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Economics for Everyone – Food for Future

As inflation prompts consumers to cut down unnecessary expenditure, it may impact GDP growth, if allowed to continue indefinitely. Before starting the blame game, it would be worth analyzing the root cause of the problem.....

June 10, 2010 3:32 IST | India Infoline News Service
PART - I

“Of all the things before us, agriculture comes first”
-Pt. Jawaharlal Nehru

ISSUE
Recently group of top union ministers met recently to redraft the food security bill.The food price inflation, which is at an 11-year high, is threatening to dent the shining economy. As inflation prompts consumers to cut down unnecessary expenditure, it may impact GDP growth, if allowed to continue indefinitely. Before starting the blame game, it would be worth analyzing the root cause of the problem.

Inflation in India is calculated as a wholesale price index of 435 goods over 1993-94, as base year. In the week ending November 14, the food inflation index touched 15.58. The rise in the prices of pulses (35.6%), wheat (12.53%), rice (11.89%), milk (11.36%), and fruits (10.97%), over last year, indicate an imminent problem. The cost of vegetables has climbed, as much as 62.42% since the beginning of this fiscal. By December 2009, the wholesale food prices in India touched a 10 year high with food inflation coming at 19.95%.

Government has recently convened a meeting with state chief ministers to discuss different measures to control rising food prices.The food prices has been soaring and has been cause for concern for all as common man finds it difficult to buy essential food supplies. According to a recent study, food security in rural areas of the country— is extremely low, prompting thousands to migrate to nearby towns in search of livelihood. There is uproar in Parliament as political parties jostle to grab as much mileage as possible from the government's apparent failure to curb runaway inflation, as they try to show their concern up to the aam aadmi who has been worst hit by skyrocketting prices.

Let us see the change in food prices since 2007:

  • Food articles: 7.02% (in 2007) to 17.41% in January 2010.
  • Food products: 3.43% (in 2007) to 22.55% in January 2010.
  • Food commodities: 5.60% (in 2007) to 19.42% in January 2010.
  • Foodgrains: 6.27% (in 2007) to 17.89% in January 2010.
  • Cereals: 6.27% (in 2007) to 13.69% in January 2010.
  • Pulses: 2.14% (in 2007) to 45.62% in 2007 in January 2010.
  • Rice: 6.05% (in 2007) to 12.02% in January 2010.
  • Wheat: 6.77% (in 2007) to 14.86% in January 2010.
  • Dairy products: 6.08% (in 2007) to 12.87% in January 2010.
  • Eggs, fish and meat: 6.38% (in 2007) to 30.71% in January 2010.
  • Sugar: (-) 14.69% (in 2007) to 58.94% in January 2010.

The most worrisome problem agitating the minds of millions of common people in India today is how long they must bear with the food price inflation that has hit them hard in the past couple of years. Stung by the sharp rises in the cost of living, large sections of the people in both rural and urban areas clearly feel let down by the state. The relentless upsurge of the prices of food items and some other essentials, and the absence of an adequate response from the central and State governments, has stoked people’s fears about the future. This inflation, which the aam aadmi has been experiencing for now close to two-and-a-half years, has been a disaster in the making for a while.

CAUSES

CHART - A

CHART-B

Economists attribute inflation to a demand-pull theory. According to this, if there is a huge demand for products in all sectors, it results in a shortage of goods. Thus prices of commodities shoot up.

Another reason for inflation is the cost-push theory. It says that labour groups also trigger inflation. When wages for labourers are increased, producers raise the prices of products to make up for salary hike.

Let us look how these factors have palyed a role in the current crisis.

  • Monsoon
  • Infrastructure
  • Exports
  • Global prices
  • Food articles
  • Other external forces
  • Food management
  • Monsoon->Drought->Productivity

The reason most pointed out for inflated prices is the bad monsoon. The Indian farmers had to endure extreme natural calamities of drought and floods every year. Indian agriculture is largely dependent on monsoon, even today. Therefore, a weak monsoon in the current fiscal is likely to put further inflationary pressure on the food prices, as India plans to make up for the supply deficiency through the import of rice. In addition, the extremely high proportion of food reserves in the Government’s possession (more than 5% of which is wasted every year) is also being blamed for the current food shortage and consequent price rise.The Indian farmers are largely dependent on the four-month monsoon season during which 80% of the year's total rainfall takes place.

The per hectare agricultural yield in India is lower for many crops. This again points the failure to help the farmers adopt latest technology in order to increase the crop output.Thus the primary cause of the food price inflation can be explained by supply side bottlenecks in some of the essential commodities, precipitated by the delayed and sub-normal south –west monsoon which severely affected the kharif crops, especially paddy. Decline in rainfall has not only caused a reduction in the net area sown but has also adversely affected the yield thereby creating a gap in domestic demand and supply. Severe drought of 2009 caused a downturn in food production in the third quarter of 2009-10, causing apprehensions of shortages in agricultural production and the expectation of the resultant price rise itself fed into the inflation

Infrastructure and other supply bootlenecks

In 2008, it was estimated that India loses INR 60,000 crore worth of agricultural food items due to lack of post harvesting infrastructure such as cold chains, transportation, and storage facilities. In spite of having buffer food stock we are facing food inflation, as large amounts of stored food stock has got spoilt and is unfit for consumption. Thus lack of proper food storage infrastructure has also contributed to the situation.There is no free-trade zone in the country for movement of goods. Distributors have to shell out money at every checkpost. The cost is passed on to the consumer. There is also a shortage of food.

Exports &Global prices

Another cause for increase in domestic food prices since 2008 can be attributed to high volatility in global prices and rising trend in food prices observed in the global market. The price volatility observed in the first half of 2008-09, was due to increasing international fuel and commodity prices. Share of exports in domestic production of food was more than 10% between 2006-07 to 2008-09.This resulted in transmission of some of the increase in global prices to the domestic market and domestic prices started increasing in spite of an increase in domestic food production. A widely held view has it that rapidly growing food demand in the emerging economies is pushing up global food prices.

The recent runup in global food commodity prices reflects both long-term trends and short-term events. Slower long-term growth in global crop production and more rapid growth in demand have tightened world balances of grains and oilseeds. In addition, about 5 years ago, global production of ethanol and biodiesel began to add to the demand for grains and oilseeds. Most of the analysis focuses on changes in demand and supply to explain increased food prices. With rapid economic growth, along with a global population growth, demand for meat and grains (and grain-fed animals) has increased. This rising demand is coming up against supply constraints due to bad weather (a severe drought in Australia, for example) and increased production of crops for biofuel. Moreover, the high cost of oil (at over US$130 per barrel) is increasing investment in ethanol production.

The fact that in country after country in the developing world, there has been a diversion of land, from food grain production to export crops. Growth rates for food grains have slowed sharply in every developing country, including India and China, and in many countries, there has been an absolute decline in grain output.

But as it is noted, balnket cover ban on export may lead to further problems. An additional cause of the food crisis, often mentioned by the media, are export bans. Around 40 foodexporting countries have imposed some sorts of trade restriction of food: taxes, quotas, or across-the-board bans. A study by the International Food Policy Research Institute (IFPRI) predicts that getting rid of these would reduce world cereals prices by an average of 30%

Food articles

According to some economists, there are price pressures for agricultural products but these pertain largely to non-food articles like oilseeds and raw cotton. Food inflation rose marginally to 16.35 per cent for the week ended March 20 mainly on account of high prices of pulses and milk.The rise in food prices is mainly driven by pulses, which became dearer by 31.55 per cent.Milk prices rose by 18.74 per cent on the yearly basis.

Speculative commodity markets

Market panic, and more specifically “speculation”, may well have played a role on derivative markets for agricultural commodities. The amount of capital invested and the number of transactions observed in these markets has increased very significantly in recent times. Activity on futures markets may, to some limited extent, have spilled over into spot markets.According to experts, there is a compelling case to examine critically the role of food derivatives in the ongoing food crisis. Speculation might help explain movements in food prices that demand and supply factors are, by themselves, unable to account for. Some economists feel that expanded market opportunities in food commodity derivatives has led to large increases in speculative investment, pushing global food prices far higher than predicted by demand-supply effects.Many economists and researchers point out that there is strong correlation between the volume of trading in Rice and corn derivative contracts and the global market prices.Thus even as the government has yet to grapple with the problem of runaway food prices, investors in food stocks are laughing their way to the bank.

Other external forces

Oil, Dollar, population, disposable income, Bio fuel.

The Indian per capita income went up by 56 per cent between 2001 and 2009, from Rs 16,000 to Rs 25,000, while the population went up by 15 per cent, from 1 billion to 1.15 billion.Considering that most Indians have still not had enough to eat, these changes would obviously push up the demand for essentials.But output has barely kept pace with the population growth or declined: Grain production increased by 15 per cent before falling off this year, sugarcane went up 17 per cent up to 2007, but then dropped to the 2001 level, pulses have stagnated between 13 and 14 mt, tea around 0.8 to 1 mt, and coffee at 0.3 mt.

Thus we have been squeezed between rising desires for consumption but constant or declining per capita availabilities for most articles figuring in the food price index for the whole of the last decade.

Spiralling global crude oil prices have worsened the situation. Sometimes, banks create more liquidity by allowing more loans for people, giving them the purchasing power to buy more, as a result of which prices are driven up further. The demand-supply gap also drives inflation rates.The rapid increase in crude oil prices and energy prices more generally has significantly raised the costs of producing and shipping agricultural products.

The weak dollar has contributed to driving up dollar-denominated commodity prices in international trade. Also experts point out the high and growing level of support provided to the production and consumption of biofuels.

At increasing per capita income levels, an increasing amount of grain is consumed as animal products, so the total per capita grain consumption rises fairly sharply with rising income. The share of direct cereal demand in the household food budget does decline, but there is an absolute increase of total cereal demand and no decline in its overall share in the food budget.

Policy Issues:

Recently our finance Minsister Mr.Pranab Mukherjee indicated about the constrains created by the multi-level supply chain system for stoking prices of food articles in the country. According to him this increases the cost of intermediation is very high from farm gate to the wholesale markets and from wholesale markets to retail markets, and thus increases the food prices. "Inflation has risen high mainly because prices of food articles have gone up," Mukherjee said.

According to some experts, large parts of the resources are going to subsidies which benefit the fertiliser companies more than the farmer. While the government promises free power for farmers, there is no power available at all.This hampers the agricultural production. Again take the case of matching the food supply and demand. One of the solutions for growing food inflation could have being, to promptly augment the imbalance in demand and supply through imports. In the recent times as pointed out by many policy observers there was delay in our import decisions. By the time India took its decision the global prices start soaring.

IMPACT

As food price inflation has seriously started affecting the poor, it is high time that prices are reined in. The obvious solutions of withdrawing stimulus and hiking interest rates are facing stiff resistance from the industry. As Indian economy has not yet stabilized after its good showing in the second quarter, a quick withdrawal of stimulus may upset the whole economy.

Impact of Food Inflation on Indian Consumers

The high food price inflation is having a significant impact on the Indian consumer in general and the Indian middle class in particular. A high proportion of the personal disposable income goes into food products. Unfortunately, this is the segment which is experiencing highest inflation. A high food inflation ensures that consumers have to cut back on their spending (on non-necessary items). This in turn will impact the consumption part of the GDP growth.Another important point to note is that a majority of Indians still don't invest in equity markets. They prefer going for fixed deposits which are currently yielding only around 8-10% annually. On the other hand, inflation for an average household is easily around 12-15% (even education, health and housing cost are going up).Thus, a large section of the population are losing out on their purchasing power.

Higher inflation and stronger economic growth may prompt the central bank to start reversing record cuts in interest rates made between October 2008 and April 2009 to shield Asia’s third-largest economy from the global recession. This is also supported by the proposed action by RBI to start withdrawing monetary stimulus by draining excess cash in the banking system to combat inflation. This could hamper the economic recovery.And if RBI increases the interst rate then there is a risk of input-cost rises feeding into output of manufactured products and further adding to inflation. Also, as increase in food prices is related to supply side problems and monetary policy generally pertains to the demand side, RBI needs to be cautious in its approach.

ANALYSIS & SOLUTIONS

Everybody who is involved with agriculture - agri-businesses, scientists, NGOs, academics, economists, planners, governments agrees that if nothing is done now, this crisis is going to blow into a full-scale catastrophe in the coming decades. So, how does the we tackle this?

The divergence between WPI and CPI-based inflation also reached historic levels. Economists argue that an understatement of food inflation in the major inflation indicators will mislead the direction in which prices are moving; however, it will not have any major effect on the formulation of monetary policies.According some economists, if the weight of primary articles do go down, then the divergence between CPI and WPI will continue and might increase further. The WPI-based inflation rate, which is followed more widely than CPI, would of course be a little misleading for the common people.

Indian Experience of Inflation

An assessment of the inflation record of India reveals that inflation increased from the 1970s onwards before moderating in the mid-1990s. Supply shocks, both due to a setback in agricultural production and international oil prices, and monetary expansion due to automatic monetisation of the fiscal deficit were the major contributory factors to higher inflation. Reform initiatives since the early 1990s towards developing a broad-based financial market, particularly activation of the government securities and forex markets coupled with improved monetary-fiscal interface enabled better monetary management since the second half of the 1990s. Moreover, judicious supply management through buffer stocks of foodgrains and import of sensitive commodities containing the adverse impact of supply shocks also played an important role. It can also be noted that notwithstanding the unprecedented size of external capital flows, monetary management was effective in ensuring a reduction in inflation and lowering expectations.

  • A sizeable per cent of India’s subsidised foodgrain does not reach families below the poverty line (BPL), an official measure used to implement social-security programmes.According to some economists; the current situation poses a big dilemma for the policy makers in terms of the growth-inflation trade off.
  • Having discussed the above factors which highlighted the reasons for rising double digit food inflation, let us see the following probable solutions proposed by many experts.
  • A Second Green Revolution which is very urgently needed as only technological improvement in the agriculture sector and a strong action to develop and disseminate technologies for raising food production would be the savior.
  • Reform of the services sector, of the financial sector, has all happened, but not yet reform of the agricultural sector, on which 65% of India depends for a livelihood.
  • Keep a check on the huge piles of grain are left rotting in the open.
  • Crackdown on hoarders and black marketers could help prevent prices from rising further. This step might not significantly reduce prices but will ensure that prices don't escalate further.
  • The markets need an effective regulation.Experts feel that there is no reason why the sugar stocks continued to climb in the stockmarket at a time when the industry claimed it was running in losses. It was all designed.
  • Some experts feel that there should be a curb in the big retail as they are also responsible for the price hike.
  • If categories in which the price hikes have been the sharpest are also those that have large imports and exports. Thus it is clear that their prices closely track international prices. This has to be managed.
  • Expand emergency responses and humanitarian assistance: food or cash transfers should be expanded and should target the poorest people.
  • Need proper biofuels policies - a range of measures should be considered to make more grains and oilseeds currently used for fuel available for food and feed.
  • Regulation on unrestrained real estate and commodity furtures market.

Dr.M.S.Swaminathan the leading Agricultural scientist from India proposes the following action plan to creat a Hunger free India.

Hunger-free India

Seven Point Action Plan:

  • Reform nutrition delivery systems on a whole life cycle basis
  • Introduce a universal public distribution system and enlarge the basket of grains included in PDS, eg., ragi, bajra, jowar and maize
  • Foster Community Grain Banks and Community Food and Water Security Systems
  • Eradicate hidden hunger through a food cum fortification approach
  • Enhance the productivity and profitability of small holdings (66% of consumers are members of farm and fisher families)
  • Promote opportunities for new non-farm livelihoods and provide a new deal to the rural self-employed
  • Introduce a Food Guarantee Act combing the features of NREGP and Food for Work programmes

RECENT POLICY MEASURES IN INDIA

FOOD SECURITY BILL:

Addressing a joint session of Parliament earlier this summer, the President of India announced that India will soon pass a Food Security Act, which will ensure at least 25kg of wheat at Rs. 3 per kg to every household below the poverty line. Since then there has been a raging debate on the scale and scope on the potential Act. Two drafts of the proposed legislation have been passed around policy circles: one version that mainly focuses on the delivery of grain to poor households through reforms of India’s large food subsidy programme and another prepared by activists who are part of the Right to Food Campaign, a people’s movement that hopes to enshrine broader entitlements to food in law.

Recently the government has come with a proposal to redraft the Food Security Bill and will include fresh suggestions from the Planning Commission and the Food Ministry.

The implementation would rely excessively on existing infrastructure and logistical support of the public distribution system (PDS).

In 1997, the PDS was reformed and converted from a universal to a targeted programme, the TPDS, which focused on different levels of subsidy for three categories of households: APL (above poverty line), BPL (below poverty line) and Antodaya (ultra poor) households. If made into a law, the draft Food Security Bill would reduce the allocation for a below poverty line (BPL) household (e.g. in the case of Antodaya Anna Yojana) from 35 kg of rice/ wheat per month to 25 kg of rice/ wheat per month.

Areas of debate

Several points of contention have been raised by the experts related to the scope of the act –

  • Should the act cover the broad set of issues that relate to food security, including land reform, agricultural policy etc. or should the act be limited to concrete food entitlements that the state had responsibilities for
  • Given the problems with identifying the poor and the large errors in existing BPL lists, there was a strong case presented for universal coverage. On the other hand, others argued that agricultural production, resource and capacity constraints might initially call for some form of targeting

The World Development Report 2008-Agriculture for Development, which has been brought out by the World Bank mentions that India presently faces the problem of depleting ground water level that makes agriculture unsustainable and poses risk to environment. If rice is one of the foodgrain that would be supplied when the Food Security Act comes into being, then more and more farmers would go for cultivation of rice.According to experts, a minimum support prices (MSP) for rice increase the financial attractiveness of rice relative to less water-intensive crops, which makes depletion of ground water table.

The Right to Food Campaign, which has for long been asking for a law to guarantee universal ‘nutritional gaurantee’ to the poor, has expressed its concern at the fact that the bill instead reduces the ration the government provides to the poor from 35 kg under the current targeted public distribution system to 25kg under the proposed legislation.The campaign noted in its letter to PM that “targeting minimum food entitlements is to create food insecurity”. The activists are worried by the fact that proposed bill intends to exclude a large section of the population by targeting only those selected as living below the poverty line and reduce the volume of foodgrains it will provide despite apex court orders to the contrary.

It is to be noted that the Supreme Court of India had passed orders regarding the right to food with respect to the following:

  • Converted all food and employment schemes into legal entitlements
  • Universalised food entitlement programmes for children (ICDS for children under six and Mid Day Meal Scheme (MDMS) for all primary school children)
  • Instituted the independent mechanism of Commissioners to the Supreme Court to monitor all food and employment programmes
  • Prevented the reduction of the “poverty line” from 36% to 26%
  • Since then the government of India has made the following policies
  • Universalisation of MDMS (120 million children get school meals) and ICDS (Government would need to double the ICDS centres to 1.4 million centres covering 60 million children under the age of six)
  • Managed to restrict the lowering of BPL quotas by GoI from 36% to 26%
  • Increase in off-take of subsidised food-grains through the targeted public distribution system
  • Increased budgetary allocation for ICDS, Old Age Pensions
  • Passage of the National Rural Employment Guarantee Act which guarantees 100 days of employment a year (at minimum wages)
  • Brought the discourse on food rights to the centre-stage of governance in the States and GoI

The crisis in agriculture has been manifest in the growing incidence of farmers taking their own lives.At least 10,000 farmers have committed suicide each year over the last decade because of their inability of repay loans taken at usurious rates of interest from local moneylenders.The problem then - and now - is entitlement or access to food at affordable prices.Given the low purchasing power of India's poor, even a small increase in food prices contributes to a sharp fall in real incomes.The current crisis in Indian agriculture is a consequence of many factors - low rise in farm productivity, unremunerative prices for cultivators, poor food storage facilities resulting in high levels of wastage.Fragmentation of land holdings and a fall in public investments in rural areas, especially in irrigation facilities, are also to blame.Bad harvest timing, inefficient machinery, lack of storage facilities, contamination, inordinate exposure to heat, cold, and lack of moisture are the major reasons cited by experts for the losses. These can be prevented to some extent but what can’t be curbed completely, until the government cracks the whip, is the role of the black marketeers.

Long term inflation can be controlled only by a dedicated and ardent political will to implement the new agriculture revolution. A new agricultural strategy assessing the food requirements of the Indian economy is long overdue and the current inflationary situation should make the government realize the gravity of the situation as well as make them think in this direction and implement policies which will avoid such alarming conditions in the future.

PART –II

Explanations for the following key concepts are given below:

  1. NOTES – KEY CONCEPTS
  2. Explanations for the following key concepts are given below:
  3. -INFLATION THE THEORY
  4. INDICATORS AND MEASUREMENTS OF INFLATION
  5. WPI, CPI, GDP DEFLATOR
  6. BELOW POVERTY LINE
  7. POVERTY
  8. DEMAND PULL INFLATION
  9. COST PUSH INFLATION
  10. STRUCTURAL INFLATION
  11. Agricutltural Sector ,Monsoon and Impact on the Economy
  12. Food subsidy
  13. Drought
  14. Commodity futures
  15. MINIMUM SUPPORT PRICE AND PROCUREMENT PRICE:
  16. Agreement on Agriculture (AoA)
  17. GM FOOD
  18. FAMINE
  19. PDS (PUBLIC DISTRIBUTION)
  20. Targeted Public Distribution System (TPDS)
  21. OTHER GOVERNMENT PROGRAMMES
  22. The Right to Food
  23. MINISTRY OF AGRICULTURE,Government of India
  24. MMTC
  25. About FCI(Food Corporation of India)
  26. FAO-The Food and Agriculture Organization of the United Nations
  27. IFPRI(International Food Policy Research Institute)
  28. Commodity Credit Corporation (CCC USA)

KEY CONCEPTS USED UNDER THE SECTION ISSUE- BOX I

INFLATION

THE THEORY

An issue which has been causing grave concern to monetary authorities both in developed and in developing economies in recent years has been the phenomenon of inflation. Inflation can be described as a situation marked by a continuous increase in price level. The situation begins to cause worry when this increase in price level exceeds a tolerable limit. When prices increase they do not affect all sections of the society uniformly. When prices rise, some sections of society gain while other sections lose. The persistence of inflation also causes permanent damage to society. It diverts investment into channels like acquisition of land and other assets, which yield quick capital gains. When inflation continues over a period of time it also erodes the motivation for saving. However. In controlling inflation the authorities must not only identify the causes but also must evaluate other side effects that may arise as a result of the pursuit of anti- inflationary policies.

INDICATORS AND MEASUREMENT

PRICE INDICES

Movements in prices have two aspects. One is the change in relative prices, which affect microeconomic resource allocation and the other in the overall price level, which affect the purchasing power of money over goods and services in general.

A variety of price indices are devised to capture this second aspect. IT is easy to measure changes in the prices of individual commodities, but how does one work out the overall price increase in a whole basket of commodities? This is what a price index does. There are three types of price indices viz., the Wholesale Price Index (WPI), the Consumer Price Index (CPI), and the GDP deflator.

The Wholesale Price Index (WPI)

Measures changes in wholesale prices, it reflects producer inflation - the inflation facing producers in terms of inputs

And

Consumer Price Index (CPI) measures changes in retail prices and hence inflation as it affects the consumer.

GDP deflator

Blow Poverty line

Below Poverty Line is an economic benchmark and poverty threshold used by the government of India to indicate economic disadvantage and to identify individuals and households in need of government assistance and aid. It is determined using various parameters which vary from state to state and within states.

The poverty line was originally fixed in terms of income/food requirements in 1978. It was stipulated that the calorie standard for a typical individual in rural areas was 2400 calorie and was 2100 calorie in urban areas. Then the cost of the grains (about 650 gms) that fulfil this normative standard was calculated. This cost was the poverty line. In 1978, it was Rs. 61.80 per person per month for rural areas and Rs. 71.30 for urban areas. Since then the Planning Commission calculates the poverty line every year adjusting for inflation. The poverty line in recent years is as follows - (Rs. per month per head)

Poverty

The poverty line is an abstraction that's essential to measure how poor a country is. Behind statements like, `40 per cent of Indians are poor,' there is an implicit poverty line. India draws a poverty line by calculating the `minimum' cost of living that can sustain people. For very poor country like ours, this boils down to a nutritional requirement: the cost of the minimum number of calories needed to keep people alive.

KEY CONCEPTS USED UNDER THE SECTION CAUSES- BOX 2

Base on the source of inflationary pressures, it has been customary to distinguish three types of inflation, demand pull, cost push and structural.

Demand Pull Inflation

Inflation, which is caused by excess demand, is described as demand-pull. When an attempt is made to raise the level of aggregate demand from an existing level, it caused the price level to rise.

A shift in the aggregate demand curve can arise as a result of an increase in private as well as government expenditures. Very often it is caused by an increase in government expenditure, which is facilitated, by an increase in money supply.

Cost Push Inflation

The main cause of inflation is traced to the shift in the aggregate supply curve. The shift in the aggregate supply curve can occur as a result of the result of the rise in the wage rate. The cost-push inflation is very often a case of wage push inflation.

Structural Inflation

The structural inflation thesis emphasis the possibility that even when there is no excess aggregate demand; price level rises may rise because of excess demand situations in specific sectors.

Agricutltural Sector

Impact on the Economy

Eventhough the share of agriculture is declining in GDP; the income dependence is still high. Today agriculture accounts for 25% of GDP.However the income dependence on agriculture remains high, given that more than 60% of the Indian rural working population still directly or indirectly earns its livelihood from agriculture or related activities. Agricultural growth therefore in turn determines demand growth in other industry segments

The monsoon is crucial to India’s economic growth as agriculture contributes 25% to the GDP. With only a part of the agricultural land in the country irrigated, and the rest of the cultivable area depends heavily on monsoons. GDP growth decelerates to below 5% levels in years of decline in agriculture, while good agricultural years have enabled more than 6% growth in GDP in the past

The link between Monsoon – Crops and Business

Over 600mn Indians directly or indirectly depend on agriculture for their livelihood. With low level of irrigation, monsoons directly impact agriculture.Strong agricultural growth drives rural demand in industries such as consumer goods, automobiles and fertilizers.

A good monsoon during this time will result in a good agricultural growth which would translate into rising rural incomes, which in turn would trigger a revival in demand in several other industries. The demand revival is immediate in certain industries such as fertilizers, agrochemicals or tractors. Demand growth is witnessed with a time lag in several other industries such as FMCG, durables and automobiles (particularly Motorcycles). In a good monsoon year, a huge pickup in rural demand for consumer durables and vehicles is witnessed specially during the festival and marriage season (October- December). For several FMCG companies, rural sales account for 40-50% of their turnover, and a good agricultural growth is the right recipe for an improvement in topline growth.

Food subsidy

The food subsidy can be disaggregated into three components. The consumer subsidy cost of buffer stock operations which includes producers' subsidy, and cost of 'inefficiencies' of the FCI. The FCI purchases foodgrains for the central pool at the procurement price and distributes this at the central issue price fixed by the government. The issue price so fixed does not cover the economic cost of the FCI - this difference represents the consumer subsidy and is paid to the FCI by the government.

The cost of buffer stock operations consists of costs related to maintaining a minimum level of buffer stock as dictated by the national food security requirements and the cost of holding stocks in excess of the food security and PDS requirements. This second part is also termed producers' subsidy, as it is a direct consequence of the price-support based procurement operations.

The inefficiencies of the FCI translate into costs in excess of the permissible limits in its various operations. This amount is also fully reimbursed to the FCI by the government .There are possibilities of increased food subsidies amounting to Rs. 70,000 crore per annum if the Bill becomes a law, which might be opposed by those who prefer to follow neo-liberal doctrine. Subsidies are usually opposed on the pretext of distortion in prices, inefficiency and leakages. The Interim Budget 2009-10 estimate of the food subsidy bill in 2009-10 was Rs. 42,490 crores.

Drought

Prolonged drought results in the depletion of surface water and a fall in groundwater levels, causing severe shortage of water for livestock and human needs. An agricultural drought is defined as a period of four consecutive weeks (of severe meteorological drought) with a rainfall deficiency of more than 50% of the LTA (long-term average) or with a weekly rainfall of 5 cm or less during the season.

During this time the relief measures are undertaken by both the State and the Central government. The steps taken may include: Suspension of revenue collection from that region, waiver of interest on loans, deferred repayment of loans, food for work programmes, direct cash relief, and assistance for crop damage, damage to livestock etc.

Commodity futures

Futures contracts perform two important functions: price discovery and hedging of price risk in a commodity. In international bourses, traders can also use financial instruments like call and put options, not yet allowed in India. Futures contracts are useful for the producer because he can get an idea of the price likely to prevail at a future point of time. They enable consumers to cover purchases by making forward contracts. For exporters, futures provide an advance indication of the price likely to prevail and thereby help them to quote a realistic price, and also hedge risk.

MINIMUM SUPPORT PRICE AND PROCUREMENT PRICE:

Earlier, the government made a distinction between the minimum support price (MSP) and the procurement price. The MSP was the price at which the government would step in and buy any amount of stocks off the farmers, in case open market prices went below this floor. The idea was to provide price support to farmers in times of glut. Procurement price was that price at which the government procured stocks of its own volition. For example, in the case of Maharashtra, the entire cotton produce in the state was (and still is) bought by the government. With the concept of monopoly procurement virtually disappearing, the terms MSP and procurement price are now used interchangeably.

The stated objective of the government's agricultural price policy is to ensure remunerative prices and income security to growers to encourage higher investment and production. The Commission for Agricultural Costs and Prices (CACP) recommends minimum support prices for around 25 major agricultural products each year. These are fixed after taking into account important factors like the cost of production, changes in input prices, trends in market prices, inter-crop price parity, demand and supply situation, effect on industrial cost structure, effect on general price level, international market prices and terms of trade.

Of these factors, cost of production is the most tangible as it takes into account all operational and fixed demands. In recent years, because of pressure from the farm lobby, the government often announces an MSP in excess of that recommended by the CACP.

The central government determines uniform central issue prices for all states for foodgrains sold through the PDS. Under the revamped targetted PDS (TPDS), those availing of the PDS have been divided into two categories of above poverty line (APL) and below poverty line (BPL). Determination of families under BPL in various states is based on the recommendations of the Planning Commission. A fixed quantity of 20 kg of foodgrains per family per month is issued under this category.

Following the latest budget, this is done at an issue price of 50 per cent of the Food Corporation of India (FCI)'s economic cost, which is the cost of procurement, storage, distribution and wastage. Issue price to APL is at the full economic cost.

Agreement on Agriculture (AoA)

The extensive use of subsidy and protectionist measures by developed countries throughout the post-World War period led to large-scale distortions of trade in agricultural products. This adversely affected the export potential of developing countries. Member governments decided to prepare for a new round of multilateral trade negotiations. In 1986, the Uruguay Round of Trade Negotiations by GATT (now WTO) was launched by which time there was a broad consensus on the need to reform agricultural policies and achieve trade liberalisation in the sector. Subsequent consultations culminated in the Agreement on Agriculture (AoA) which, as it stands today, formed part of the Final Act of the Uruguay Round of Multilateral Trade Negotiations (1986-93). Signed as part of the Uruguay Round Agreement by member countries in April 1994 at Marrakesh in Morocco, it came into force on January 1, 1995.

The AoA contains provisions in three broad areas of trade and agricultural policies - market access, export subsidies and domestic support. Under market access, the agreement states that there can be no restrictions on farm trade except through tariffs and all quantitative restrictions have to go. Tariffs are to be reduced by a simple average of 36 per cent over six years in the case of developed countries and 24 per cent over 10 years in the case of developing countries. Domestic support measures are targeted largely at developed countries where the levels of domestic agricultural support had risen to extremely high levels. It is divided into two categories: support with no, or minimal, distortive effect on trade, referred to as `Green Box' and `Blue Box' measures and second, trade distorting support (often referred to as 'Amber Box' measures).

GM FOOD

In a GM product, the genetic material is altered to benefit the consumer and producer, as it is pest-resistant and promises to offer a higher yield.GM stands for Genetically Modified. It is a technique of crop production that uses genetically modified seeds to raise crops that have some genetically ingrained abilities. It might be that some GM crops are resistant to a highly virulent

FAMINE

A famine is a widespread scarcity of food that may apply to any faunal species. This phenomenon is usually accompanied by regional malnutrition, starvation, epidemic, and increasedmortality.Emergency measures in relieving famine primarily include providing deficient micronutrients, such as vitamins and minerals, through fortified sachet powders or directly throughsupplements.

KEY CONCEPTS USED UNDER THE SECTION GOVERNMENT POLICIES - BOX III

SYSTEMS, INSTITUTIONS AND POLICY MEASURE IN INDIA AND THE WORLD

PDS (PUBLIC DISTRIBUTION)

The Public Distribution System is one of the important elements of the Government’s ‘Food Security’ system. PDS involves management of supplies of essential commodities and maintenance of their uninterrupted flow at affordable prices to the identified beneficiaries. It also works as an instrument for moderating the open market prices of food.

PDS means distribution of essential commodities to a large number of people through a network of FPS on a recurring basis. The commodities are as follows:-

  • Wheat
  • Rice
  • Sugar
  • Kerosene

PDS evolved as a major instrument of the Government’s economic policy for ensuring availability of foodgrains to the public at affordable prices as well as for enhancing the food security for the poor. It is an important constituent of the strategy for poverty eradication and is intended to serve as a safety net for the poor whose number is more than 330 million and are nutritionally at risk. PDS with a network of about 4.99 lakh Fair Price Shops (FPS) is perhaps the largest distribution network of its type in the world.

PDS is operated under the joint responsibility of the Central and the State Governments. The Central Government has taken the responsibility for procurement, storage, transportation and bulk allocation of foodgrains, etc. The responsibility for distributing the same to the consumers through the network of Fair Price Shops (FPSs) rests with the State Governments. The operational responsibilities including allocation within the State, identification of families below poverty line, issue of ration cards, supervision and monitoring the functioning of FPSs rest with the State Governments.

The Public Distribution System (PDS) evolved as a system of management of scarcity and for distribution of food grains at affordable prices. Over the years, PDS has become an important part of Government’s policy for management of food economy in the country. PDS is supplemental in nature and is not intended to make available the entire requirement of any of the commodities distributed under it to a household or a section of the society.

Public Distribution of essential commodities had been in existence in India during the inter-war period. PDS, with its focus on distribution of food grains in urban scarcity areas, had emanated from the critical food shortages of 1960. PDS had substantially contributed to the containment of rise in food grains prices and ensured access of food to urban consumers. As the national agricultural production had grown in the aftermath of Green Revolution, the outreach of PDS was extended to tribal blocks and areas of high incidence of poverty in the 1970s and 1980s.

PDS, till 1992, was a general entitlement scheme for all consumers without any specific target. Revamped Public Distribution System (RPDS) was launched in June 1992 in 1775 blocks throughout the country.

The Targeted Public Distribution System (TPDS) was introduced with effect from June 1997.

The Revamped Public Distribution System (RPDS) was launched in June, 1992 with a view to strengthen and streamline the PDS as well as to improve its reach in the far-flung, hilly, remote and inaccessible areas where a substantial section of the poor live. It covered 1775 blocks wherein area specific programmes such as the Drought Prone Area Programme (DPAP), Integrated Tribal Development Projects (ITDP), Desert Development Programme (DDP) and certain Designated Hill Areas (DHA) identified in consultation with State Governments for special focus, with respect to improvement of the PDS infrastructure. Food grains for distribution in RPDS areas were issued to the States at 50 paise below the Central Issue Price. The scale of issue was up to 20 kg per card.

In June 1997, the Government of India launched the Targeted Public Distribution System (TPDS) with focus on the poor. Under the TPDS, States are required to formulate and implement foolproof arrangements for identification of the poor for delivery of food grains and for its distribution in a transparent and accountable manner at the FPS level.

The scheme, when introduced, was intended to benefit about 6 crore poor families for whom a quantity of about 72 lakh tonnes of food grains was earmarked annually. The identification of the poor under the scheme is done by the States as per State-wise poverty estimates of the Planning Commission for 1993-94 based on the methodology of the “Expert Group on estimation of proportion and number of poor” chaired by Late Prof Lakdawala. The allocation of food grains to the States/UTs was made on the basis of average consumption in the past i.e. average annual off-take of food grains under the PDS during the past ten years at the time of introduction of TPDS.

AAY is a step in the direction of making TPDS aim at reducing hunger among the poorest segments of the BPL population. A National Sample Survey Exercise points towards the fact that about 5 % of the total population in the country sleeps without two square meals a day. This section of the population can be called as “hungry”. In order to make TPDS more focused and targeted towards this category of population, the “Antyodaya Anna Yojana” (AAY) was launched in December, 2000 for one crore poorest of the poor families.

India ha a three tier structure in the PDS. At the apex level there are natinl agencies like the FCI, State trading Corporation of India and the PSU oil companies entrusted with the task of procuring, storing and attending to other

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