutiny. Take a look at the accompanying Table and Chart, which present the long-term trends in food expenditure pattern in rural and urban India by taking advantage of the latest available (2009-10) information. The share of many high value food commodities in total monthly per capita consumer expenditure (MPCE) on food has recorded an increase in rural and urban India between the years 2004 and 2010.
This trend is the basis of the argument that Indians today prefer to consume more of high-value food items. However, a deeper examination of the food expenditure pattern reveals several infirmities in this argument.
They are the following:
(a)With the exception of pulses, the increase in the expenditure shares of other high-value commodities in 2009-10 over 2004-05 was only marginal and not significantly different than in other periods.
(b)The shares of edible oils and fruits have exhibited a negative growth during 2004-10.
(c)The expenditure shares of sugar and vegetables registered in 2009-10 are not new highs. Whereas, the share of sugar was the highest in 1993-94 in both rural and urban sectors, in the case of vegetables the year 1999-2000 recorded the highest share (in urban India).
(d)The share of expenditure on pulses and eggs, meat, fish group (in urban sector) was over 6 per cent on several occasions in the past.
(e)In urban India, the real MPCE (that is, after eliminating the effect of increasing prices on MPCE) on cereals, pulses, eggs, meat, fish, fruits and vegetables declined during 2004-10 (Chart). Also, the real MPCE on these food items recorded in 2009-10 was the lowest since 1993-94.
Although the expenditure on edible oils increased between 2004 and 2010, the growth in expenditure (0.73 per cent) during this period not only declined sharply but was also significantly lower compared to the past trends (2.29 per cent during 1993 to 2000 and 1.04 per cent during 2000 to 2005). Only in the case of milk, did real MPCE record an increase during 2004-10 both in terms of absolute amount and growth.
Thus, based on the available statistical evidence, it is quite misleading to conclude that (a) a “secular shift” in food consumption pattern towards high value food items has occurred in India in recent times, and (b) rising domestic demand pressures have contributed significantly to the food price spiral. Only in the case of milk can the high inflation be attributed substantially to these factors.
These findings are strengthened by one more fact. The growth rate of India’s per capita GDP was considerably low in recent years. It was in the range of 5.2-6.9 per cent during 2008-09 to 2010-11 against 7.8-8 per cent recorded during the previous three years.
Since the demand for high value food commodities is income responsive, it is not wise to believe that India experienced diet diversification in these years of an economic slowdown. The latest “dismal” GDP numbers reaffirm this view point.
If not demand pressure, then what is fuelling high food prices in India?
Our research points a finger at supply-side constraints. Besides this, global factors added to the domestic price pressure through “passing on” of world oil price increases and import of some food items at higher international prices.
(The authors are with the Indian Institute of Management, Kozhikode.)
Keywords: food inflation, not due to high income, consumption data, driving up food prices, supply-side constraints
Comments:
Your data does not add up. The numbers do not add up to about 60%,where
is the remaining 40%. Is the data captured accurate?
A well-researched article building in it quite some pains-takingly collected data. Supply side constraints have been primarily responsible for rising food prices. It is in this context that FDI in retail should benefit the economy. FDI in retail is expected to bring in appropriate technology, logistics, better transportation arrangements, beneficial changes in the relationships between various participants
in the supply chain of food and vegetables. A great deal of consistent and
transparent efforts will have to be made by the state government departments. It is
only the joint and sustained efforts of all concerned in the chain that could bring
about desired far-reaching changes. However the fact remains that secular shift in
food consumption patterns and demand pressures are evident. All in all, the points
made are enlightening and useful for policy makers.
I would like to appreciate the authors for writing such a well researched article. But there is a miss, the whole analysis is based on the average spending of households on food products. But across the timeframe the population hasnt remained constant, thus even if the average hasnt risen, due to increase in population the total spending has grown higher. Thus continuous inflation means the supply has not been able to match with the demand. Rising incomes have also resulted in increasing the demand, as today a person is willing to spend some extra amount for better food, since his salaries have risen, which was not the case before. Initially during high price regime people used to cut expenditure, but this hasnt been noticed in the current period specially on food stuffs.
Well written article! However, the intriguing aspect of these articles is that the same author at some point of time might have or will bemoan the pathetic collection and accuracy of government data, which other analysts are already doing (e.g., incorrect export, IIP, GDP growth, and other numbers). If the data is wrong, how can the analysis be right? This ties in to my earlier comment to a different article where I said that as the government is the last resort of data for these analyses, the analysts have no choice but to accept it the way it is. They may bemoan later that the data is fudged or inaccurate, but when it suits them they use the same data from the same government which they criticize for data inaccuracy!!
Purchsing power of middle class has gone up with increase in wages,salaries,multiple employment and the whole family employed.India has over 65% farmer(producer)-consumers and escalation in gate price and MSP have boosted their income.In 1960s, it was only three digit salary.Now it is a minimum 4 digit reaching to 5-6 digits/month.Car a luxury in 1960, is a necessity now.Flats(2-3BR) in Chennai are above Rs 1.5 crores and demand going up.Average wage of a farm labour in Kerala is Rs 500/day.The victims of escalating price of food,shelter,clothing,health care and education are the lower middle class, migrant labour from states like West Bengal,Nagaland,Assam and Odisha.They have no ration card or local identity to claim entitlement of BPL.As they are not included in voters list, political parties are least interested.Eminent economists have a very interesting study ground in India.Market is full of grains/fruits/vegetables.There is no leg space in jewellery/diamond/platinum shops.
This really answered my downside, thanks!
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