In words of Milton Friedman, Inflation is taxation without legislation. The intensity of burden that inflation puts on a nation and it’s people can be felt after avidly analyzing it.
The story of inflation or sustained price rise became peculiar in the aftermath of global financial crisis of 2008. However, global inflationary trend became evident since 2001.Food inflation averaged 3.7 percent in the eight-year period from 2000 to 2008. But, in the five years following the financial crisis it rose substantially, averaging 10.3 percent year on year and has remained at these levels despite slow GDP growth.
The period from 2009 onwards in India, however, witnessed a unique phenomenon of Skewflation. It is a situation where price rise is seen predominantly in primary articles i.e. food, minerals and non-food items without percolating to other economic sectors such as fuel, energy or manufacturing.
In his book, “Prelude to Political Economy“ , Kaushik Basu pointed out , ‘Skewflation or the lopsided rise in prices is now the government’s biggest political headache’.
At deeper level of analysis, to this unequal and uneven price rise, the major contributor was Food Inflation. It is sustained rise in collective prices of food articles, fruits, vegetables and their derivatives. Further, Protein Inflation, as a subset of food inflation, took the graphs to touch its all time high peaks. It is defined as increase in price and demand of milk and milk products, eggs, meat, fish, edible oils, dairy and poultry products i.e. protein yielding items.
Why such a trend in Inflation
According to CRISIL Research, it can be attributed to both Demand side and Supply side factors.
a. Demand side : These are primarily reasons arising from consumer’s spending on products and commodities.
- Diversification and change in dietary patterns in India towards high end products.
- Increasing health awareness among the citizens and increased preference for protein rich diet.
- Rising per capita income, especially in rural India, increases affordability for protein rich diet.
- Increasing population increases overall demand.
b. Supply side : These are primarily factors arising from productive capacity of the economy.
The Mahatma Gandhi National Rural Employment Guarantee Scheme (MNREGS), has increased the bargaining power of labourers by setting a floor for rural wages, resulting in higher real rural wages. But higher rural wages have not been accompanied by productivity gains in the farm sector, further fuelling inflation.
Input costs have risen substantially. Significant year-on-year increases in the price of key agriculture inputs like fertilizers (8 percent), fodder (20 percent), diesel (8 percent), electricity (8.7 percent), and tractors (5.4 percent) has been witnessed.
India’s food price policy has the dual objective of providing minimum support prices for the benefit of farmers, and subsidization of prices for the poor through a public distribution system. Not only does it lead to higher food prices directly, it also increases the burden of the food, fuel and fertilizer subsidy bill on the government. This translates into a higher fiscal deficit which further increases prices.
Inefficiencies in food supply chain, malpractice and the monopoly of intermediaries under the APMC Act results in much higher margins and fuels such trend. Economic Affairs Secretary, Arvind Mayaram rightly pointed out that, “The rise in inflation can be attributed mainly to price rise in vegetables and protein-rich items. There is in-elasticity of demand in terms of price as far as food concerned. Thus, there was an urgent need to amend the Agricultural Produce Market Committee (APMC) Act.”
Underdeveloped agriculture infrastructure including lack of cold chains, transport facilities act as bottlenecks.
Steps required to contain it.
A series of steps and measures can be undertaken, broadly clubbed under 3 heads.
a. Administrative measures by Government of India.
- Imposing ban on exports of essentials such as pulses, edible oils.
- Prevent futures trading in them to prevent hoarding.
- Target PDS to check leakages.
- Reducing subsidy and undertaking open market sale of certain products.
- Encourage states to sell through APMC markets.
It is also required to manage physical gap between demand and supply through effective supply chain management by broad based national missions in area of protein products.
b. Fiscal Measures by Government of India.
- Reduction in import duties of pulses to minimum to manage short run demand-supply deficits.
- Investment in research and development, technology to cater to long term solutions.
c. Monetary measures by Reserve bank of India.
- Regulation of money supply in the market can partly aid other measures to curtail inflation.
So in light of above observations, going forward, following steps could help in Inflation management.
The key drivers of inflation may vary across different food categories. For example, India imports most of its edible oil and pulses, hence domestic prices of these commodities respond quickly to global prices. Domestic policies like MSP, stocking decisions, and public distribution play an important role in price determination of cereals and pulses.
Broken supply chains, inefficient marketing infrastructure, and malpractice inflate the prices of fruits and vegetables. A food supply shock is generally temporary but it does lead to a sustained increase in food inflation if not tackled effectively through monetary and fiscal policy.
If high protein inflation persists, it could eventually adversely impact protein-food affordability, particularly in rural areas. Given the high nutritional value of proteins, this could be detrimental to the welfare of the malnourished, undernourished and poverty stricken population in India. It is, therefore, imperative that relevant measures be taken to increase production of protein-food to address the unmet demand as well as to rein in food inflation. The solution is to move toward mechanization and better farm technology in order to improve labour productivity in line with higher rural wages.
Thus a multi-pronged strategy involving better fiscal management, a tight monetary policy, efficient supply chains, and improvements in productivity is the cure for the high and skewed food inflation problem in India. It is noteworthy that the recent decision by the government to allow foreign direct investment in the retail sector would help develop a more effective cold storage chain, thus reducing wastage and increasing supply of highly perishable protein-foods.
References: Economic Survey, EPW, The Hindu, Indian Express.