Administered food inflation

Administered food inflation
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First Published: Tue, Jan 06 2009. 09 06 PM IST

Updated: Tue, Jan 06 2009. 09 06 PM IST
How does one explain the puzzle of bumper crops and continuing inflation of food items? As reported in Mint on Tuesday, the Consumer Price Index (CPI) continues to gallop even in the face of higher output of foodgrains.
The mid-year review of the economy for 2008-09 noted that for three consecutive years, foodgrain production has recorded an average annual increase of at least 10 million tonnes (mt). For 2007-08, the output stood at 230.7mt, 13mt higher than in 2006-07. Even if one assumes a six-month lag between output and availability and their reflection in CPI figures, this relationship should have resulted in a decline in inflation by November. It has not. In fact, CPI shows a consistent increase from April (when it increased by 7% on a year-on-year basis) to November (when it stood at 10.45% on a y-o-y basis), the last month for which these figures are available.
It is likely that an interplay of administrative and economic factors is at work here. To be sure, these figures reflect administrative failures of the government more than anything else. Because of the centralized procurement and distribution of foodgrains, there are lags between production and availability. These lags are quite long in the case of rice. Government agencies purchase them in one season and hand them to rice millers. These millers in turn take anywhere from six to eight months to return polished rice to agencies such as the Food Corporation of India. Moving, storing and distributing then take more time. The ability to provide the right quantity of foodgrains at the right place and the right time is an important factor in taming inflation. CPI reflects these failures. The Wholesale Price Index (WPI) is a wrong measuring rod to look at these problems. In any case, WPI has been used too often to create a sense of “all is fine” to be of any use.
In economic terms, the effects of programmes such as the National Rural Employment Guarantee Scheme (NREGS) are likely to have contributed to higher demand for foodgrains. Because of the above-mentioned failures, this demand is sure to be inflationary. NREGS beneficiaries usually work in grain-deficit regions where demand-supply mismatches can quickly ignite prices.
Higher minimum support prices (MSP) for farmers, too, have been blamed for such inflation. That may not be at work here. That would only come into play if the Union government passed on the price increases on this account to poor consumers. This would happen only if MSP and the central issue price of foodgrains took place simultaneously. That has not happened.
High food prices: administrative failures or something else? Tell us at views@livemint.com
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First Published: Tue, Jan 06 2009. 09 06 PM IST