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Food price inflation: why blame drought?

Food price inflation: why blame drought?
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First Published: Tue, Sep 15 2009. 10 36 PM IST

Updated: Tue, Sep 15 2009. 10 36 PM IST
The spectre of drought seems to have receded. At least that is what the media and government would like us to believe after the better-than-normal rainfall in September. But it is difficult to convince the poor, who have been enduring the longest spell of double-digit inflation since the 1980s. With last month’s consumer price indices suggesting an inflation rate in excess of 12% on a point-to-point basis, it was the 18th month since March 2008 that inflation had been at 10% or above. This may be a surprise if you still follow the Wholesale Price Index (WPI), which has been negative for some months now. Even in the WPI, foodgrain inflation is 13.8%, cereal inflation 12.6% and rice prices increased at 15.5%. Still, what the common man confronts is not inflation based on WPI, but that measured by consumer price indices.
The fact of the matter is that consumer price inflation has been high since March of last year. It remained around 10% during the whole of last year when food production was a record high with no signs of drought. Nor is there any international inflationary pressure that can be blamed for rising prices. While inflation around March 2008 was indeed affected by a surge in international commodity prices, it is also a fact that global prices have collapsed since then.
Moreover, with a ban on futures trading in rice, wheat, pulses and sugar, it is futile to blame the futures market for the inflationary spiral. Finally, with the economy growing slower than in the last four years, there is no reason to blame an increase in demand on grounds that the economy is heating up. If none of these are responsible for food price inflation, then what is?
The plain and simple answer is that it is the poor management of the food economy by the government. The spectre of drought in the last two months may have added to the misery of the poor, but the drought does not seem to be the reason for it. Not only is the evidence of high food price inflation during the whole of last year, despite record foodgrain production, a sufficient indicator of the government’s failure in managing the food economy, even the past record suggests that it is futile and escapist to blame drought for food price inflation. The last two severe droughts that the country faced were in 1987-88 and 2002-03. During both these years, not only was food price inflation less than 3-4%, even overall consumer price inflation remained low, insulating the poor from the impact of drought. However, this time, food price inflation was high even before signs of drought surfaced.
The finance minister and the prime minister have repeatedly asserted that the country has enough food stocks. But this is one of the reasons why food prices are still high. While procurement last year was much higher than the buffer norms, food stocks continue to remain high because of the government’s inability to offload them or to undertake open market sales to ease supply constraints. Added to that is the speculative hoarding that has been allowed to go unchecked in the open market even though trading is banned in the futures market. It is obvious that the supply constraints are not a result of the drought, but entirely created by the government.
Three commodities have seen the sharpest increase in price. These are rice, pulses and sugar cane. Inflation in each of these commodities seems to be a creation of the government because of its lopsided policies. The decline in sugar cane production in 2007-08 to 28 million tonnes (mt) from 35 mt in 2006-07 was not because of the monsoon’s failure, but primarily because of the delayed prices paid to farmers. This happened for two years in succession and was largely responsible for the decline in sugar cane acreage. Added to that was the stagnant prices of sugar cane compared with rice and wheat, for which the minimum support price was increased by at least 60%. And, until 2007-08, India was a net exporter of sugar cane, shipping roughly 6 mt, though there were already indications that sugar cane acreage was declining and production would come down.
Similar is the case of pulses. Prices of pulses have remained high and continue to increase despite the fact that pulse acreage has increased and production will be higher than last year. If there is one crop which seems to be unaffected by the drought, it is pulses. Yet, prices of pulses seem to have increased the most in the run-up to the drought.
The story of rice is again a story of apathy, insensitivity and lack of management. The progressive procurement of rice so far has reached a level of 33 mt, 6 mt higher than last year. However, there has not been any increase in offtake. But the extra procurement has mopped up availability in the open market, creating an artificial scarcity. Not only are stocks much higher than the buffer norms, the continued stocking of rice has created a speculative market, pushing up prices. The spectre of drought only fanned speculation and hoarding.
That a large number of people are going hungry despite plentiful food lying in government warehouses is not only a travesty of governance, it is a cruel joke on the poor.
Himanshu is an assistant professor at Jawaharlal Nehru University and visiting fellow at Centre de Sciences Humaines, New Delhi. Farm Truths looks at issues in agriculture and runs on alternate Wednesdays.
Respond to this column at farmtruths@livemint.com
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First Published: Tue, Sep 15 2009. 10 36 PM IST
More Topics: Farm Truths | Himanshu | Drought | WPI | CPI |