Food inflation looms large

Although there are signs of a decline in food inflation, it is still high, particularly in terms of the Consumer Price Index. The numbers for May 2014 show that food inflation is around 10 per cent. Cereal price inflation is also around 10 per cent. However, inflation in milk, vegetables and fruits is higher than for cereals.

Inflation in rural areas is higher for all commodities except milk and spices. In fact, inflation in vegetables in rural areas (20 per cent) is nearly four times that in urban areas (5 per cent). Moreover, the El Nino effect would have consequences for food inflation this year. The immediate task before the Government is reducing food inflation.

No single policy can solve the problem and a multi-pronged strategy is needed. The policies are all known but they need reiteration. These policies (short- and medium-term) include right-sizing the buffer stock, reviewing the minimum support price (MSP) policy, active management of non-cereal supplies and removing market bottlenecks.

The rice and wheat stocks with the Government are much higher than the optimum buffer stock. In other words, the government is the biggest hoarder! Because of this, cereal prices are still high in the open market. There is a need to offload cereals from the buffer stock in the open market in order to reduce cereal prices.

There has been a significant increase in MSP between 2004-05 and 2013-14. The justification for this is higher cost of production. The bias in MSP policy towards rice and wheat should be reduced. Increasing the MSP is not the solution. Yields have to be increased to reduce cost of production so that MSP does not have to be raised too much.

The recent episode of food inflation was witnessed mainly due to the rising prices of perishable high value commodities such as fruits, vegetables, egg, fish, meat and milk. Therefore, to tame food inflation, the supply of non-cereals has to be enhanced. This will require increasing public and private investment in high value crops and allied activities, and focusing on research and delivery of extension services. Livestock comprises 25 per cent of the total value of agricultural output. This sector needs attention.

There is a huge gap between the price received by farmers and the prices paid by consumers, particularly for fruits and vegetables.

There are a number of distortions in agricultural marketing in India. Particularly, the need for reforms in APMC (agricultural produce marketing committees) is well known. There is need to reduce intermediaries and make necessary reforms in the APMC Model Act to keep fruits and vegetables out of it.

These reforms were found to be taking place in bits and pieces in various states. The incentives for states to ensure APMC reforms for direct buying from farmers have to be explored. There is need for regulation to avoid speculation. The role of forward/future markets is not clear.

Another policy that is needed relates to storage problems and high post-harvest losses. Improved post-harvest handling and processing is essential to reduce prices.

Efficient marketing with less market margins and wastage specifically for fruits and vegetables and dairy call for better transport and cold storage facilities. The food processing sector needs huge investments in logistics to support the value chain from farm to plate.

Fiscal deficit is one of the factors responsible for food inflation. A reduction in subsidies, among other things, is one way of tackling fiscal deficit. It is true that monetary policy has less of a role in containing food inflation. But, if fiscal policy is ineffective and supply side measures are not forthcoming, monetary policy has a role in containing food inflation by reducing aggregate demand.

The opening up of exports and imports can moderate food prices. Tariffs can be reduced so that higher imports of food items such as pulses, oilseeds, fruits and vegetables, meat and so on can be facilitated. Thus, trade is an important instrument for reducing food prices.

Another reason for the gap in supply and demand of agricultural commodities is lack of information.

As Chief Statistician of India TCA Anant said recently, we must identify critical areas of shortage and surplus; the information will help to shift commodities from surplus to deficit areas. Another way is to have credible forecasts on the output of commodities in national and international markets. Information thus plays an important role in lowering food prices.

The writer is the director and vice-chancellor of the Indira Gandhi Institute of Development Research

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