Saturday, February 27, 2010

Food prices and coping mechanism in India

Debates abound, in the recent months, as to the steep increase in inflation in India and a substantial contribution from the primary food articles. This obviously is a matter of great concern to the government, the civil society and consumers alike. Since food is consumed on a daily basis and most households undertake daily purchases, it is imperative to find out how poorer households cope with high food inflation and sustain their food consumption.

In the following we investigate: (1) whether the food inflation is accurately captured through the WPI- inflation monitoring; and (2) how do the households in rural and urban areas cope, so as to smoothen food consumption.

Prices: Inflation which is benchmarked on the wholesale price index underestimates the impact of food prices due to low weightage attached to the group of food products, for example, the food group as a whole has a weight of just over a quarter, and food grains have only a 5 % weight. In reality (estimated from household survey) these proportions are 51% and 19.2% in rural and 41% and 16% in urban areas. Therefore, food price increase is not adequately factored in inflation figures provided by government agencies. Given this situation, if the government claims that food price increase indeed is one of the factors for high inflation, it should mean an unprecedented and very high price increase in food articles indeed.

Further citizens normally take newspaper reporting seriously to make judgments about the food inflation. Often the retail market prices collected from urban neighborhoods do not correctly reflect prices due to large discrepancy with the wholesale market prices of the same food items. Further, for food items other than vegetables and fruits it is essential to take a short to medium (as opposed to immediate) term view by tracking prices say on a weekly, monthly and seasonal basis. This article gleams over monthly data for over 25 food items from 78 towns and cities spread all over India since April 2006 to October 2009 period. The size of the town/city is a good proxy for size of market as well as proximity to the source of supply, normally the rural areas. An interesting pattern emerges. Small town having less than one lakh population are the cheapest for unprocessed food items such as whole wheat, paddy and rice, unprocessed milk and so on. The processed food items such as wheat atta, polished rice and packed milk are found to be priced high in large towns above 25 lakh population. But the contrast is in wheat and atta. While wheat prices are least in small towns, wheat atta is priced highest in small towns compared with the larger ones. The wheat flour is priced between 40% to 50% higher than the whole wheat prices in small towns. Other processed food items also cost exorbitantly high in small towns and rural areas. However, towns with 1-5 lakh population are the cheapest for both rice and wheat in India suggesting that they maximize gains from nearness to source of supply, as well as possible scale economics in business and also because of location of processing industries. Rice price increases as size of town/city increase and thus affects the poor living in larger towns and cities the most. The price of pulses and sugar has recorded unprecedented increase during the 2009-10 periods and affects both rural and urban areas equally. There is a broad based increase in prices of food items in India and the momentum of this increase has built up during 2007-8 and is continuing during the 2010.

Coping Mechanisms: There are noteworthy rural-urban consumption differentials in India – rural households consume more of cereals so is the case for poorer households. Consumption of quality and value added foods are high in urban areas and amongst the richer households. Price wield large and dominant impact even on consumption of rice and wheat, generally considered price inelastic. Therefore, self production of these cereals has considerably strong impact on sustaining consumption. It is instructive to note that 36 % of wheat and 32% of rice requirement are met through self-grown agriculture. Another 11% of wheat and 14% of rice requirement is met by the Public Distribution System. Thus even in the rural areas one half of the all wheat and rice requirement is met by open market purchases. As expected 92% of wheat and 84 per cent of rice requirement of urban households is met by open markets, and only about 5 % wheat and 11% rice requirement is met of PDS in urban area.

Relatively poorer households try to depend less on markets but they fall short of home grown food at least in rural areas, consequently their dependence upon the PDS supply is large. One finds that PDS has reached rural areas and there is also a great demand for supplies. However, the PDS supply is irregular and insufficient due to state specific bureaucratic failure, leakage and large exclusion and inclusion errors in targeting. Urban areas show unfair distribution of BPL cards compared with rural parts although the mismatch is considerable in both place of residences. Further the targeted PDS program is poor in states where poverty is high such as Jharkhand, Uttar Pradesh, Bihar and Chhattisgarh.

It is essential to find out the share of expenditure on cereals to total food so as to find out how relative prices impact the poor. Cereal shares are about 35% in rural and 27 % in urban areas; but a disturbing fact is that relatively poor spend substantial higher shares on cereals compared to relatively richer. Therefore, any cereal price increase is going to impact the poor the most. Therefore, it is absolutely essential to keep a check on unusually high price rise of cereals from the consumers’ point of view, yet it is imperative that incentives are built so as to directly benefit the farmers who will sustain cultivation of cereals. Another aspect which provides deeper understanding is the fact that bottom 20 % (poorest) households spend almost all their disposable income in urban and 72 % higher than the disposable income in rural areas on food. This suggests that there is an urgent need to build food security for the rural poor much more than the urban poor although at the outset it appears that it is the urban poor who gets affected by the food price inflation.

In conclusion, it is essential to emphasize, that there has to be a prudent price management scheme for both wheat and rice in India. Further it is imperative that appropriate amount of income transfer is effected either through the PDS or food / cash vouchers schemes. The key is in the ability of the state to identify the poor dispassionately and through a systematic methodology. Keeping a close watch on market price of food items must become inherent part of public policy. It appears India is not yet amenable for free market in food products although experiments in crafting exclusive agricultural markets for exports and strengthening supply chains to organized and supermarkets can continue.