Today is World Hunger Day. And while the great Indian middle class is getting worked up because of the overdue increase in domestic petrol prices, a bigger inflationary threat could be on the horizon.
The World Bank said in its Food Price Watch released on 25 April that global food prices increased by 8% in the first quarter of 2012, after four months of decline. More recent data shows that the problem could exacerbate. Take a look at the chart below:
Most commodity prices have been falling because of weak economic activity across the globe. But wheat prices have been an exception.
India may not have reason for immediate worry. It could be facing a wheat glut thanks to a bumper winter harvest, as Mint reported on Monday. The total domestic wheat harvest this year was a record 90.23 million tonnes while wheat stocks held by the government on 1 May stood at 38.2 million tonnes. So the potential to release wheat from this stockpile to cool prices is significant.
The average Indian household spends around a third of its budget of food, going by data at current prices. High food inflation can hurt --- as it has in recent years.
One way to explain the persistence of food inflation in recent years has focused on the demand side. Some economists --- Reserve Bank of India deputy governor Subir Gokarn among them --- have argued that rising incomes have pushed up the price of proteins. Food inflation is thus structural.
This popular view has been challenged by two economists, Sthanu R. Nair and Leena Mary Eapen of the Indian Institute of Management, Kozhikode. In a recent paper published in the Economic and Political Weekly, they try to show that, barring milk, “the recent phase of high food inflation cannot be attributed substantially to structural demand-side factors…” Production shortfalls and higher input costs are important reasons why prices of stuff such as rice, pulses, fruit, vegetables, eggs, mutton, fish and sugar have climbed steeply in recent years.
The debate on why food prices have been rising is an important one, because the policy response depends on it. Either way, the government needs to focus on increasing farm output, and building modern supply chains that ensure that less fresh food rots away.