Ashok Gulati and Shweta Saini (ICRIER) Panel Discussion at IHC August 26, 2014 • • • 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%! 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 • • Continue offloading of grains from FCI granaries; Revamp FCI Create efficient value chains connecting farmer groups with processors and organized retailers; Reform APMC • Encourage food processing of perishables • Promote Warehouse receipt systems, futures, • Better monitoring of price data…and quick actions