Food Inflation – Prices Are Very Dear!

It was Tuesday afternoon, 1.20 P.M. and I was very hungry. I just had a piece of roti in my mouth and I heard some people talk in the background. Those were my colleagues and were discussing on the rising prices of Onions and Tomatoes. I finished my lunch in 30 minutes but their discussion was still going on. I was not surprise with the length of their discussion and their frustration on the government for unsuccessful attempt to control rising food prices. Food inflation today has been a very hot topic of discussion in our country.

Every morning when I open newspaper it contains headlines on food Inflation, News channels have their special coverage on food inflation, whenever I ask my mother to prepare pav bhaji during Sunday she reminds me about food inflation, Bhel Puri that is available at the chaatwaala contains very less quantity of onion, any order placed with any restaurant do not contains any onion in their salad. The list will not end over here, In fact if you want I can go on and on.         

There is no stopping up for food inflation in India. It’s being two consecutive years we are facing double digit inflation and now we hardly get surprised when we hear about it.  Food inflation in India has been there since March 2008, with no sign of slowing down. After its effect from cereals to sugar it has now started to show its effect on Vegetable, especially Onion.

Government on the other hand is very optimistic. According to them food inflation will relax in three to six months. However it’s another thing that those claims have been made by the Government since last 2 years. May be the road side astrologer sitting with a parrot will do a better job predicting trends in food inflation.  

With every new development in the food inflation, new excuses are played out by our Government. However the fact will never be changed, it is the Government that has either contributed to fuelling of inflation, for example, by hoarding cereals or has completely failed to read the early warning signals. Just some few months back Government food stocks were almost double that of the buffer stock requirement. This was expected to increase further with the new kharif arrivals, and with no feasible plans of offloading stocks that have been rotting for months. Even with vegetables, government actions has been too little, and too late. With the Government clueless, speculators have had a free run on prices.

Domestically it is not a constraint, and not the thing to be worried about. We are in a much better position internally than we have been in the last five to six years, thanks to our farmer who have done well in stepping up production for almost all major food products. As per the latest data, rabi production will hit a record, with wheat output is expected to touch around 82 million tones. There have been significant improvements in cotton and sugar production too. In both, we will be producing more than the domestic demand. The current inflation in vegetable prices is at best seasonal, and suitable action to contain speculative pressures should ease the situation.

Now for time being we will keep aside the domestic bottlenecks and focus our attention on the larger picture; International Food Prices. There is a greater danger waiting outside. International food price have been increasing and is increasing much faster than domestic prices.

More worryingly, global prices are increasing for almost all food groups, in some cases even reaching the peaks of 2008. This increase, which started in July, led to overall food prices increasing to 26% by November. Sugar prices increased by 67%, oils by 44% and cereals by 49%. There is no sign of any slowing down in the international food prices. They are expected to continue with their upward movement.

US is the largest producer of wheat and Australia the fourth largest. However due to severe winter and cold waves in the northern hemisphere, including the US, and massive floods in Australia, there is a major possibility of further wheat shortage in international markets. We have already witnessed highest future prices of wheat in international commodity exchange since August. We can expect similar upward pressure on sugar as well as other cereals.

Adding wine to the fire, oil prices are on rise for the last five months. Crude is currently trading at $92 a barrel and is expected to cross $ 100 a barrel very soon. This would be highest in the last 26 months, and there is a clear danger of crude price touch the peak which was last seen in 2008.

With surge in the primary commodities it is estimated to have affected around two billion people and several food riots have been seen in as many as 26 countries.

International food prices and its effect on the Indian market:

India is mostly domestic driven market and hence largely insulated from global food price. However not the case as far as the crude prices are concerned. There is more worrying factor from international crude prices, which will put upward pressure on domestic prices. This hurt us both ways: Firstly, increase in the cost of cultivation due to rise in fertilizers and diesel and secondly, increase in the transport cost.

Hence even despite our production advantage, India may see food price inflation becoming an ingrained problem. Given the Government record in containing current food price, it’s very easy to predict them fail on their report card.

I guess it’s now high time for us to start worrying.