Are rising incomes to blame for food prices?

Sudhanshu Ranade Chennai | Updated on February 01, 2011

According to a Reuters report, the Finance Minister, Mr Pranab Mukherjee, believes that “high food inflation is being driven by supply bottlenecks and rising incomes”.

To the extent that Mr Mukherjee had the flagship employment guarantee programme in mind, the thing to note is that though the programme can cause a 12 per cent hike in the aggregate income of the bottom 40 per cent of the rural population, it can do so only once. Rs 40,000 crore has to be spent year after year. But subsequent outlays only serve to maintain enhanced incomes; no further increase takes place.

This money could have raised the incomes of the poor by twice as much if half of it had not being earmarked for expenditure on raw materials and equipment used for building ‘roads that get washed away'. But that is neither here nor there.

It is possible to guess how the poor increase consumption expenditure when incomes rise, by moving the average consumption of the lowest four deciles of the rural population (on, say, cereals, milk, vegetables) up to the observed average consumption of the next higher decile.

Survey data

Such a procedure effectively ‘increases' total (food and non-food) expenditure by 27.4 per cent for the lowest decile, and by 14.6, 11.3 and 10.8 per cent for the next three deciles in ascending order, according to data made available by the NSS survey on consumer expenditure for 2007-8. Which is as it should be, because the poor have less, and because they get more.

According to the results of this ball-park exercise, the expected increase in aggregate expenditure of the rural poor on milk is 37 per cent. Expected increases in expenditure on fruits, eggs-meat-fish, and sugar are 27, 21 and 16 per cent respectively.

The figure for vegetables is only 11 per cent, but that is because existing consumption levels are already relatively high, even for the poor. Conversely, expenditure on fruits rises so much only because present levels average less than a rupee a day, though the CSO says this is because fruits are mostly consumed outside the home, at bus-stands, fairs and marketplaces.

Incremental expenditure

Be that as it may, incremental expenditure of the rural poor accounts for 4 per cent of total national consumption of milk, 3 per cent for edible oils, eggs-meat-fish and sugar, and 2 per cent for cereals.

It is conceivable that such increases, at the margin, can trigger food inflation, though not for edible oils and sugar, which do not figure in the wholesale price index for food.

But the thing about the rising incomes hypothesis, is that it cannot be used to explain spikes. It cannot explain why some prices rise so much more than others; it cannot explain why prices rise so much more at some times than at others; and it cannot explain why the drought of 2009 led to higher prices in 2010.

Finally a word on the relationship between rising incomes and supply bottlenecks: to put it simply, one nullifies the other.

Published on February 01, 2011

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