People's Democracy

Food Inflation in India

WHILE the Indian people suffer from incessantly rising food prices, the government mandarins are busy celebrating the Indian growth story at the World Economic Forum in Davos. The deputy chairman of the Planning Commission, Montek Singh Ahluwalia, who was recently in the news for suggesting that food inflation is occurring because people are becoming more prosperous in India and eating more, has stated in Davos that not only are the recent increases in petrol prices justified but diesel prices will also be decontrolled and increased in the near future. Ministers are also suggesting that the solution to food inflation lie in allowing MNCs like Walmart and Tesco to open supermarkets in India. These callous and cruel statements are symbolic of a government, which has dropped even its pretence of working for the aam admi.

As we prepare to launch the anti-price rise agitation from February 3, it is important to lay bare the real reasons behind the raging food inflation in India, which is playing havoc with the livelihoods of the people. The blame lies with the neoliberal policy framework of the Congress led government, which needs to be fought and reversed.

CURRENT STATE

OF INFLATION

The inflation rate in India as measured by the Wholesale Price Index (WPI) has been rising continuously over the past three years. Inflation in food products has driven overall inflation.

WPI Inflation (year-on-year)

            Source: Office of the economic adviser, ministry of commerce and industry, GoI

As per the latest data, overall WPI Inflation stood at 8.4 per cent in December 2010. In the week ending January 15, 2011, food inflation stood at 15.5 per cent.

FALSE

CLAIMS

Food demand in an economy like ours naturally grows over time. In order to keep pace with population growth, food production also needs to grow. However, in India, food production and availability have not grown commensurately. In 2008-09, annual per capita cereal availability in India was only around 165 kg, which was that of the same level as in 2000-01. In contrast, per capita cereal availability in China was over 290 kg in 2008-09, and in the US it was over 1000 kg. Moreover, per capita cereal availability in India fell to 161 kg in 2009-10, despite high GDP growth. Therefore food consumption for the entire population is certainly not witnessing any rise.

What is happening is that income and consumption growth is getting disproportionately concentrated within the top 10 to 15 per cent of the population, who are benefiting from GDP growth. For the bulk of the Indian people, consumption levels are getting further squeezed. If 77 per cent of the Indian population is spending less than Rs 20 per head a day as per the Arjun Sengupta commission report, one can well imagine what the consumption levels of the majority of Indians are.

Widespread hunger and malnutrition is the reality of India. India continues to be home to around 25 per cent of the world’s hungry population currently estimated at 925 million by the UN World Food Programme. Nearly half of India’s children under three years of age continue to remain malnourished, as per the National Family Health Survey, alongside half of pregnant mothers who are anaemic. Food price inflation is making matters worse for these sections by squeezing their consumption levels.

MAIN

REASONS

There are four main reasons. The immediate reason for the spurt in the prices of specific food items, like onions today or earlier in the case of sugar and pulses, is hoarding. Trader cartels, encouraged by an inept government, are mainly responsible for this. Assured of inaction, hoarders are creating artificial shortages and fleecing people from time to time.

Secondly, the growing penetration of big corporates in the food economy, international trade in food items and speculative futures trading in agricultural commodities has weakened the government’s capacity to control food prices. The share of corporate retail in food distribution has tripled over the past four years. The government has manipulated trade policies to allow big traders to make huge profits through export and import of essential food items like wheat, sugar and onions. On the other hand, the PDS has been weakened considerably through targeting. In most states, the role of the ration shops, state agencies like the NAFED etc and consumer cooperatives in food distribution, has been whittled down. Therefore, the profit margins of private traders have also increased, reflected in growing gaps between wholesale and retail prices as well as farmgate and wholesale prices.

There are medium and long-term reasons too. Our agriculture is in a crisis. We are not producing enough to meet the needs of a growing population. The peasantry continues to be in distress, with 2.5 lakh farmers committing suicide over the past 15 years. State intervention in raising agricultural productivity has been weakened. The government is more interested in handing over this role to big agribusinesses and retail giants like Walmart and Monsanto in the name of a ‘second green revolution’. That will further marginalise the small peasants.

Finally, the cuts in subsidies and price hikes of inputs like diesel and fertiliser are also contributing to food inflation. The deregulation of petrol prices has led to very steep hikes in the recent weeks.

NOTIONAL

LOSSES

The so-called ‘under-recoveries’ of oil companies cited by the government are notional losses. In actual terms the oil companies are not making such losses. The international crude oil price is currently ranging between 85 to 90 dollars per barrel, which comes to around Rs 25 per litre (1 barrel = 159 litres and 1 dollar = 45 rupees). However, the retail price of petroleum ranges between Rs 58 to Rs 63 per litre in the metro cities. This huge difference between crude oil prices and the retail price of petrol is on account of taxes, over Rs 30 per litre of which is collected by the central government through customs and excise duties. If we take these taxes into account, the government earns much more in taxes on petrol and diesel than it spends on fuel subsidies. If the government cuts these indirect taxes, the fuel prices would not rise.

The government does not want to cut these taxes, because otherwise it has to impose more direct taxes on the rich and the corporates. Therefore the government is passing the burden on to the people. After petrol prices were deregulated in June 2010, petrol prices have been raised seven times by the oil companies, the last time being in January 2011, amounting to an increase of over Rs 10 per litre in seven months. Increase in fuel prices have been adding to inflationary pressures.

STEPS TO  CONTROL

FOOD INFLATION

The present steps being undertaken by the government are inadequate. What we need is a long-term strategy to fight inflation. The first step should be to strengthen state intervention in the food economy, both in food distribution and production.

The government is dithering on the food security legislation. The food security act should be passed without further delay, which must ensure universal food security. The government is currently holding stocks of nearly 50 million tonnes of rice and wheat, which is way above the buffer norms. 35 kgs of foodgrains per month should be supplied through a universalised PDS at Rs 2 per kg and not limited to the arbitrarily determined BPL families. Moreover, other essential commodities like sugar, pulses and edible oils should be supplied at fixed rates across the country through the PDS. 

The government has been sitting on the recommendations of the National Farmers’ Commission for the past five years. The Farmers’ Commission had made several suggestions to make farming remunerative for the peasantry and step up public investment in agriculture, as well as agricultural storage and marketing. Besides supporting farmers, government agencies, cooperatives and self-help groups should be supported to open more outlets to sell food items like vegetables, milk etc. Raising agricultural productivity and modernisation of storage and marketing of agricultural products cannot be left to the private corporates and MNCs. Inflation cannot be controlled with liberalised trade and private profiteering in food items.

The influence of private corporates and traders in the food economy needs to be curbed. For this it is essential for the central government to take the state governments on board and coordinate measures against hoarding and black-marketing. In this regard, it is also important to prohibit commodity futures trading in food articles, because such trading facilitates speculation on food prices.

Finally, the costs of agricultural inputs like fuel and fertilisers have to be controlled by the government. Deregulation of fuel and fertiliser prices will raise agricultural costs and contribute to food inflation. The government must continue to subsidise fuel and fertiliser and rationalise the taxes on petroleum products. The decision to deregulate petrol prices needs to be reversed.

FUTURES

TRADING

Futures trading is linked to inflationary expectations in the economy. Futures are contracts made between sellers and buyers for sale/purchase of a fixed quantity of a commodity at a fixed price at a future date. What commodity futures markets do is to enable selling and buying of these contracts on a daily basis, like in the stock market.

So, a future contracts of say 10 kg of sugar to be delivered in May 2011 at Rs 30 per kg, can sell at more or less than Rs 30 per kg in January 2011. Someone, for example, buys the contract at Rs 29 per kg today, because sugar prices are expected to fall in the coming months. However, in the coming months international sugar prices can rise, may be because the sugar crop from, say Brazil, fails this year. Then demand for sugar contracts in Indian futures market will also rise and the person who bought sugar at Rs 29 per kg can sell it in March 2011 at, say Rs 35 per kg, making a windfall profit of Rs 6 per kg without having to either produce or consume a single grain of sugar. Moreover, when sugar prices rise in the futures market in India, sugar traders expect to make profits (a) by exporting sugar abroad (b) by hoarding sugar so that there is scarcity in the domestic market, which eventually increases domestic sugar prices.   

The commodity futures markets therefore achieve two things. First, they link domestic food prices to the volatile international commodity markets. Second, they provide avenues for pure speculators, who have nothing to do either with production or trade in food, to emerge as major players and make capital gains by speculating on food prices.

With the advent of multi-commodity exchanges in India since 2002-03 and the commencement of online trading, commodity futures trading have grown manifold. Like most countries across the world, the people who are investing in these markets are not farmers, but big players of the financial markets who are only interested in making speculative gains. The government was forced to suspend futures trading in some essential commodities like rice, wheat, sugar and some pulses in 2007 due to the pressure from the Left Parties. However, futures trading in wheat and sugar have once again been allowed by the government.

India is a food deficient country. Our productivity levels are low and we are not producing enough to meet the demands of a growing population. Moreover, our agricultural production is heavily dependent on the weather and above or below normal rainfall (floods and drought), significantly affects the supply of agricultural commodities. Storage capacity in India is also limited and many food items cannot be stored because of lack of modern storage facilities. In this backdrop, futures trading in food items distort the price signals and encourage speculation and hoarding, thus contributing to food inflation. Therefore, in order to control food inflation, futures trading in food articles need to be prohibited. 

Retail Prices of Some Essential Commodities in Delhi: 2008 to 2011 (Rs/kg)

Source: Price monitoring cell, ministry of consumer affairs, food and public, distribution, GoI