Ashok Gulati and Shweta Saini
(ICRIER)
Panel Discussion at IHC
August 26, 2014
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•
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Food Inflation: What is the nature
& structure of food infl. in India?
Diagnostics: What drives India’s
food inflation?
Remedies: What can policy makers
do to tame food inflation?
Weight in WPI
Food: 24.3%
210
190
Avg. Inflation Rt. Avg. Inflation Rt.
Food =5.9%
Food =4.1%
WPI= 6.1%
WPI= 4.8%
110
90
13-14
WPI
12-13
08-09
UPA II
07-08
Food Index
06-07
04-05
03-04
UPA I
02-03
01-02
99-00
98-99
97-98
96-97
00-01
NDA
50
05-06
70
Avg. Inflation Rt.
Food =10.3%
WPI = 7.1%
11-12
130
10-11
150
09-10
170
95-96
Index Values- WPI Base 2004/05
230
Weights in WPI
Food: 24.3
Food Articles (FA):14.34
Food Products (FP) : 9.97
Avg. Inflation Rt. Avg. Inflation Rt.
•Food =5.9%
•Food =4.1%
•FA = 6.8%
•FA = 4.3%
•FP= 4.7%
•FP= 3.8%
130
110
Avg. Inflation Rt.
•Food =10.3%
•FA = 12.2%
•FP= 7.1%
UPA II
90
Food Articles' Index
08-09
07-08
06-07
04-05
03-04
UPA I
02-03
Food Index
01-02
99-00
98-99
97-98
96-97
00-01
NDA
50
05-06
70
13-14
150
12-13
170
11-12
190
10-11
210
09-10
230
95-96
Index Values- WPI Base 2004/05
250
Food Products' Index
Inflation Rates (%)
20
18
16
14
12
10
8
6
4
2
0
CPI
10.1
9.9
4.7
2.9
Sugar
11.5
8.7
12.5
13.0
13.2 13.0
7.6
5.6 5.6
Pulses and Cereals
Products
Food
18.5
17.4
WPI
Milk and Eggs,Fish
Milk
and Meat
Products
7.0
Oil and
Fats
15.3
7.7
Fruits
Vegetables
Weights in
WPI-Food
Weights
in CPIFood*
Item Group
Weights in WPI
Weights in
CPI*
cereals & cereal
substitutes
3.4
14.59
14.0
29.4
pulses
0.72
2.65
3.0
5.3
milk & milk products
3.2
7.73
13.2
15.6
edible oil
3.04
3.9
12.5
7.8
egg, fish & meat
2.4
2.89
9.9
5.8
vegetables
1.74
5.44
7.1
10.9
fruits
2.11
1.89
8.7
3.8
Food Total
24.3
49.71
100.0
100.0
*includes beverages and tobacco
73.4% HVA
perishables
100%
80%
29.1%
16.3%
60%
31.6%
40%
20%
0%
23.6%
22.2%
16.5%
10.4%
47.4%
23.0%
Other
Articles
19.4%
Condiments &
Spices
Eggs,
31.0%
Food
Meat
fish
&
Milk
23.5%
31.4%
12.3%
11-12
23.1%
22.3%
Fruits
Vegetables
Pulses
12-13
13-14
3 year Average
Cereals
-20%
Financial Year
and

Three main drivers:
◦ Cost push: rising farm wages
◦ Globalization: rising global food prices and desi
farming going global
◦ Fiscal and Monetary policies: rising deficit and
expanding money supply (M3)
230
210
Index: Base 2004-05=100
190
170
150
130
110
90
70
50
NDA
UPA-I
Avg.
Avg.
Annual wage
Annual wage
rate growth = 6.34%
rate growth = 5.5%
Avg.
Annual wage
rate
Growth=19%
UPA- II
Rate Tapering
off
Oct 13/Oct 12
:14%
Oct 12/Oct11:
21%
WPI-Food
FAO-Food
Mar-14
Mar-13
Mar-12
Mar-11
Mar-10
Mar-09
50
Mar-08
Mar-07
Mar-06
Mar-05
Mar-04
Mar-03
Mar-02
Mar-01
Mar-00
Mar-99
Mar-98
200
Mar-97
Mar-96
Mar-95
Index- WPI(2004/05) and FAO (02/04)
250
Tapering off
Export
Bans
150
100
Export Bans
0
Fiscal Deficit(FD) and Money Supply (M3)
10000
9000
8000
7000
6000
5000
4000
3000
2000
1000
0
Broad Money-M3 (RHS)
Fiscal Deficit
INR '000 crore
900
800
700
600
500
400
300
200
100
0
95-96
96-97
97-98
98-99
99-00
00-01
01-02
02-03
03-04
04-05
05-06
06-07
07-08
08-09
09-10
10-11
11-12
12-13
13-14
INR '000 crore
FD (combined) went up by 132% in 2008/09. FD and M3 growth rates
since 2008/09 highly correlated (r=0.7)
“Part of Global Stimulus by G-20”
Log Food (WPI) Index = - 0.176
+ 0.27 Log FAO Food Index (T-1)
(3.9)
+ 0.26 Log Farm wage (nominal)Index T
(2.1)
+ 0.21 Log FD (T-1)
(3.2)
Log Food (WPI) Index = 0.046
+0.336 Log Farm wage (nominal)Index T
(5.8)
+0.163 Log M3 (T-1)
(6)
+0.131 Log FAO Food Index (T-1)
(3.7)
•Models individually checked for the Granger Wald Test, and the endogenous variables
in each model are seen to jointly Granger cause log Food (WPI).
Adjusted R square for each model is 0.99.
t-values in parenthesis
Source: World Bank for International prices and DES for
Domestic wholesale prices
Note: Rice (Thailand), 25% broken, WR, milled indicative
survey price, Government standard, f.o.b. Bangkok
Quarters refer to marketing year (Oct-Sep)
Source: World Bank for International Price and DES for domestic Prices & MSP from CACP Report.
Note: 1.Wheat (US) No.1 HRW, export price delivered at US Gulf port for prompt or 30 days Shipment.
2. Wheat (US) No.2, SRW, export price delivered at US Gulf port for prompt or 30 days Shipment.
4. Domestic Prices of wheat in Punjab
MSP of Rice and Wheat for Selected Countries
MSP(US$)/MT
700
600
500
400
(US$/MT)- 2013*
695.2
594.6
494.1
444.7
408.4
320.3
300
388.7
297.3
200
100
Rice Price US$/MT
Wheat Price US $/MT
282.6
225.9

Containing farm labor costs
Good News: Deceleration in farm wage
growth (from 21% to 14%...)
Going forward:
◦ Dovetailing MGNREGA with agri-operations
(especially lab intensive, like rice transplantation,
to contain cost of production)?
◦ MGNREGA for check dams/water harvesting to
boost agri-productivity, reduce costs
◦ Incentivize farm mechanization to contain lab costs
Good News:
◦ Global food price increases tapering off since Feb
2011 (Global G-20 stimulus being calibrated down,
especially by US)
Going forward:
◦ Liberalize trade policy - lower and rationalize tariffs
for food items where inflation is high
Ex. rice attracts duty of 70-80 %; meat, including poultry, milk and milk products,
vegetables and fruit generally has30% duty, though fresh apples attract 50 per cent;
poultry meat, cut in pieces, attracts a duty of 100 per cent, though uncut meat has a
duty of 30%!
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Contain fiscal deficit-Tackle three F’s-fuel,
food, and fertilizer subsidies
Direct cash transfers can save at least 30%
subsidy bill
Redirect farm subsidies to farm investmentsAlmost 80% of the public expenditure going to agriculture is in the form of input
subsidies (fertilizers, power, irrigation) and only 20% as investments in agriculture

Redirect consumption doles to infrastructure
investments
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Continue offloading of grains from FCI granaries;
Revamp FCI
Create efficient value chains connecting farmer
groups with processors and organized retailers;
Reform APMC
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Encourage food processing of perishables
•
Promote Warehouse receipt systems, futures,
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Better monitoring of price data…and quick actions