Food inflation: a quick fix won’t help
Controls upon prices and quantities don't help manage secular price rises, which can only be addressed by fundamental changes to increase supply and create efficient markets
Now that the monetary policy is anchored to headline retail inflation, food inflation gets primary attention from the government. Food prices have nearly 50% weight in the consumer price index. It is then reasonable to choose lasting solutions when demand-supply disparities cause prices of pulses to rise relentlessly. Yet what we see is a series of quick-fix measures, which are anti-market and will not solve the problem. Structural reforms to increase yields and build markets are practically non-existent.
Last week, the government announced a range of measures to stop speculative trading and hoarding in pulses along with recommendation to delist chana from the futures market, a lower import duty on sugar, directing states to rationalise stock holding limits on pulses for millers, producers and importers, and exempting them from value-added tax.
Additionally, a six-fold increase in the pulses buffer stock to 900,000 tonnes is under consideration as is a price stabilisation fund in the states. A year ago, the government imposed stockholding limits, increased imports and raided stockists to prevent hoarding and thus check prices and expectations.
These measures, however, are just a temporary fix for price trends that are secular in nature. There is a trend rise in pulses’ demand as rising incomes induce a dietary shift to higher protein intake—a development that is likely to sustain, even accelerate in future. Supplies, on the other hand have lagged far behind. India cultivates far too little pulses but consumes a lot. Prices have steadily climbed up at least for two years (see chart).
Since June 2015, inflation in this dietary staple—the primary source of protein for millions of vegetarian Indians—has been double-digit, making it an important driver of overall food inflation where its weight is just 2.38%. Inflation rates rapidly doubled every few months in 2015, from 9.4% in January to 22% in June and to 46% thereon by November 2015. Signs, however, were visible earlier in 2014.
Lasting solutions have so far eluded the policy space. Price incentives for farmers were realigned last year as the government raised minimum support price (MSP) for pulses, while restricting these for food grains to shift production. But policy needs to extend itself beyond commonplace MSP measures: Pulses output is dragged down if rains fail, so irrigation is required to delink the two. Yields, which are abysmally low in international comparison, need to be raised. And markets, which are uncompetitive and under the control of few, need reforming for direct and more efficient linkages with farms.
Mitigating food price shocks with short-term responses is alright, but when repetitive and substituting for structural reforms that are either postponed or delayed, they only accentuate price issues and advance the cause of traders benefiting from ever-higher retail price margins. Controls upon prices and quantities don’t help manage secular price rises, which can only be addressed by fundamental changes to increase supply and create efficient markets. If quick-fix and anti-market responses persist, it is hard to visualize food price disturbances disappearing over longer periods.
Renu Kohli is a New Delhi based economist.
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