Spectre of rising food prices

The indications of escalating food prices have triggered an alarm for the Modi government. The developing situation highlights three critical factors. First and politically most significant — the negative headlines generated by the release of food price data. Though this comes with at least a month's gap, the data activates the realisation that food prices are hurting the common man. For a government that won an encouraging mandate on the promise of 'good days' for its citizens, the rising trend of food prices is a major concern.

Second, the fact that Raghuram Rajan, the Governor of India's Reserve Bank of India, the lone man who had been pressing for a check on retail inflation, is not going to ease the monetary policy unless a reversal of trend in the rising retail prices takes place. That Rajan had proved to be the only sane voice amid the chaos that was called government in Delhi, makes it difficult to brush aside his views. Food prices, therefore, must be addressed.

The third and a very significant issue is the impact of rising food prices on the government's ambitious plan for development. Food price is just one element of retail price index. A number of decisions on administered prices and adjustment of the ballooning subsidy bill are imminent: prices of petroleum products including natural gas, rail fares and freight are some examples. The necessary steps for containing these and rerailing the economy on a growth path will push prices up. In an economic environment where prices have a natural tendency to rise, the measures will end up as inflationary.

To be fair to the new government, this is an inherited problem. To be fair to its predecessor, the problem had its genesis in the higher economic growth experienced during the early part of the 21st century. Inflation is a price paid for prosperity, though this in itself did not bring in affluence to the farmers. A cursory glance at the difference between the farmgate price and the market price exposes the problems. Vegetable price index recorded 25 per cent increase between March 2013 and March 2014. From January 2014 the rise in vegetable price was 4.1 per cent, largely due to seasonal factors. In summer vegetable prices increase more than the prices in the winter months. The hike was most pronounced in fruits — a steep 32.7 per cent increase in the index in May over that in January 2014. On a year-to-year basis, the rise in fruit prices in May over the same in May 2013 was 23 per cent and vegetables 15 per cent. The overall food price increase in May on a year-by-year comparison was 9.56 per cent, marginally less than 9.83 per cent in April. The consumer price index in May stood at 8.28 per cent as against 8.59 per cent in April. On the whole the conditions have not slipped so badly as to cause undue alarm.

In the overall basket for consumer price index, food prices have a 33.77 per cent weight with cereals, pulses, milk products, vegetables and fruits together accounting for 70 per cent of that. In other words 23.6 per cent weight in India's retail inflation is due to these five food items. To check the rising food prices, the government must address these five products. Out of these five, three are perishables where there will be seasonal variations in prices depending on the supply at the farmgate. Milk prices, thanks to success of the milk cooperatives, have been somewhat under check. So are the prices of the cereals and pulses where the state can intermediate with procurement and release of produce. The problem becomes acute for fruits and vegetables. In the absence of proper infrastructure on procurement, storage, distribution and infrastructure like a cold chain, India, even in 2014, remains at the mercy of the weather gods. An interesting aspect of the lack of infrastructure is revealed if one looks at the inflation rate difference between the rural and the urban areas. Food price inflation in rural areas was 10.27 per cent in May against 7.98 per cent in urban areas. Clearly, whatever little infrastructure is available for procuring and marketing food products it is directed from the rural to the urban centres, not the other way round. To the extent the rural population grows food for self-consumption they are protected from the food price rise. But whatever items they cannot procure locally and have to buy, the rural people end up paying more than the amount paid by urban consumers. Clearly, there is an urgent need for upgrading rural infrastructure so that rural markets can integrate with the urban. The one-way channel of moving food products from rural to urban is essentially due to the presence of the channel of middlemen who control the food chain. They procure from the farmgate, take it to the mandi and then hand it over to another set of middlemen. Finally, when the food item reaches the market, the price increases manifold. For example, bitter gourd (karela) that a farmer sells at Rs4 a kg ends up in the shopping bag in Delhi market at Rs20 — a whopping 400 per cent increase in price. Innumerable middlemen who have to recover their cost with a mark up and the unavoidable waste in case of the perishable commodity add up to this price. Karela is not an isolated example, there are many others.

It is said that the APMC Act (Agricultural Produce Marketing Committee Act) regulating agricultural markets in most parts of the country, is to blame. The state is divided into different market areas, which are managed by the committees constituted by the state governments. Once a particular area is declared a market area and falls under the jurisdiction of a market committee, no person or agency is allowed to freely carry on wholesale marketing activities. The licensing of traders leads to monopoly and provides little help to farmers in direct and free marketing.

Taking note of these factors, New Delhi has announced de-listing of fruits and vegetables from the purview of the APMC Act. But it is for the states to implement it. The ruling state governments might not like to ruffle the feathers of the politically important middlemen. No major announcements have come from states yet. The long-term solution of building infrastructure for food procurement will take time. Will the good intention shown by the Central government therefore remain a PR exercise only?

The writer works as a consultant analyst on economic issues impacting business in India