New Delhi: Anand’s restaurant has served flat bread, lentils and vegetables to loyal customers every day for four decades but for the past year he has been on the receiving end of complaints that don’t seem to stop.
“They argue because we have raised prices, but we had to increase them because everything including wheat, butter and vegetables has steadily gone up,” says Sanjay Anand, second-generation owner of the restaurant in New Delhi’s Connaught Place.
Small restaurants like his, as well as millions of people across the country have been hit by a huge surge in demand and prices for food worldwide.
The price hikes have triggered government anxiety over whether it can continue to ensure supply of affordable food for the country’s 1.1 billion people.
Analysts say India, which produces most of its own food, exports surplus items such as sugar and heavily subsidises supplies for the poor. It has so far managed to avoid severe price shocks.
But it now facing the same mix of factors as other nations that are grappling with rising food prices given the higher incomes that boost demand for protein, leading to a surging demand for energy which s pressuring oil prices, and diverting agricultural towards land to urbanization and industrialization, as well as grain production for biofuels, all of which is only pushing land values sky high.
Impacted by global events
“India is impacted by global events,” said Saumitra Chaudhuri, economic advisor at Indian credit rating agency ICRA. “The question is whether there will be a supply response. Better yielding seeds, irrigation, technology and more efficient distribution can and probably will have a major impact.
“But it will take a little time and we are likely to see no slack in demand or costs soon.”
The price of wheat on the Chicago Board of Trade more than doubled in the past year to a record high above 10.60 dollars a bushel for March delivery. That means India’s government will have to boost the subsidies it pays to wheat farmers and extra costs that have to be passed on to customers in restaurants like Anand’s.
For the Indian government, subsidies to feed the poor have more than doubled in the past five years to $7 billion dollars. Along with other efforts such as selling transport fuel below market rates to stem inflation, India now spends more than 15% of its budget attempting to control food prices.
“The government would never scrap food and fuel subsidies. It’s politically impossible and as we’ve seen can lead to strikes and protests,” Chaudhuri said.
“It’s also not sustainable beyond a point and if costs such as wages and other inputs keep going up, other things will fall by the wayside, like roads, power and other infrastructure which just aggravate the problem.”
Inflation in India, measured by wholesale prices, is running at around 4%. Consumer prices, less widely cited, have gained around 5%. India’s economy is forecast to grow 8.7% in the year ending March, a slowdown from a torrid 9.6% rate for the previous year.
Rise in incomes create surge in demand for food supplies
Rising incomes have created a surge in demand for food supplies from a growing middle class, even as almost two-thirds of the country continues to survive on less than a dollar a day.
This has created a dichotomy in supply and pricing, illustrated by the spike in demand created by newly-established retail chains using grain and cooking oil to produce ranges of processed foods while the government sells bulk items below cost through its public distribution system for the poor.
“The Indian government procures wheat and edible oils domestically and offshore and sells below world rates for the poor,” said Si Kannan, associate vice president at Kotak Commodity Services in Mumbai.
“But if they pay the local farmer below global prices, he’s not going to grow the crop unless demand from private companies makes the price attractive.
“India’s farmers are much more sophisticated about world markets now, they know the price of soy in China and palm oil in Malaysia.
“So there’s a structural problem and prices for items like wheat, soy and oils are going to remain high in India like the rest of the world because demand is so strong and supply is limited,” he said.
Record prices of wheat, soy meal and corn impact economic growth patterns worldwide. In India one outcome is that farmers, like their counterparts elsewhere, switch to high-priced crops and set off a chain reaction for other commodities.
As a result, the government has been forced to sharply raise domestic support prices to ensure production stays high enough to avoid large imports.
The price of wheat in India is more than international benchmarks such as the CBOT and many farmers have switched out of soy and palm oils to take advantage of the high wheat price.