The failure of monsoon and the resulting drought has been blamed for the alarming rise in food prices. That seems entirely plausible—after all, the shortfall in the crop is obviously a big factor. But do crop shortfalls invariably lead to high food prices?
The way to check that is to look at what happened during earlier periods of severe drought. This year, according to the India Meteorological Department, the monsoon has been the worst since 1972, with rainfall being 23% less than the average. But in 2002-03 too we had a severe drought, although it may not have been as bad as this year’s. In 2002-03, rainfall was 19% lower than the average.
But consider the difference. In November 2002, the index of food articles was at 182.3 compared with 179 in November 2001, a rise of 1.8%. In sharp contrast, the index of food articles at the end of November 2009 is up 19.05%. That’s more than a 10-fold rise in food inflation this time compared with 2002, despite both years being drought years.
Also See Slow Response (Graphics)
In fact, total output of foodgrain fell by 17.9% in 2002-03 compared with the preceding year. This year, most analysts are projecting a decline of 8-10% in foodgrain production, provided the rabi crop is the same as last year’s.
Why then the marked difference in prices? Deutsche Bank AG economists Taimur Baig and Kaushik Das pin the blame squarely on the government. In a research note, “India: Surging prices—drivers and implications,” dated 10 December, they wrote: “What sets apart the two episodes is government response. In FY02/03, the government responded proactively by an aggressive drawdown of strategic food stocks. Targeted public distribution programmes were stepped up, which helped dampen fears about food shortage and eased price pressures… Public response so far this year appears to have been poor. Latest available data on procurement (through October) and disbursement (through July) show that while the government has been adding to its strategic stocks, it has been slow in responding to the drought.”
The note points out that apart from the cyclical factors, the structural drivers of high food prices are higher food procurement prices, which have been raised by around 50% in the last three years. The National Rural Employment Guarantee Act, which guarantees 100 days of work a year to one member of every poor rural family, too has raised demand for foodgrains.
Moreover, while food price inflation has been exceptionally high this year, it was quite high last year also. While the index for food articles is up 19.05% as on 28 November this year, it was up 10.03% year-on-year on 29 November last year. The chart shows that we had double-digit inflation for rice and vegetables last year, too, although there was no drought.
Food price inflation is expected to come down soon because the winter crop is likely to be good. But the Deutsche Bank economists also say: “The dynamic could however remain adverse if government disbursement of food products does not pick up. The onus of bringing food prices under control, therefore, is largely on the authorities.” Clearly, the comparison with 2002 shows that the government has badly mismanaged the situation.
Graphics by Sandeep Bhatnagar / Mint
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