Hunger for ideas

More heat than light on food inflation

Between the Reserve Bank of India, the Union finance ministry and the army of economic advisors that surround Prime Minister Manmohan Singh no one seems to have a clue about how to get a grip over food inflation. Not only has the recent episode of high food prices seen surprisingly sharp spikes in the prices of vegetables and fruit but it has lasted longer than any other episode of inflation in recent memory. At the end of a long consultation earlier this month the prime minister reportedly said in exasperation that nobody seemed to know what to do! Apart from the usual mantras on the pursuit of supportive monetary and fiscal policies, the only other substantial idea forthcoming related to the reform and liberalization of agricultural product markets. Economists have expressed surprise that higher prices do not seem to be sending adequate market signals to the producer to increase supply. After all, supply can respond fairly quickly to price signals in the case of vegetables, where the highest rates of food inflation have been witnessed. The reason for this gap may well lie in the fact that high retail market prices are not translating into adequately attractive farm prices, which means the producer is not getting the price signal, with traders cornering the margins. If this is true, then retail trade liberalization and agricultural marketing reform is called for. Imperfections in agricultural marketing were sought to be removed by the creation of agricultural produce marketing committees. These regulate agricultural mandis and were meant to ensure fair trade, preventing monopolies and cartelization. In practice APMCs have failed to deliver in most states. Several states have amended APMC laws but with little impact on outcomes. The number of intermediaries between the farmer and the consumer in the food trade chain still remains high. This pushes up price at every tier of marketing. Moreover, adequate post-harvest infrastructure for cleaning and grading of produce, its efficient transport, storage and retail are all missing. All this would help transmit retail price signals more effectively to actual producers, enabling supply response.

Another explanation for persistently high food prices could well be the rising demand for food on account of higher income, including the income of the poor. This is not a very popular argument among left wing economists and Congress Party socialists who smugly berate the rising demand hypothesis. But policy makers must consider the possibility and draw appropriate policy conclusions. The rise of India and China has pushed up commodity prices in general and is likely to keep food prices high for a long time as consumption at the bottom of the pyramid rises. Does this mean the world is entering a new phase as far as inflation is concerned? Is the low inflation of the past decade firmly behind us? No informed answers are as yet available.