FOOD PRICE INFLATION AND ITS IMPACT IN INDIA Submitted By : Sri Harshini Mudigonda MBA G SEM III Specialization: Finance – Marketing Under The Guidance Of : Dr. AZRA Ishrat ABS ,LUCKNOW STUDENT’S CERTIFICATE Certified that this report is prepared based on the desertation thesis project undertaken by me for the topic FOOD PRICE INFLATION IN INDIA AND ITS IMPACT, under the able guidance of Dr . Azra Ishrat in partial fulfillment of the requirement for award of degree of Master of Business Administration (MBA-G) from Amity University, Uttar Pradesh.
Date. ______________ Signature Signature Signature Sri Harshini M Dr Azra Ishrat Professor R P Singh Student Faculty Guide Director (ABS) FACULTY CERTIFICATE Forwarded here with a summer internship report on Food Price Infaltion In India and its Impact” submitted by SRI HARSHINI MUDIGONDA Enrollment NO. , student of MBA (G) 4th Semester (2009-2011).
This project work is partial fulfillment of the requirement for the degree of Master in Business Administration from Amity University Lucknow Campus, Uttar Pradesh. Dr . Azra Ishrat AMITY UNIVERSITY, LUCKNOW CAMPUS UTTAR PRADESH ACKNOWLEDGEMENT In the venture , cooperation is sought from many persons . It is my humble duty to express great sense of gratitude to my project guide Dr. Azra Israt under whose support and supervision made my project successful. . I would also like to thank ABS Director , Prof. R. P. Singh and under whose able guidance , was able to complete my project efficiently .
Last but not the least , I would like to express my sincere thanks to AMITY BUSINESS SCHOOL for availing me with resources including library , internet etc in order to complete my research. SRI HARSHINI MUDIGONDA CONTENTS S. no Topic Pg. No. 1. Student Certificate ………………………………………………… 2 2. Certificate of Faculty guide…………………………………………. 3 3. Certificate of the Industry guide
One of the reasons identified for the present inflationary situation in India has been the high food prices. However, the nature of the contribution by this product category to the present price spiral remains vague. Among food products, the blame should fall mainly on oil cakes, edible oils and dairy products for the current food price spiral. Contrary to the popular perception, the primary food articles have not much to do with the rising food prices. Interestingly, compared to the past, the current situation in respect of the prices of primary food articles is not as precarious as perceived
Recent steep price increases of major crops (cereals, oilseeds) were triggered by a combination of production remaining somewhat below trend and strong growth of demand. The acute price hike adds to inflationary pressures in developed countries. Poor consumers in developing countries, and food importing developing countries overall, will have to spend an even higher share of their limited income on food. In the medium term, there is a need to foster growth and development in poor countries, to improve the purchasing power of food buyers.
Agricultural trade policies require further reform in order to ensure an effective supply response. Investments in productivity growth, particularly in less developed countries, should also strengthen the supply side of global agriculture. On the demand side, policies that encourage increased production and use of biofuels from agricultural commodity feed stocks warrant review. The data collected by me was purely on secondary basis sources being internet , newspaper articles and magazines. CHAPTER – I THEORETICAL PRESENTATION OF THE TOPIC OBJECTIVE OF THE REPORT To study the existing system of food prising in india.. •To examine the feasibility of present system of Managing food crisis in india. •To study the significance of food price inflation in india. •Suggesting a better way if any for improving food inflation in india Introduction The rapid increase in prices of rice, wheat, corn and other food staples has sent a shock wave through poor households around the world, as well as through governments and international policy makers. While food prices are always volatile, recent increases are of a magnitude last seen in the 1970s.
There are multiple causes: rising demand in large developing countries that have experienced growth in household incomes; neglect of agriculture in many developing countries over recent decades, leading to reduced supply; increased costs to farmers due to high fuel and fertilizer prices; competition from biofuels for land use; supply disruptions caused by drought in major agricultural exporting countries; speculation and an asset bubble in commodity markets; and the decline of the dollar, the currency in which many commodities are priced on global markets.
Before turning to those issues, it must be noted that the rise in food prices has created a crisis for many poor households that demands an immediate policy response from the global community. The poor, often those displaced by civil strife, who already depend on aid agencies for their food supply must be protected from hunger caused by rising prices. Rising prices will push many other poor households into deeper poverty and increase demands on food programs. The world must supply additional aid quickly.
The initial response from wealthy countries has been promising, although translating commitments by heads of state into actual appropriations and delivery of aid remains to be accomplished. Pressure must be kept up. In many developing countries, governments will need to provide safety nets, such as cash vouchers or subsidized food, to help poor households afford adequate nutrition. Some countries will have the budgetary resources to fund such programs, but many low-income countries will need help from international donors.
In order to understand various issues about food price inflation , it is necessary to understand what inflation actually is. What Is Inflation? Inflation is defined as a sustained increase in the general level of prices for goods and services. It is measured as an annual percentage increase. As inflation rises, every dollar you own buys a smaller percentage of a good or service. The value of a dollar does not stay constant when there is inflation. The value of a dollar is observed in terms of purchasing power, which is the real, tangible goods that money can buy. When inflation goes up, there is a decline in the purchasing power of money.
For example, if the inflation rate is 2% annually, then theoretically a $1 pack of gum will cost $1. 02 in a year. After inflation, your dollar can’t buy the same goods it could beforehand. There are several variations on inflation: • Deflation is when the general level of prices is falling. This is the opposite of inflation. • Hyperinflation is unusually rapid inflation. In extreme cases, this can lead to the breakdown of a nation’s monetary system. One of the most notable examples of hyperinflation occurred in Germany in 1923, when prices rose 2,500% in one month! Stagflation is the combination of high unemployment and economic stagnation with inflation. This happened in industrialized countries during the 1970s, when a bad economy was combined with OPEC raising oil prices. In recent years, most developed countries have attempted to sustain an inflation rate of 2-3%. Causes of Inflation Economists wake up in the morning hoping for a chance to debate the causes of inflation. There is no one cause that’s universally agreed upon, but at least two theories are generally accepted: Demand-Pull Inflation – This theory can be summarized as “too much money chasing oo few goods”. In other words, if demand is growing faster than supply, prices will increase. This usually occurs in growing economies. Cost-Push Inflation – When companies’ costs go up, they need to increase prices to maintain their profit margins. Increased costs can include things such as wages, taxes, or increased costs of imports. Costs of Inflation Almost everyone thinks inflation is evil, but it isn’t necessarily so. Inflation affects different people in different ways. It also depends on whether inflation is anticipated or unanticipated.
If the inflation rate corresponds to what the majority of people are expecting (anticipated inflation), then we can compensate and the cost isn’t high. For example, banks can vary their interest rates and workers can negotiate contracts that include automatic wage hikes as the price level goes up. Problems arise when there is unanticipated inflation: • Creditors lose and debtors gain if the lender does not anticipate inflation correctly. For those who borrow, this is similar to getting an interest-free loan. • Uncertainty about what will happen next makes corporations and consumers less likely to spend.
This hurts economic output in the long run. • People living off a fixed-income, such as retirees, see a decline in their purchasing power and, consequently, their standard of living. • The entire economy must absorb repricing costs (“menu costs”) as price lists, labels, menus and more have to be updated. • If the inflation rate is greater than that of other countries, domestic products become less competitive. People like to complain about prices going up, but they often ignore the fact that wages should be rising as well. The question shouldn’t be whether inflation is rising, but whether it’s rising at a quicker pace than your wages.
Finally, inflation is a sign that an economy is growing. In some situations, little inflation (or even deflation) can be just as bad as high inflation. The lack of inflation may be an indication that the economy is weakening. As you can see, it’s not so easy to label inflation as either good or bad – it depends on the overall economy as well as your personal situation. How Is It Measured? Measuring inflation is a difficult problem for government statisticians. To do this, a number of goods that are representative of the economy are put together into what is referred to as a “market basket. The cost of this basket is then compared over time. This results in a price index, which is the cost of the market basket today as a percentage of the cost of that identical basket in the starting year. In North America, there are two main price indexes that measure inflation: • Consumer Price Index (CPI) – A measure of price changes in consumer goods and services such as gasoline, food, clothing and automobiles. The CPI measures price change from the perspective of the purchaser. U. S. CPI data can be found at the Bureau of Labor Statistics. Producer Price Indexes (PPI) – A family of indexes that measure the average change over time in selling prices by domestic producers of goods and services. PPIs measure price change from the perspective of the seller. U. S. PPI data can be found at the Bureau of Labor Statistics. Inflation And Interest Rates Whenever you hear the latest inflation update on the news, chances are that interest rates are mentioned in the same breath. In the United States, interest rates are decided by the Federal Reserve. The Fed meets eight times a year to set short-term interest rate targets.
During these meetings, the CPI and PPIs are significant factors in the Fed’s decision. Interest rates directly affect the credit market (loans) because higher interest rates make borrowing more costly. By changing interest rates, the Fed tries to achieve maximum employment, stable prices and a good level growth. As interest rates drop, consumer spending increases, and this in turn stimulates economic growth. Contrary to popular belief, excessive economic growth can in fact be very detrimental. At one extreme, an economy that is growing too fast can experience hyperinflation, resulting in the problems we mentioned earlier.
At the other extreme, an economy with no inflation has essentially stagnated. The right level of economic growth, and thus inflation, is somewhere in the middle. It’s the Fed’s job to maintain that delicate balance. A tightening, or rate increase, attempts to head off future inflation. An easing, or rate decrease, aims to spur on economic growth. Keep in mind that while inflation is a major issue, it is not the only factor informing the Fed’s decisions on interest rates. For example, the Fed might ease interest rates during a financial crisis to provide liquidity (flexibility to get out of investments) to U.
S. financial markets, thus preventing a market meltdown. Inflation And Investment When it comes to inflation, the question on many investors’ minds is: “How will it affect my investments? ” This is an especially important issue for people living on a fixed income, such as retirees. The impact of inflation on your portfolio depends on the type of securities you hold. If you invest only in stocks, worrying about inflation shouldn’t keep you up at night. Over the long run, a company’s revenue and earnings should increase at the same pace as inflation. The exception to this is stagflation.
The combination of a bad economy with an increase in costs is bad for stocks. Also, a company is in the same situation as a normal consumer – the more cash it carries, the more its purchasing power decreases with increases in inflation. The main problem with stocks and inflation is that a company’s returns tend to be overstated. In times of high inflation, a company may look like it’s prospering, when really inflation is the reason behind the growth. When analyzing financial statements, it’s also important to remember that inflation can wreak havoc on earnings depending on what technique the company is using to value inventory.
Fixed-income investors are the hardest hit by inflation. Suppose that a year ago you invested $1,000 in a Treasury bill with a 10% yield. Now that you are about to collect the $1,100 owed to you, is your $100 (10%) return real? Of course not! Assuming inflation was positive for the year, your purchasing power has fallen and, therefore, so has your real return. We have to take into account the chunk inflation has taken out of your return. If inflation was 4%, then your return is really 6%. This example highlights the difference between nominal interest rates and real interest rates.
The nominal interest rate is the growth rate of your money, while the real interest rate is the growth of your purchasing power. In other words, the real rate of interest is the nominal rate reduced by the rate of inflation. In our example, the nominal rate is 10% and the real rate is 6% (10% – 4% = 6%). As an investor, you must look at your real rate of return. Unfortunately, investors often look only at the nominal return and forget about their purchasing power altogether. CHAPTER 2 Food Pricing For decades, food prices had been declining in real terms, allowing millions of people around the globe to escape from the trap of poverty.
This long-term trend took place despite rapid income and population growth, as agricultural productivity rose steadily. However, productivity gains began to stagnate in the face of continuing growth in demand, bringing about a reversal of this long-term trend. Rising food prices contributed to an acceleration of inflation across the Asia and Pacific region during 2007, and in 2008 the further rise in food prices has reached alarming proportions. The rise in food prices is worrisome precisely because food price inflation is the most regressive of all taxes—it hurts the poor the most.
This paper addresses the dimensions of the so-called “food crisis” in developing Asia, including the relationship of rising international prices of staple foods to domestic food prices; the impact of dramatically higher prices on growth, inflation, fiscal balances, as well as poverty and inequality; and the policy choices and responses to elicit a supply response and, in the longer run, realize sustainable productivity gains in agriculture that will mitigate the current crisis. First, recent trends in global food prices and their implications for food prices in developing Asia are examined.
Section II explains the reasons behind the recent surge in food prices, while Section III provides a scenario analysis of macroeconomic impacts of food prices on inflation and growth in 2008 and 2009, and explores the fiscal consequences of measures aimed at sheltering consumers from the full brunt of the price increases. Section IV presents an assessment of how the rise in food inflation will affect the incidence and severity of poverty and inequality prior to any supply response (the pure price effect). Section V analyzes the supply response as prices rise and farmers respond, using a computable general equilibrium model.
Section VI identifies medium-term and long-term prospects for investment and productivity growth in agriculture that are essential if developing Asia is to manage the problem, so that the hard won reductions in poverty incidence in the region are not reversed. Section VII reviews policy responses across the region and concludes with the key messages of the paper. International prices of the two key staple cereals produced and consumed by Asians, rice and wheat, have spiked in recent months. Rice prices have been rising steadily but incrementally until late 2007—by which time they were roughly double the levels of 2002.
In the fourth quarter of 2007 and in the first quarter of 2008, the rate of increase of international rice prices sharply accelerated, fueling inflation and stoking fears of a 21st century food crisis in the region. Wheat—the second most important item in the food consumption basket in Asia—has also had a spike in international prices albeit not as pronounced as in the case of rice (Figure 2). Since rice is the basic staple for over 2 billion Asians and wheat for an additional billion, there is concern that unless the problem is managed well, there could be social tension and unrest on the horizon.
In general, international markets in rice are shallow and subject to heavy regulation and protection compared with those for wheat. The sensitivity of rice prices to slight changes in international supply and demand compounds the difficulty of managing the problem of high rice prices relative to that of high wheat prices. In addition to rapid increases in cereal prices in the region, other food items are also experiencing high prices including vegetable oils, soybeans, meat products, and fish. Across developing Asia, rising food prices are pushing up inflation.
There is a clear and present danger that rising food prices will push large numbers of households back below the poverty line in developing Asia. In the first months of 2008, food price inflation has hit double digits in Bangladesh; People’s Republic of China (PRC); Hong Kong, China; Indonesia; Pakistan; and Viet Nam. Food price inflation is also rising in India, Malaysia, Philippines, Singapore, and Thailand. And although no 2008 figures are yet available for Sri Lanka, there is little doubt that food prices are also rising at double digits there as well.
Wheat-dependent countries in Central and West Asia are also experiencing double-digit rates of food inflation (ADB 2008). The problem is not confined to importing countries, as net exporters are also experiencing food price inflation. In fact, the rising inflation pressure has been more intense in net exporting countries (compare Figure 7 and Figure 8). The indices understate the true amount of food inflation pressures as governments have introduced numerous policy measures to suppress prices.
It can readily be seen that the general index of domestic food prices in developing Asia (Figures 7 and 8), while on an upward trend, is not anywhere near as pronounced as the rise in international rice and wheat prices (Figures 1 and 2). The first reason is that cereal grains imports make up a fairly small percentage of consumption and production in most developing Asian countries with significant agricultural sectors. Rice and wheat also constitute roughly a quarter of the weights in food used to construct the consumer price index (CPI).
Furthermore, international prices are denominated in United States (US) dollars, and most regional currencies have appreciated somewhat against the dollar over the last year or so. Finally, governments have intervened to cushion consumers from the sharp rise in staple food prices through various measures. Still, the sharp acceleration of food prices in recent months is evident in the figures The explosion in food prices across the region is a threat to macroeconomic stability through inflation, the rising fiscal cost of food subsidies, and the possible exchange rate depreciation in foodimporting countries.
The rate of inflation measured by the CPI in 2007 accelerated in developing Asia to 4. 3%, up from 3. 3% in 2006, and currently is forecast to surge further in 2008 to 4. 8% (ADB 2008). The fiscal burden of food subsidies will mount in 2008 given the sharp rise in food prices that is occurring across the region. Already, some rice-importing countries are experiencing weakening currencies against theUSdollar, which threatens to push inflation rates even higher in 2007 . The problem is not confined to importing countries, as net exporters are also experiencing food price inflation.
In fact, the rising inflation pressure has been more intense in net exporting countries (compare Figure 7 and Figure 8). The indices understate the true amount of food inflation pressures as governments have introduced numerous policy measures to suppress prices. Food prices carry considerable weight in consumer expenditure baskets (see Table 1) used to construct the CPI in developing Asia, and there is a strong correlation between food price inflation and general CPI inflation Table 1 Food Weights in CPI ECONOMYSHARE (%) China, People’s Rep. of33. 2 Hong Kong, China26. 94
India57 Indonesia42. 3 Korea, Rep. of14 Philippines46. 58 Singapore23. 38 CAUSES OF HIGH FOOD PRICES Prices of close substitutes for rice are rising sharply as well: wheat,maize, and soybeans & all other food products are all at record highs. Three sets of factors mustbe taken into account in order to explain what is happening to food prices in developing Asia ,especially India. First is the distinction between structural and cyclical factors; second is the distinction between supply and demand; and third is the relationship between international and domestic markets. A .
STRUCTURAL AND CYCLICAL FACTORS Structural factors are fundamental in explaining what has happened to food prices in recent years. The current steep increases in the price at which rice is traded in international markets reflect not only shortfalls in production relative to current consumption but also reflect the attempt to rebuild stocks themselves, putting even greater upward pressure on demand relative to supply. Cyclical factors as well have been unkind in influencing price trends. Adverse weather including the drought-related harvest failure of wheat and the flooding have harmed production.
Recent financial market turmoil has also exerted a cyclical effect as investors turn to commodities with high expected rates of return in contrast to poor returns from equities, bonds, and money market instruments. B . DEMAND AND SUPPLY FACTORS The most important demand factors in the rise in food prices in recent years are long-term in nature and can also be thought of as supporting the view that structural rather than cyclical factors are predominant. Among these demand-side factors are growing world population and strong income growth in emerging economies around the globe.
The latter factor is associated with dietary change toward higher-quality food such as meat and dairy products. Production of meat and dairy products requires large amounts of grain in the form of livestock feed. In order to produce a single kilogram of beef, it may take as much as 7 kilograms of grain, hence as caloric intake shifts to more protein, more and more grain is demanded for the same amount of calories for human consumption. Another important structural demand factor is the competing use of food grain to produce ethanol as a substitute for oil.
Biofuel demand is rising and is leading to diversion of grain, soybeans, sugar, and vegetable oil from use as food or feed. On the supply side, urbanization and competing demand for land for commercial as opposed to agricultural purposes is an important factor, as is the increasing scarcity of fresh water for agriculture. Cropping patterns away from food to biofuels may also reduce the available supply of land devoted to food. Neglect of investment in agricultural technology, infrastructure, and extension programs is also to blame for the tepid growth in the supply of rice.
Pricing policies may have played a role by discouraging farmers from increasing marketed supplies. Also, poor and marginal farmers may not have the means to respond and may also be hurt if they are net buyers rather than net sellers of food. The rise in costs of inputs related to record-high fuel prices and rising costs of power for irrigation pumps also are factors. Inadequate post harvest milling and storage facilities entail losses as does poor infrastructure and bureaucratic indifference. C . DOMESTIC AND WORLD MARKETS
Government short-term responses have made matters worse by attempting to paper over relative price changes and shield consumers through beggar-thy-neighbor policies of restricting exports and using administrative measures in an attempt to control prices. In order to shield consumers, taxes and import duties on imported grains are being reduced in net importing countries—temporarily. Price subsidies are also widely applied throughout the region for staple foods such as rice and for suppression of food prices.
It is not possible to untangle all the causes of rising prices without conducting a more detailed statistical analysis or decomposition of price movements. However, it appears from the discussion of these three sets of factors above that structural factors are swamping cyclical factors, as price spikes have occurred in the context of slowing world growth. The International Monetary Fund in its World Economic Outlook 2008 (IMF 2008) has cut its forecast for world growth drastically in 2008 from 4. 1% down to 3. 7%.
In spite of this slowdown, prices have been accelerating, indicating that it would be unwise to be complacent, and that higher food prices are not merely a short-term phenomenon that markets will automatically correct. This has strong implications for macroeconomic stability, poverty incidence and inequality, and for corrective measures over time. MACROECONOMIC EFFECTS OF HIGH AND RISING FOOD PRICES A . Analysis Of Food Price Shocks Food prices have been rising since 2007, but in the first three months of 2008, the rate of increase has accelerated.
The World Bank’s food price index climbed 57. 5% in the first quarter of 2008 relative to the corresponding figure a year ago. At the same time, energy prices have also been on an upswing, with the World Bank’s oil price index growing by 66. 5% in the first quarter of 2008. These global developments are likely to cascade to developing Asian economies’ growth and inflation prospects. Two scenarios have been analysed to stimulate the effects of food and fuel price inflation . In the first scenario, it is assumed that the 57. % increase in world food prices in the first quarter of 2008 is maintained through the fourth quarter of the year. In the second scenario, the 66. 5% growth in world oil prices is added on top of the 57. 5% world food price increase. The rise in oil prices is critical in analyzing food price increases since fertilizer prices, which are highly dependent on petroleum and natural gas prices, move in tandem with energy prices. In 2009, the growth in food and oil prices is assumed to revert to the baseline rates in the Oxford Economics model.
But as food and fuel prices continue to rise, these economic responses could well be underestimates. In the second scenario, the impacts are much more pronounced, with regional inflation rising by 2. 37 percentage points in 2008. However, the results are further magnified in the second year under both scenarios, since the model takes time to adjust to the exogenous food and oil price shocks. With food and oil accounting for a large share of consumer price indexes in the region, and with a majority of countries being net food and oil importers, the consequent rise in developing Asia’s prices is not surprising.
Food Pricing Food inflation is considered as one of the most regressive forms of taxation; it affects the common man, and hurts poor consumers more than those in higher income groups. It is a cause of great concern, especially for developing countries where a larger section of population is net buyer of food. Of late, high inflationary pressure particularly double digit food inflation since October 2008, is turning out to be a spoilsport in an otherwise robustly growing economy; 8. % in the first half of 2010-11. If continued unabated, this will aggravate the already conspicuous food and nutritional insecurity in the country. The fact that people in the lowest income quartile, accounting for more than a quarter of the population, spend nearly 65% of their total expenditure on food commodities (GoI, 2006), adds gravity to the situation. Fig 1 : WPI inflation in food and non food commodities Food prices in India started spiralling-up since mid-2008 onwards, reaching a peak in February 2010.
The spill-over effects were visible in other sectors also and 2010 witnessed overall inflation rate crossing the psychological threshold of 10% for five months in a row. Inflation based on year-on-year wholesale price index (WPI) of primary food articles, on which the people spend the most, still rules high at double digits (in January 2011). Even though, the government took several measures in a bid to reign in food inflation, the problem persists indicating that it may be treating only the symptoms, and not getting to the root causes behind high food inflation.
Several factors like drought-induced shortages in food supply, rising international prices, fragmented value chains resulting in a large price spread of high-value commodities, greater government spending leading to increased money supply, structural changes in demand patterns, etc. are being cited as the main reasons behind this high food inflation, although the jury is still out with regard to the exact influence of each of these probable factors. NCAP, New Delhi IFPRI, New Delhi
This note attempts to analyze the nature of the problem, provide some diagnostics of the underlying causal factors, and suggest both short-term and long-term policy options that may help bringing the situation back to normal. Nature and structure of food inflation India did not face double-digit inflation in food during the past several years despite severe droughts and decline in food output in some years (Chand and Shinoj, 2010). In the initial seven years of the decade starting 2000, both food and non-food inflation was moderate, in the average range of 6-8%.
However, after this relatively long gap, the country experienced two episodes of high inflation in general price index, the first during May to November, 2008 and subsequently from January 2010 till date with some temporary relief. Even though non-food prices decreased sharply after the first episode bringing down the overall inflation, the food prices remained high during all this period. As evident from figure 1, the rate of food inflation crossed 20% in December 2009 and again in February 2010. Despite a downward movement in the rate of increase of food prices since this peak, the problem seems far from over.
It is easier to understand the nature of food inflation by disaggregating total food into primary food articles and manufactured food products with a weight of 59% and 41%, respectively. Primary food articles include cereals, pulses, fruits and vegetables, milk, meat and fish, spices, etc. , whereas the major components of manufactured food products are sugar, dairy products, vegetable oils, prepared food stuff and other processed items. As observed from figure 2, till January 2010 the rates of price rise in food articles and food products were more or less aligned with one another, but later, they followed disparate trends.
While the prices of food products declined sharply afterwards, food article inflation remained in double digits and even shooting up again in the late-2010, prompting us to infer that the high prices of food articles are currently preventing the overall food inflation to wither away. It is interesting to note that no single commodity or commodity group consistently contributed to higher food inflation. In 2008, high prices of food grains and manufactured food products contributed more towards inflation than any other commodity group, gradually receding thereafter.
Between the first quarter of 2009 and last quarter of 2010, share of food grains in overall food inflation declined from 25% to 0. 3%, while that of food products eased out from 32. 3% to 6. 8% (figure 3). Commodities like fruits and vegetables, milk and meat group dominated overall food inflation in the fourth quarter of 2010. The overriding role of fruits and vegetables group in this quarter can be specifically attributed to the sudden spurt in prices of onion due to production deficit in key producing areas.
Also, the role of structural demand-supply mismatch cannot be ruled out and it will take sometime when supply responds to higher demand. The consistently increasing contribution of milk and meat group to food inflation is particularly visible during the past two years Fig 2 : Contribution of various commodities to inflation The receding effect of food grains and manufactured food products and sustained influence of fruits, vegetables, milk and meat group is clearer from their rates of inflation during 2010 and is presented in Table 1.
The food grains inflation weakened substantially from 19. 5% in January 2010 to (-) 2. 59% in December 2010. Similar was the case with manufactured food products, while the inflation rates of fruits and vegetables, milk and meat remained in double digits. In the case of onion, inflation was moderate in January 2010, remained negative from April to June 2010 before the sudden and sharp jump to 45. 8% in December 2010. Table 1. 1 Recent Trends In Inflation In Major Food Commodities : 2010 MonthFood GrainsFruits & VegetablesOnionMilkMeat GroupManufacturing Food January19. 57. 89726. 5936. 6019. 16 April11. 0514. 32-10. 027. 9138. 619. 09 July9. 6313. 22-7. 526. 0631. 427. 34 October3. 8912. 3922. 321. 0427. 373. 75 December-2. 5922. 7745. 818. 2119. 230. 35 Post-liberalization, the integration of Indian economy and agriculture has increased considerably with the global markets. This leads to increasing transmission of global prices to domestic markets. Therefore, the situation of domestic inflation cannot be viewed in isolation and it is important to look at the global picture as well.
As observed from the FAO monthly food price indices, a composite index of five major food groups (2002-04=100), global food inflation was at a much higher level during January to September 2008, compared to that in 2006 and 2007 (figure 4). Current food inflation has been surging and has crossed the peak of June 2008 (at 213. 5) in December 2010 (at 214. 7). Unlike in the past, global food inflation at present is being driven more by non-cereal commodities such as sugar, oil & fats, dairy, etc. The price spikes in rice, wheat and maize are not as precarious as they were in 2008 but are also following an upward trend (figure 5).
There are advance alarms that global food prices are increasing towards new peaks with anticipated implications on the domestic food prices in India too. Fig 3 : FAO Monthly food price indices Fig 4 : Global Price movements of selected agricultural commodities and crude oil. Although global prices impact domestic price movement along a similar trend, it has not been the case in 2007-2008 when international prices were skyrocketing and India was successful in warding off the transmission effect (Chand et al. , 2010).
However when global prices were somewhat cooling off, domestic inflation gathered steam which indicates that the ongoing crisis in India is being driven by a combination of interrelated factors and has roots within the country. In this context, it is topical to look at the diagnostics of rising food price inflation and alternative policy options to tame it. Some diagnostics of food inflation Supply shortfall The most important and widely discussed causal factor for the ongoing crisis is the demand–supply imbalance in food commodities.
Production of staples and other essential commodities is constrained by stagnating area under cultivation and plateauing of crop yields and hence not matching up with increasing demand. Though a sunrise sector, the fast growing demand of high-value livestock products like meat, egg, milk, etc. is outpacing their supply growth. In spite of the fact that capital investment in agriculture and allied sector has nearly doubled in real terms over the past seven years or so, commensurate productivity gains are not perceptible.
This is perhaps because of low capacity utilization and insufficient delivery of services to make use of the new infrastructure created under various projects. The drought in 2009 caused by deficient south-west monsoon was an immediate reason for supply shortfalls and consequent inflation during later half of year 2009, extended to 2010 (Chand, 2010). The country received around 25% less precipitation in the 2009 kharif season in relation to long-term average. As a result, production of major food commodities was affected leading to overall shortfall in production of food grain and other major crops like oilseeds and sugarcane.
Rice production was down by around 12% compared to the previous year. Wheat production was less than targeted, but not lower than that of previous year. Production of pulses, oilseeds and sugarcane also suffered a perceptible reduction. Though the country received sufficient monsoon in the year 2010, and overall growth in agriculture is slated to pick up momentum, crop losses were reported in several parts of the country due to unseasonal rainfall during the harvesting season. For nstance, weather aberrations in November 2010 affected the output of onions in Maharashtra and Gujarat leading to conspicuously low market arrivals in December. The untimely heavy showers in southern India also affected the onion crop in Karnataka and Tamil Nadu, with an estimated overall damage of 30%-35% of the crop. This has resulted in unprecedented rise in onion prices in most parts of the country, reversing the downward movement of food inflation in December 2010. Huge crop losses were also reported from Orissa due to heavy rainfall in December.
In a similar line, the rains are also reported to have affected the flowering of mango crop in Maharashtra due to which supply shortage of mango in the coming season is anticipated. Deficiencies in distribution chain While there are genuine concerns about supply trailing behind increasing demand, better food grain management and prudent trade decisions can be effective strategies to counter inflation in the short- run. On one hand, the government is grappling with high food inflation, and on the other hand, it faces the problem of managing large volume of stocks, much above stipulated buffer stock norms.
As of 1st January, 2011 the stock of food grains in the central pool was pegged at 47. 1 million tonnes whereas the prescribed stock limit in January is only 20 million tonnes, leading to unnecessary high storage cost on one hand and constraining supplies of grains in the market on the other. However, inflation in recent months is being driven by commodities like fruits and vegetables, milk and meat for which no public stocks are held and therefore, remedy largely involves augmenting the supplies and improving efficiency in distribution.
In the case of high-value commodities, fragmented markets and lack of integration result in higher price volatility. The problem lies not as much with production as with post-harvest losses and wastage due to lack of advanced supply chains infrastructure to ensure smooth delivery from farms to markets and finally to consumers. The price spread in some commodities like fruits and vegetables is quite large on account of fragmented supply chains and high commission cornered by middlemen. In addition to this, black marketing and hoarding also add to flaring up of margins, as perhaps was the case in onions.
Demand side factors While various supply constraints are central to the rising food prices, role of demand side factors is also crucial and needs to be looked at from the broader spectrum of monetary and fiscal policies. It is observed that money supply (M3) has been growing at the rate of 20% and above during 2006-07 and 2008-09 and nearly 20% in 2009-10. Gross market borrowings by central and state governments have increased manifold, from Rs 1817. 5 billion in 2005-06 to Rs 6236. 2 billion in 2009-10.
These together with reduction in repo rate and cash reserve ratio in response to the economic slowdown have resulted in pumping in of excess liquidity in the system, now hitting back with a lag in terms of uncontrollable food price inflation (table 1. 2). Table1. 2: Trends in inflations and selected indicators of monetary policies YearWPI allWPI foodM3Market borrowings (in Rs billion)Repo rate (%)Cash reserve ratio (CRR) 2005 – 06 4. 353. 6715. 41817. 5(24. 5)7. 25(Oct 2006)5. 26(Dec 2006) 2006 -076. 517. 8820. 52001. 9(10. 2)7. 75(Mar 2007)6. 0(Mar 2007) 2007-084. 825. 6322. 12259. 8(27. 9)9. 00(Jul 2008)8. 75(Jul 2008) 2008-098. 038. 9420. 54366. 8(70. 6)5. 50 (Jan 2009)5. 00(Jan 2009) 2009-103. 5714. 6019. 26236. 2(42. 8)5. 75(Jul 2010)6. 00(Apr 2010) With the introduction of recommendations of the sixth pay commission, expansion of rural employment scheme (MGNREGS) and Kisan Credit Cards, popular loan waivers and fertilizer subsidies, disposable income with the people has increased in both urban and rural areas, thereby giving rise to increase in demand for food as also non-food items.
It is interesting to note that the demand is increasing much faster in case of high-value commodities like fruits and vegetables, milk and milk products, meat, fish, etc. than that of cereals simply because high-value products have higher expenditure elasticity. The Great Onion Disaster Recently, the sky rocketing of onion prices made head lines and sent ripples across the polity, the issue was immediately addressed and relief to some extent was brought. This was but a stark manifestation of the disturbing trend of accelerating food inflation that India has now been experiencing for 3 years.
While exogenous & institutional factors have certainly contributed to this trend, what is worrying is the coming to the fore of significant structural elements, which point to a scenario of continued food inflation unless major changes in the sector are brought about. Rise in onion prices had brought down tears in most of the indians’ eyes. Before buying Onions from the market (sabzi-mandi) people were thinking twice, in fact in some of the small time restaurants “cabbage” was used as a substitute to Onion.
Onion being one of the most used commodity/vegetable, its something which is found in every house and is being bought by the majority as onion is such a vegetable which is used in cooking most of the dishes and salads Nationally. Prices have shot up from Rs 11/kg in June 2010 to Rs 60-80/kg in December 2010. They rose the most in the past 20-25 days. The price rise is due to unusual heavy rainfalls in the top most onion growing areas which has disrupted the supply-demand ratio.
Skyrocketing Prices Forced Government To Intervene and Control Prices The Onion Price rise issue has forced the Prime Minister of India to write a letter to the Agriculture Minister, Sharad Pawar and asked his ministry to control down the price of onion in India. As a result of which, Onion export has been banned till January 15th, 2011. Now India cannot export till the Government lifts the ban. The ban in exporting Onions made wholesale market price of onions to correct as much as 30% . Onion imports from Pakistan at Loss
When India is going through the Onion crisis, our neighbor countries like Pakistan is benefit from the windfall. Earlier this year in June, India were exporting onion to Pakistan at a rate of Rs 16-18/kg. But for the first time on the back of crisis in India, onion is being imported from Pakistan. Now Pakistan is exporting onion to India at whopping Rs 40/kg. Sources tells that at least 100 Metric Tons have been imported from Pakistan till now and more import is likely in the coming day given the crisis if continues Proposal to control onion prices Various proposals were being made to reduce onion prices.
For instance in according to Times Of India Jan 17th 20101 Chandigarh a proposal aimed at controlling the spiralling prices of onions would be shortly submitted to UT administrator. A joint survey operation conducted by SDM (south) and food and civil supplies department in Sector-26 grain market revealed that majority of wholesalers were not adhering to rates fixed by the department. A large number of sellers did not agree with the UT officials’ optimistic understanding that the hike was over. Senior department official NPS Randhawa said the joint search team was in the process of finalizing the proposal to be submitted to UT administrator.
They said that they were looking at routing the delivery system through Manimajra cooperative society so that they were able to manage the prices of onions and other vegetables CHAPTER 4 Food Pricing and its impact Even before the food crisis, the poor and vulnerable were significantly left behind. Rising food prices would further undermine the food security and livelihoods of the most vulnerable by eroding their already limited purchasing power. Poor people spend 60 to 70 per cent of their income on food and they have little capacity to adapt as prices rise and wages may not adjust accordingly.
Thus, the situation in India can still pose a threat to food and nutrition security of the country. Apart from the problem of rise in food prices, India is also facing the adverse impact of global financial crisis since the 3rd quarter of 2008. The current financial crisis originated in the financial sector of the United States and is being transmitted to countries around the world through several channels. The sub-prime mortgage lending and collapse of housing market, flawed regulatory systems have affected the financial institutions around the world.
India has largely avoided the impact on banking system. However, the crisis has adverse impact on liquidity situation and the economic growth in India. This in turn can have adverse affect on the poor and food security of the country. Although the underlying causes for the rise in food prices and financial crisis are different, they are interconnected through their implications on financial stability, food security and political security (Braun, 2008). At the global level, the capital was diverted from the collapsing housing market to speculation in agricultural futures.
Speculative activities were partly responsible for the rise in global food prices. The food crisis increased general inflation and impact on macro economic policies. Similarly, the financial crisis can have impact on employment, poverty, agriculture investment and social sector expenditures. Therefore, both food and financial crisis may have adverse impact on food and nutritional security of India and undermine the poverty reduction efforts and the gains over the last several years if large sections of the population do not cope with rise in prices and financial crisis.
These two crises can potentially further exacerbate and deepen existing vulnerabilities in India for the poor and disadvantaged groups including women and children. The coping strategies due to these crises could have adverse impact on the food security and human development of women and children. The objective of this study is to examine analytical issues that would identify the pathways of the effects of the rising food prices and financial crisis on households, particularly women and children.
It also outlines desirable macro and sectoral, in particular social protection, policies and measures that would mitigate the negative effects and would have the strongest effect on protecting levels of living of the households, in particular on nutrition, health, education and enhance child protection. Macro policy Issues on the Rise of Food Prices and Financial Crisis Global Situation There are five major drivers of rising global food prices. They are: (a) long term supply problems; (b) rise in oil prices; (c) Changes in demand due to bio fuels; (d) depreciation in dollar and low interest rate in the US and peculative activities; (f) export restrictions of developing countries. Thus, surge in food prices is ‘both a real and a monetary phenomenon and both market-driven and policy-induced’. Some of the structural factors like long term supply problems, oil prices and change in demand due to bio fuels could be responsible for the rise in food prices. It may be noted that monetary and other factors were also responsible for increase in food prices at the global level. Depreciation of dollar is one of the factors. However, food price increase was noticed even if we take Euros or other currencies.
Therefore, other factors are also important. Low interest rates in the US led to shifting of portfolios away from interest bearing instruments into other assets including commodities. Particularly the post-2007 increases in food prices could be mostly a monetary policy phenomenon including global inflationary pressures. Rising food prices pose significant macroeconomic challenges for developing countries. This is because global overall inflation increased including oil prices and not just prices of food commodities.
The sub-prime crisis also led to shifting of funds to commodities as speculation activities. The rise in food prices accelerated further by policy interventions such as export restrictions, price controls etc. These measures curtailed the supply of some commodities in world market. The reasons for global financial crisis are well known. The crisis in the financial sector originated in the US and transmitted to other countries. The financial sector in the US is largely unregulated. In this environment, mortgage lending to subprime borrowes had rapidly expanded in the US in 2000s.
It is known that by definition, the subprime borrowers either have prior default history or incomes to qualify for the loan they seek in the prime market. Lenders could sell the mortgages they issued to other financial institutions like Lehman Brothers. These financial institutions in turn packaged a large number of the mortgages into a mortgage-backed security and issued bonds of varying risks and returns backed by it. Bonds with the highest value would carry the highest risk. Financial institutions and individuals around the world invested in these instruments. As long as the US housing market boomed, mortgage-default rates remained low and emained attractive. But once the housing market collapsed, it impacted the balance sheets of financial institutions that invested in the mortgage-backed securities and their derivatives, which turned toxic following large scale defaults in the US housing market. The financial crisis affected liquidity and economic growth in many countries. The US and European countries had to announce bailout plans. The US is suffering from recession now. Indian Situation The global food, oil and financial crisis have affected India also although the impact is much lower than some of the other countries.
Trend in Food Prices There have been three patterns in the trends in food prices in India as compared to global food prices. First pattern is that Indian inflation in food prices increased from 2005-06 to 2006-07 when global prices increased. Of course, the rate of increase was much lower in India. Second pattern is that inflation in food prices declined in 2007-08 as compared to 2006-07 when global prices rose significantly. In the third pattern, global prices declined but Indian inflation in food prices started increasing in recent months (third quarter of 2008).
These patterns show that global impact on India is limited because of less exposure. FAO food price index indicates that it increased more than 80 per cent during the period 2005-2008. The wholesale price index in India for food articles (foodgrains +nonfoodgrains) increased 21 per cent over this period (Fig A1 in Appendix). Cereal prices in India rose only 20 per cent as compared to 170 per cent increase of global prices during 2005-08 (Fig A2 in Appendix). Similarly, Indian wheat prices rose only 21 per cent as compared to 170 per cent at global level (fig A3 in Appendix).
Rice prices in India increased only 16 per cent as compared to 230 per cent of global price increases during 2005-08 (Fig A4 in Appendix). In the case of India, increase in food prices was higher in 2006-07 as compared to 2007- 08. The inflation of foodgrains, food articles and wheat in 2006-07 was 10. 2%, 7. 8% and 13% respectively. As compared to this, inflation in the same commodities in 2007-08 was 4. 7%, 5. 5% and 4. 3% respectively. India almost insulated from the global impact of high price rise in wheat and rice. It does not mean that price increase in the prices of these two commodities is insignificant.
Wheat prices increased significantly in the year 2006-07 by about 13%. There are several reasons for increase in wheat prices during January 2006 to January 2007. The decline in wheat output to 69. 4 million tonnes in 2005-06 coincided with a bad international wheat year. World wheat production was estimated to be around 587 million tonnes as against production of 628 million tonnes in 2004-05 (corresponding to India’s agriculture year of 2003-04) and sharp increases in international wheat prices. This is one of the reasons for higher wheat prices.
The Government has taken several measures to stabilize the price of wheat such as (a) release of adequate quantities under targeted public distribution scheme (TPDS) and other welfare schemes, (b) rising domestic supplies through Open Market Sales Scheme, (c) ensuring adequate stocks in all the regions in the country together with supplementing the domestic availability with import of 5. 5 lakh tonnes through State Trading Corporation, and (d) by permitting private trade to import at zero duty. However, higher international prices continued to push the landed cost of the imported wheat in each successive tender (GOI, 2007).
Because of perceived supply-demand mismatch and private trade offering prices above the minimum support price (MSP), Government procurement was lower than the target fixed for 2006-07. Stock of wheat at 6 million tonnes in November 2006, was lower than 10. 3 million tonnes recorded in October, 2005. The upward trend in year-on- year inflation in wheat prices commenced in August 2006 (12 per cent) and reached 20 per cent in November 2006. In 2007-08, there was record production of wheat at around 78. 4 million tonnes. India also procured at a record level of 22. million tonnes in the same year. As a result, the prices were low in the year 2007-08. In contrast to wheat, the price increase in rice was very low at 2. 9% in the year 2006-07. Rice price increased to around 7% only in 2007-08 and it hovered around 5 to 8% in 2008-09. The price increase in India was very low as compared to rise in global rice prices. The inflation of pulses in India was 30% in 2006-07 but showed an absolute decline (-4. 5%) in 2007-08. As compared to other commodities, oilseeds and edible oils recorded higher inflation in 2007-08.
Oilseeds showed 24% increase in prices in 2007-08 and it is still high in 2008- 09 although it declined. The continued increase in oil prices was on account of higher demand, lower estimated rabi crop as well as rising global prices. The global prices of oilseeds rose by 70% to 90% in March 2008 over March 2007. Surge in demand including demand for bio-fuels, low stocks, higher oil prices contributed for the price rise. Soybean seeds at global level showed an increase of 78. 6% in March 2008 over March 2007. In India, Soyabean seeds recorded 30% inflation in 2007-08 and this price rise continued in 2008-09.
Inspite of record production of 10 million tonnes, soybean prices showed high inflation partly because of high global prices. Domestic consumption of edible oils is estimated at over 10 million tonnes per year, while domestic production has been hovering around 6 million tonnes. Import of edible oils (mainly soyabean and palm group of oils), which bridges the gap between domestic supply and demand, was 4. 7 million tonnes and 4. 3 million tonnes in 2004-05 and 2005- 06, respectively. There was a decline of edible oils from 27. 98 million tonnes in 2005-06 to 24. 8 million tonnes in 2006-07. As a result, imports increased to 4. 7 million tonnes. Because of higher global edible oil prices, domestic prices also increased in 2006-07. The same situation continued in 2007-08. The global inflation was 100-106% in March 2008 over March 2007. The inflation in edible oils in India was 14% and 20% respectively in March 2007 and March 2008. Thus the price increase in India is much lower than that of global prices. In the case of food products under manufactured goods, the inflation in oil cakes and dairy products was high 2007-08. The price rise in oil akes was nearly 40% in 2007-08. Increase in the price of oil cakes led to rise in prices of dairy products. The trends in food prices in India and global level show that the impact of global rise in food prices on India are limited. Domestic production shortfalls in wheat and maize, and dependency on imports of pulses and edible oils, transmitted the international price shocks to domestic prices. However, the increase in food prices in India was much lower as compared to sharp increase in global prices. Food prices in India particularly for wheat and pulses were higher in 2006-07.
This is much before the sharp increase in global prices in 2007-08. In fact, inflation for foodgrains and food articles was lower in 2007-08 in India as compared to those of 2006-07. In the case of oilseeds and edible oils, the global impact on India seems to be much more than other commodities. It is true that in the past few months, the prices of major cereals at global level have fallen by about 30 to 40 per cent as a result of the economic slowdown and favourable weather conditions. In the case of India, the food price inflation started increasing in fourth quarter of 2008.
The consumer price index for agriculture labourers and industrial workers also increased in recent months. What are the reasons for the lower rise in Food Prices in India? The policy stance was to attempt insulation of domestic prices from the high world prices by combining different measures including high subsidies, lower tariffs and export restrictions. First, one of the reasons for global price increase was increase in oil and fertilizer prices. Indian subsidies on Oil and fertlizer subsidies have insulated the global transmission of prices. Only small part of diesel prices was passed on to farmers and consumers.
Second, was 16% increase in foodgrain production over three years from 198 m. t. in 2004-5 to 231 m. t. in 2007-08. Third, large scale imports were mainly in case of edible oils and to some extent in pulses. Wheat was also imported in 2006-07 (5. 5 million tonnes) and 2007-08 (1. 8 million tonnes). Simultaneously India was exporting rice varying from 3 to 5 million tonnes per year till 2007-08. Fourth, import duties for wheat, pulses and edible oils were either reduced or permitted at zero duty. Fifth, some administrative measures were undertaken. There was a ban on export of rice,wheat, edible oil and pulses.
Ban was imposed on futures trading in eight commodities viz. , rice, wheat, pulses (urad, tur, chana), potato, rubber and soy oil. Food stock limits were imposed under Essential Commodities Act from August 2006. State Governments have been given powers to take effective action on hoarding of food stocks. Apart from the above, India’s policy of procurement, bufferstock and public distribution also made impact on insulating from global prices. In order to give incentives, Government increased the minimum support prices (MSP) significantly in recent years.
There was only marginal increase in MSP of wheat and paddy during 2000-01 to 2004- 05. On the other hand, there was more than 50% increase in MSP of wheat in the last three years (2005-06 to 2007-08). In the case of paddy, there was nearly 50% increase over three years 2006-07 to 2008-09. The procurement was low in 2006-07. But it increased significantly in 2007-08. There was a record procurement of 22 million tonnes of wheat in 2007-08 as compared to 9 m. t. in 2006-07. Inspite of some weaknesses, the public distribution system (PDS) has been able to contain prices and help the poor.
Central Issue Price of rice and wheat for PDS has not been revised since 2002. General Inflation in India The general inflation in India was 4. 4%, 5. 4% and 4. 7% in the years 2005-06, 2006-07 and 2007-08 respectively. It started hardening from January 2008. It increased from 8. 0% in April to nearly 13% in September before declining to below 6% in December 2008. The high general inflation also affects the poor and vulnerable sections. What are the reasons for increase in general inflation in India? Increase in global crude oil prices was one of the main reasons for increase in general inflation in India.
Global crude oil prices increased 150 per cent during February 2007 to August 2008. Recent decline in inflation in India was mainly due to decline in crude oil prices to less than US $ 40. The increase in inflation to around 13% in the middle 2008 was on account of supply side pressures such as the one-off increase in domestic petrol and diesel prices, continuous hardening of prices of petroleum products that were not administered, rise in prices of wheat and oilseeds and adjustment in steel prices, and increased demand side pressures (RBI, 2008).
The prices of non-administered petroleum products increased in the range of 19-56 per cent over end March-2008. Apart from fuel prices, the intermittent but sharp increase in basic metals prices in line with international trends, along with iron ore prices were the other major factors that have contributed to inflation during 2008-09. Manufactured products’ inflation hardened to 11% in August/September which, apart from metals, was due to increase in the prices of edible oils and oil cakes as well as recent firming up of textile prices.
Due to concerns over slowdown in growth in relation to earlier expectations, Central banks in many developed countries reduced their policy interest rates. As a result, there was higher liquidity in search of higher yields. India with strong macro fundamentals attracted large capital flows during 2007-08 driven by external commercial borrowings, portfolio flows and foreign direct investment (FDI) inflows. Capital flows significantly higher than the current account deficit and hardening of inflation necessitated preemptive monetary policy actions to dampen excessive demand pressures.
A number of fiscal and supply-side measures were undertaken by Indian Government. The RBI undertook monetary measures in the form of increase in CRR and policy interest rates in response to the evolving macroeconomic, monetary and liquidity conditions to stabilize inflationary expectations. Financial Crisis in India Even before the financial crisis, there were problems regarding economic growth including growth of industry and services partly because of tight monetary policy which was due to higher inflation. The global financial crisis has impact on India indirectly in terms of liquidity problems and ower economic growth. Developments, on both international and domestic fronts, particularly from mid-September 2008, have impacted domestic liquidity conditions. The bankruptcy/sell out/ restructuring of some of the world’s largest financial institutions beginning mid-September 2008 brought some pressures on the domestic money and foreign exchange markets, in conjunction with temporary local factors such as advance tax outflows (RBI, 2008 a). The global financial environment deteriorated with the number of troubled financial institutions rising, stock markets weakening and the money markets coming under stress.
Central banks in several major advanced and emerging market economies responded to these extraordinary developments by synchronised policy actions, including measures for liquidity infusion. The RBI has acted swiftly to augment liquidity in the system by reducing CRR (cash Reserve Ratio), SLR (Statutory Liquidity Ratio) and the repo rate ( the rate at which RBI lends to banks). These measures started in September, 2008 have continued till January 2009. The repo rate has been reduced during October 2008 to January, 2009 from 9% to 5. 5% – a decline of 3. 5% percentage points. Now the problem of general inflation has come down.
Inflation is expected to be less than 5% by March 2008. However, the consumer price index and food articles are still showing higher inflation. As shown below, the global financial crisis will have significant impact on economic growth, employment and food security of poor in India. 3. Pathways that Lead to poor outcomes for Women and Children The FAO Director-General Jacques Diouf noted recently that the financial crisis, following hard on the heels of the soaring food crisis which threw an additional 75 million people into hunger and poverty in 2007 alone, may well deepen the plight of the poor in developing countries.
He said that ‘last year it was the pain’ and ‘next year could be the fire’. “ Commodity prices are currently dropping, mainly on expectation of favourable crop prospects but also because of a slowing world economy, among other factors. This could mean a cutback in plantings followed by reduced harvest in major exporting countries. Given continuing low grain stocks, this scenario could lead to another turn of record food prices next year – a catastrophe for millions who by then would be left with little money and no credit” (FAO, 2008)
Both food and financial crises would affect the conditions of women and children. Here we discuss the pathways for the poor outcomes for these vulnerable groups. I Pathways of poor outcomes due to rise in food prices There are several pathways that lead to poor outcomes in nutrition, health and education of children due to increase in food prices. One can group them into four heads (1) impact on poverty; (2) macro economic impact and its affect on employment and social sector (3) impact on nutrition and social protection programmes (4) women’s well being and intra-household decisions. a) Impact on Poverty The impact of soaring food prices in any country depends on various factors including: (a) the extent world market prices are passed on to domestic prices; (b) the initial poverty line and the number of people clustered around the poverty line; (c) the number of net buyers or net sellers of the commodities; (d) the share of poor people’s budgets devoted to food overall and staples in particular; (e) the extent of own-consumption relative to market purchases; and (f) the effect of food price increases on real wages of poor people(World Bank 2008).
A recent study in eight countries estimates that the rise in food prices between 2005 and 2007 increased poverty by 3 percentage points on average. Extrapolating these results globally suggests that, as a result of the rise in food prices, total world poverty may have increased by 73-105 million people (World Bank 2008). FAO’s food insecurity numbers in 2007 show that 75 million more people were added to the total number of undernourished relative to 2003-05. The rising prices have increased 41 million hungry in Asia and 24 million hungry in sub-Saharan Africa. India has around 231 undernourished population.
High food prices would have different effects on net sellers and net buyers. However, net buyers are large in number including all urban poor and majority of rural poor. It is true that net sellers are likely to benefit from rising food prices. However, the constraints on agriculture may prevent the farmers to respond in the short run. Some of the small producers who have a marketable surplus could become worse off with higher prices. This is because typically a small producer sells the surplus immediately in the post harvest season, when prices are low, and buys food when prices are high.
In India, the rising food prices would have adverse impact on the poor as (a) poor have large share of expenditures on food; (b) there are many more poor households who are net buyers of staple food than net sellers. Poor typically spend 50% to 70% of their total expenditure on food. In India, the share of food in total expenditure declined over time (Table 1. 3). However, the bottom 30% of the population still spends 66% of their expenditure on food in rural areas. The share of cereals in total expenditure declined over time. Here again poor spend nearly 30% of their expenditure on cereals (Table 1. ). They still get more than 60% of calories from cereals. Thus, cereal consumption is going to be important for the poor in future also. Table1. 3. Percentage budget share of total food by bottom 30% middle 40% and top% of population Year Rural Urban Bottom 30%Middle 40%Top 30%AllBottom 30%Middle 40%Top 30%All 1970-7184. 0781. 0471. 2976. 6779. 9675. 0162. 4868. 87 1990-9173. 7170. 4159. 4065. 5170. 6964. 5848. 0556. 55 1993-9469. 8366. 4752. 6159. 9966. 3559. 7843. 7851. 82 2004-0566. 0761. 9847. 4855. 1859. 8750. 034. 5042. 52 Note: The shares are in 1993-94 constant prices Source: NSS Consumer Expenditure Surveys, Government of India Table1. 4. Percentage budget share of cereals by bottom 30% middle 40% and top% of population Year Rural Urban Bottom 30%Middle 40%Top 30%AllBottom 30%Middle 40%Top 30%All 1970-7153. 6543. 6529. 4938. 1538. 8528. 1913. 3721. 58 1990-9139. 3730. 6818. 2225. 9327. 5519. 139. 4915. 12 1993-9435. 6827. 8715. 7222. 9525. 5917. 148. 1813. 32 2004-0529. 3422. 0412. 4918. 2820. 5913. 296. 2910. 21
Note: The shares are derived from the expenditures at constant prices (1993-94 prices) Source: NSS Consumer Expenditure Surveys, Government of India The increase in food prices erodes the purchasing power of the poor. The incomes of the poor will fall and those who are near (and above) the poverty line are likely to become poor. The progress towards achieving poverty and hunger MDGs would affect for some time to come. The impact on poverty would have four effects on the poor. These are: (a)nutrition status of pregnant and lactating women and of pre-school children; (b) thehealth status of women and children; c) increase in child labour and withdrawal of children from school; (d) the distress sale of productive assets. All these have potential long term impact and will reduce the ability of individuals and households to reduce poverty. It is true that increase in agricultural production would benefit the poor in terms of wages and employment. But, adjustment in wages, employment and capital flows to agriculture and rural areas will take time to reach the poor. Apart from reduction in food consumption, the purchasing power would decline.
The loss in purchasing power would affect buying of other goods and services which are essential for health and nutrition of women and children such as water, sanitation, education, lighting, health care etc. The persistence of high food prices could lead to irreversible damage to the human capital of the poor and a significant reversal in the progress made towards achieving the Millennium Development Goals. (b) Macro economic impact and affect on employment and social sector Rising food, commodity and oil prices have increased the general inflation.
Apart from food price rise, increase in general inflation would hurt the poor and vulnerable sections. While India relies less on food grain imports, its reliance on petroleum products and other commodities like edible oils is large. As a result, given the sharp increase in oil and commodity prices, it has experienced terms of trade loss and had impact on current account balances. It has adverse economic and social impact on the poor. Earlier, the loss of income in terms of trade has been compensated by remittances and exports of services.
Now, the global financial crisis will affect these external flows to the country. General inflation could rise due to higher food prices. If wages also rise as a consequence, inflation could spiral, causing inflationary expectations with the general level of prices rising further. Higher food prices can reduce economic activity in the country as inflation will reduce consumption, savings and investment. Combination of all these activities would slow down aggregate demand. Due to higher inflation in India, RBI tightened monetary policy resulting in high interest rates.
Rise in interest rates would result in reduced aggregate demand and slowing down of the economy. The economic slowdown may reduce employment and has adverse effect on the poor households. This would lead to problems for women and children. On the other hand, increase in food prices may provide opportunities for farmers to increase agricultural production. It may raise household and women’s employment which would benefit the children. At the same time, women’s employment may result in less time for child care (including breast feeding and preparation of weaning foods for infants) (Plan and ODI, 2008).
Rise in demand for agriculture may also increase child labour. But again, since increase in agricultural production would lead to lower prices, women and children may benefit. The reduced economic activity due to rise in food prices and general inflation would affect the social sector like education and health. At the macro level, reduction in economic growth would lead to reduction in tax/GDP ratio. This would have adverse impact on social sector expenditures. Even if growth does not decline, increase in food prices and the resultant increase in subsidies, tax concessions etc. an reduce freedom of Governments to raise social sector expenditures. This may adversely affect women and children in terms of education and health outcomes. (c)Impact on Nutrition and Social Protection programmes Rise in food prices would worsen nutrition especially among infants (0-24 months), pregnant and lactating mothers. Children suffer long term consequences from short term shocks. Countries hardest hit by the food crisis already have highest preexisting malnutrition rates. The malnutrition situation would worsen further with increase in food prices.
The food price rise would affect the food consumption of households which in turn reduces consumption of women and children. Also, the households may spend more on cheaper, high calorie staples and less on foods rich in protein and vitamins, such as meat, fish, dairy, fruit and vegetables, reducing the quality of their diet. This will have significant negative consequences for morbidity, mortality, cognitive abilities, and growth. According to Bouis et al (2008), there are four basic factors for the above conclusion as given below. (I) Expenditures on non-staple foods by poor consumers comprise 40-60% of total expenditures on food. (II) Demand for food staples (rice, wheat, maize etc. depending on the geographical region and culture) is highly inelastic. Income and price elasticities for food staples in the aggregate are low. (III) In diets, minerals and vitamins are concentrated in non-staple foods; energy is concentrated in staple foods (IV) Current intakes of vitamins and minerals are already too low, resulting in high prevalence rates of micronutrient deficiencies.
Modest decrease in current intakes of minerals and vitamins will drive these prevalence rates significantly higher, with severe consequences for the nutritional status of the poor and public health” The micronutrient malnutrition will be a widespread health consequence of high food prices. According to Klotz et al (2008), increased staple food prices around the world are forcing households to reduce their consumption of micronutrient rich foods, which will have a range of health consequences, depending on the pre-existing nutritional status of a population.
They also indicate that “the manifestation of high food prices will be observed in terms of micronutrient-deficiency-induced morbidity and mortality, a potential ‘lost generation’ of unhealthy children, and irreversible economic loss” . Rise in food prices would affect the social protection programmes particularly the food based schemes. For example, India has food supplementation programmes such as ICDS and mid-day meal for primary school children. Government of India provides subsidized foodgrains and bears cost of converting foodgrains into hot cooked meal by including pulses, oils and vegetables.
These social protection programmes benefit large segment of the vulnerable sections. General inflation and rise in food prices would affect these programmes in two ways. One way is through the macro economic decline due to inflation. The expenditures on these programmes would be affected similar to those on education and health. Secondly, the cost of these programmes would be higher because of food price rise. If the government does not increase the expenditures, the quality of the food based schemes will be diluted.
For example, the quality of food grains may be diluted and vegetables and oils may be reduced. Thus, decline in quality of these schemes would adversely affect the nutrition of women and children. (d) Women’s Well Being and Intra-household Decisions The high food prices have different impacts on women consumers and producers. The rise on food prices could increase incentives for producers. But, due to constraints on input supplies and other factors, the past evidence suggests that higher prices many not necessarily stimulate production by female farmers (Quisumbing, 2008).
At the household level, women’s time burden may increase with rise in food prices as they try to manage the household budget with increasing expenditure on food and/or paid employment, affecting children’s nutrition and reducing caring time. Intra-household dynamics are important to know the impact of rise in food prices on children. Intrahousehold allocation of resources to children depends on several factors such as women’s empowerment and education, the household wealth and asset base, social protection measures reaching the household etc (Plan, 2008).
One of the coping mechanisms of the households relates to decisions about children’s activities and time. In some cases, children may be withdrawn from school to take up paid work activities. In some other cases, children will have less time to study and leisure because of involvement of paid or unpaid activities. The impact of rising food price shock and children’s well being is given in Fig. 1. Impact of High Food prices on Children A study on Young Lives (an International Study of Childhood Poverty) indicates that high food prices will have impact on children in two ways (Dercon, 2008).
First one is the short run impact of family budgets. The constraint on family budget would not only lead less food available or cheaper food purchased but there is also less funds for nonfood items such as health and education. Secondly, it will have long term impact on children’s health, psycho-social well being and their educational achievements. The project on Young Lives for four countries reveal interesting results regarding impact of poverty and stunting on children. There is a significant impact on learning and achievements in India.
A comparison of educational and psycho social indicators for average children from the poorest quintile with the richest quintile shows the writing skills were substantially lower in India’s poor as compared to that of the rich (Table 3). The reading skills, grade aspiration gap are lower for the poorest quintile. Similarly, the educational and psychosocial indicators are lower for the stunted children as compared to non-stunted children for India (Table 4). Fig 1: Linkages between Food Price Shocks and Children’s Wellbeing East and South East Asian Experience during financial crisis
The East and South East Asian financial crisis in 1997 indicates that the crisis did affect a range of indicators such as micronutrient status, immunization coverage rates and health care expenditures (Bhutta et al, 2008). A study on East and South East Asia (Bhutta et al, 2008) estimated the potential impact of the current global financial crisis on nutrition and health indicators. It shows that maternal amenia Table 1. 5. Estimated Impact of Food crises on Mortality and nutrition indicators (if Unaddressed Indicators increase after crisis (%) Maternal Anemia10-20 Low Birth Weight5-10 Stunting3-7 Wasting8-16 Child Mortality3-15
Table 1. 6 Estimated Impact of Food Price Crisis and Insecurity on health and nutrition outcomes Nutrition and Mortality IndicatorsExcess following Crisis (%)Estimated impact in lowest income quintiles (%)Estimated impact in upper income quintiles (%) Maternal Anemia10. 512. 08. 4 Low Birth Weight35. 745. 019. 6 Stunting22. 48. 09. 7 Wasting49. 079. 025. 3 East and South East Asian Experience during crisis The East and South East Asian financial crisis in 1997 indicates that the crisis did affect a range of indicators such as micronutrient status, immunization coverage rates and health care expenditures (Bhutta et al, 2008).
A study on East and South East Asia (Bhutta et al, 2008) estimated the potential impact of the food crisis and current global financial crisis on nutrition and health indicators. It shows that maternal anemia could increase 10 to 20% if it is unaddressed (Table 5). Similarly, malnutrition, child mortality could also increase. It can also have significant impact on health and nutrition outcomes. Table 6 provides differential impact on lowest quintiles and upper income quintiles. For example, the impact on wasting could be 79% for lowest income quintiles as compared to 25% for upper income quintiles
II Pathways that Lead to Poor Outcomes due to Financial Crisis The financial turmoil which started in the US financial system as a result of defaults of sub-prime mortgage loans has blown into an unprecedented financial crisis. It has affected the international money, credit, equity and foreign exchange markets. The global situation deteriorated massively after mid-September 2008 following the collapse of Lehman Brothers, one of the top five investment banks in the US. There has been a massive choking of credit since then and a global crash in stock markets.
The slowdown that was expected in the global economy became much worse with the US, Europe and Japan moving into recession. A crisis of this magnitude in industrialized countries is bound to have an impact on India. The financial crisis originated in the US being transmitted to other countries through three principal channels (Panagariya, 2008). First, it has directly affected the financial institutions all over the world due to investments in mortgage-backed securities and their derivatives, which turned toxic following large-scale defaults in the US housing markets. Second, the financial crisis has created a liquidity problem.
The US firms which needed liquid resources withdrew their funds from stocks and bonds in other countries. Decline in the prices of stocks and bonds had impact on local investors who pulled back fro the market. This led to choking of credit all over the world. The third source of transmission is the impact on real sector. The financial crisis led to recession in the US. This led decline in demand of goods from other countries in the US. This has affected the exports of developing countries. While India has largely escaped the first transmission, it has not been able to avoid the other two channels.
The direct exposure of Indian banking system to the sub-prime market abroad is almost absent, there may be very limited investment by a few Indian banks in the collaterized debt obligations which had underlying entities with sub-prime exposures. However, the indirect impact of the crisis, transmitted through capital flows, financial markets and trade (real sector) would affect India. The foreign exchange reserves have declined in India and created a liquidity crisis due to global crisis as well as earlier tightening of monetary policy earlier. The exports from India would also be affected.
The growth rate of GDP in India is expected to decline to around 7% in 2008-09 as compared to 9% growth in 2007-08. This is partly due to the financial crisis and partly due to the tight monetary policies which in turn was due to high inflation. It is expected to go decline further to less than 6% in 2009-10. Lower growth may affect the employment prospects. It may have adverse impact on social sector expenditures as tax/GDP ratio may go down with lower growth. More importantly, the impact of the financial crisis is likely to have negative effects on the agricultural sector and food security.
The pathways through which the agricultural markets will be affected are on both demand and supply sides (FAO, 2008a). The slowing down of economic growth would affect demand for agricultural commodities. Prevailing uncertainty and consequent negative market expectations could further dampen demand. The falling demand may put further downward pressure on agricultural commodity markets. In general, lower food prices are good for consumers but reduce incentives for producers to make the necessary investments which would improve food security in the medium term.
However, decline in food prices would not be sufficient to compensate the consumers from the reduction in household incomes due to recession, fall in employment and remittances from abroad. On the supply side, reduction of agricultural prices may result in cutback in agricultural production. Although oil and fertilizer prices declined, in general, input prices can be sticky and would affect the supply of agricultural commodities. The financial crisis is likely to have negative impact on agricultural credit which is widely regarded as major constraint to agriculture in developing countries.
Farmers who took advantage of rising agricultural prices to invest in raising production may find themselves unable to pay off their debts because of falling output prices. As banks cut lending because of financial crisis, it would be difficult for small farmers to make new investments. The financial crisis may reduce agricultural investment at macro level and cut back on social protection expenditures. The combination of falling agricultural prices, reduction in agricultural investment and access to credit may have negative effect on agricultural production.
It would have serious implications for food security. Poverty reduction efforts may be stalled because of low employment and volatility in food prices. The negative impact on household income would affect the well being of women and children. 4. Vulnerabilities and Coping mechanisms for households and impact on children The term vulnerability refers to the relationship between poverty, risk and efforts/ability to manage risk. Risks and the inability to effectively manage these risks could force poor below the poverty line and if already living below poverty line, deeper into poverty.
On the other hand, reducing vulnerability through effective and efficient risk management may contribute acutely poverty reduction. Therefore, any effort towards poverty eradication/reduction need to be based upon a good understanding of risks, constraints and opportunities faced by the poor. Further, these efforts should help people manage risk and avoid falling into poverty. There is enough evidence to suggest that poor and poorest of the poor households are vulnerable to a range of risks affecting individuals, households or whole communities which can have a devastating affect on their livelihoods and well being.
They have higher exposure to a variety of risks at individual or household level. Some of them are (a) health shocks: illness, injury, accidents, disability; (b) labour market risk: many work in informal sector and have high risk of unemployment and underemployment; (c)harvest risks, life cycle risks, social risk and special risks for vulnerable groups. In addition, they have community risks such as droughts, floods, cyclones, structural adjustment policies etc. Some evidence from Andhra Pradesh shows that among the individual risks, health risk dominates over all other risks (Fig 2).
Second highest idiosyncratic shock is death of family members followed by loss of employment and pest attack for crops. In the collective risks, drought is the dominant in the state. A village level study in three states viz. , Orissa, Karnataka and Madhya Pradesh for the year 2006 shows that drought was the dominant risk followed by sudden health problems, cyclone/floods and pest attack (Dev et al, 2006)4 (Fig. 3). When all idiosyncratic risks for all states are considered together, sudden health problem dominates as the principal risk for all quartiles (Table 7).
Under covariate shocks, drought dominates other risks followed by cyclone/flood for all quartiles. The percentage of households reporting drought risk is about the same for the bottom two quartiles but increases for the top two quartiles. As for health risk, the proportion reporting is substantially higher for the poorer two quartiles compared with the top two quartiles. Further, among the top two quartiles, the proportion reporting drought risk is much higher than the proportion of households reporting health risk. For the poorer two quartiles, drought and health risks are followed by death of family member or livestock epidemic.
For the richer two quartiles, the percentage of households reporting cyclone/flood and pest attack is also high. According to this study, there are state level differences in the level of risks. In the relatively more developed state like Karnataka, the incidence of health risk is about one half of the incidence of drought (which is not surprising because Karnataka has a large proportion of arid zone) whereas in a relatively poorer state like Orissa health risk dominates (which is also not surprising given the preponderance of malaria) alongside covariate risks.
Madhya Pradesh is somewhere in between – health risk is about twothirds of weather-induced covariate risks. Another interesting difference is that in Orissa not only health risk is hitting humans, but it is also hitting livestock – highest proportion of households experienced epidemics of livestock in Orissa in comparison with the other two states. Fig. 2. Frequency of Shocks in Andhra Pradesh Coping Mechanisms Most of the coping mechanisms followed by households are: borrowing, sale of assets, spending from savings, assistance from relatives and govt. expanded labour supply, child labour, bonded labour, reducing consumption, migration etc. In South Asia, borrowing seems to be the leading one. However, excessive borrowing leads to disastrous consequences. It is known that farmers’ suicides and handloom weavers’ suicides in Andhra Pradesh have been primarily due to indebtedness. A study on Andhra Pradesh provides vulnerabilities of poor in three regions viz. Telangana , Rayalaseema and Coastal Andhra (SERP, 2001). The findings are summarized in below..
Summary of findings on a Study in Andhra Pradesh 1 Across the regions health risks have been the highest, the other being nature related, death and accidents. Health risks constitute 50% of the total household level risks reported. 2 Health risks of the total risks reported were highest among the SCs & STs. BCs reported both on health and nature related risks, and OCs mostly on nature related ones. 3 Reporting of risks appear to be linked to the primary livelihood option. 4 A large number of risks have been reported in 1998.
Both household and community level risks were high during this year. Possibly health risks are related to the community level risks. 5 Loss of work/wages and ill health has been the most common impact of risk on the livelihoods. 6 Almost all households responded to risk by borrowing thus falling into the debt trap. Adoption of reduction and mitigation strategies was almost nil for household level risks 7 Lack of awareness/information results in non-adoption of reduction and mitigation strategies. Preference to allopathic private health care was prevalent in all social groups as a response to health risks. 9 Community level risks vary across regions. Rayalaseema and Telangana report drought while cyclones/ floods are common in coastal region. 10 The results suggest that the sequence in which livelihood assets should be built must take into consideration the livelihood strategies of the group, and the consequent risks to which they are most vulnerable. Source: SERP Vulnerabilities and Impact on Children The vulnerabilities have short term and long term impacts on children.
Decline in food consumption and expenditures on health would have impact on nutrition of children. As mentioned earlier, other effects are: reduction of expenditure on non-food items like health and education, family selling productive assets, children drop out of school, increased use of child labour, become indebted etc. The study on Andhra Pradesh shows that the impact of risk responses was increased indebtedness. The extent of borrowing that took place from moneylenders and the rich farmers is quite high (nearly 90%) (SERP,2001).
Increased indebtedness is not only a short-term burden, but it can also limit the ability of poor households to invest in future income-generating activities including children. Looking at the responses for the different groups, some SCs, STs, and BCs had to revert to attach labour. Impact due to migration affected their children’s education and health. Interestingly, dependency on family and friends was most popular among the BCs, limited with SCs and not reported by STs, reflecting on the poverty status of these groups in general who are little able to assist each other financially (SERP,2001).
Rising Food Prices and Household Responses: A Rapid Price Impact Survey 2008 in Bangladesh was conducted by the World Bank to know the household responses to price rise (Viswanath, 2008). Around 1200 rural and 800 urban households were interviewed in this survey. It shows that around 43% households in rural areas reduced their educational expenses while 9% of rural households have taken children out of school. Hunger Index in India: The vulnerabilities across states in India can be examined by looking at the hunger index of IFPRI.
The hunger index shows that relatively developed states like Gujarat, Maharashtra and Karnataka have higher rank of hunger index as compared to states like Uttar Pradesh and Rajasthan and closer to states like Orissa and Chattisgarh (Table 10). It shows that poverty and hunger are not strictly correlated and vulnerability of children is high even in developed states like Gujarat, Maharashtra and Karnataka. It may be noted that social disparities overwhelm regional disparities regarding poverty and vulnerability and incidence of malnutrition.
For example, the numbers in Table 11 show that SC/ST and Muslims are suffer from more poverty and vulnerability as compared to OBCs and other castes. The incidence of malnutrition (chronic energy deficiency) among women is the highest for SCs/STs, followed by OBCs and muslims. The malnutirtion among women for OCs is much lower than other castes. This is true of all the states in India. Table 10: Hunger Index and Components in India: States StatePrevalence of calorie under nourishme ntProportion of underweig ht among children