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Food inflation in Asia and India, and a word about price indexes

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Vendors in Mapusa, Goa

Vendors in Mapusa, Goa. The middle basket contains 'nachne', local millet

 

The question in Asia again is food inflation. Entering the last quarter of 2010, news reports from South and South-East Asia cite continuing high food inflation as a persistent worry for consumers. The food weighting in Asia’s consumer price indexes is mostly high. China, India, Indonesia and Thailand have CPI weightings of 33%-46% for food.

Hence, persistently higher food prices pose a bigger risk of a rise in inflation expectations and wages in these countries as compared with higher per capita income economies on a relative basis, says the late September Global Economic Forum briefing from Morgan Stanley. “While job growth was affected by the latest global financial crisis, with GDP growth back to trend line and employment levels having recovered sharply, the risk of a rise in inflation expectations is significant. While employment statistics in the region are not very transparent, given the GDP growth trend, it appears that employment growth should have been strong.”

China, India and Indonesia together account for 40% of the global population. Any small increase in demand from these countries in the form of imports tends to push up global prices. The recent crop failure in India and its attempt to import sugar are a case in point. Moreover, there are some crops that are peculiar to local markets with very little global supply. For instance, in the case of India last year, the country fell short of pulses (lentils), and it was not really possible to import the crop even if the government had wanted to. Indeed, the top four (in terms of population) countries in the region (China, India, Indonesia and Thailand) are all net exporters of food items. All four countries tend to maintain inventories for staple items like rice and wheat, and have public distribution systems to ensure availability of these essential items at a reasonable price. Most countries in the region subsidise food for the poor.

Against this background, two recent speeches from senior figures in India’s central bank, the Reserve Bank of India, are worth examining closely. First, in ‘Managing the Growth-Inflation Balance in India: Current Considerations and Long-term Perspectives’ the deputy governor of the RBI Dr Subir Gokarn talks directly about food inflation (he gave the speech on 05 October 2010 at The Private Equity International India Forum).

“The inflation rate, which was briefly negative in the middle of 2009, began to accelerate rapidly later in the year. This upward momentum continued into the first half of 2010, with double-digit inflation persisting for a few months. The rapidity of the transition was surprising, given the fact that the recovery in growth was just getting under way and, importantly, the global situation was still very uncertain. However, the reason for the sharp increase was that all the possible drivers of inflation were simultaneously contributing. Each one by itself may not have resulted in the outcome that we saw, but all three working together resulted in a rather sharp acceleration. Food prices rose sharply because the monsoon of 2009 was deficient in most parts of the country, impacting agricultural production. However, there are, I believe, longer term forces at work on food prices, which are a matter of concern.”

 

UN Millennium Development Goals Report 2010 / UNICEF Photo

UN Millennium Development Goals Report 2010 / UNICEF Photo

 

Next, in a speech titled ‘Perspectives on Inflation in India’, executive director of the RBI, Deepak Mohanty (on 28 September 2010 at the Bankers Club, Chennai) said that the Reserve Bank is concerned over “the unacceptably high inflation rate”. Mohanty dwelt awhile on the Indian government’s new wholesale price index series.

“In the meanwhile, the Government has also released the new series on the Wholesale Price Index (WPI) changing the base year from 1993-94 to 2004-05. In terms of change in the relative weight of major commodity groups, the share of primary articles has gone down by 1.9 percentage points, which has been compensated by increase in the share of fuel group by about 0.7 percentage point and manufactured products by 1.2 percentage points. There has been a reduction in weightage of primary food articles and manufactured food products by 2.6 percentage points in the new series to 24.3 per cent from about 26.9 per cent in the old series.”

“Second, notwithstanding a significant reduction in weightage, the food inflation in the new series is higher than in the old series. This is because of change in the consumption basket in favour of protein-rich items such as egg, meat and fish where price rise has been high apart from milk and pulses. Third, the non-food manufactured products inflation is lower in the new series than in the old series. This is because of a substantial overhauling of the basket with the introduction of a number of new items. For example, the new series has 417 new commodities of which 406 are new manufactured products. Fourth, the new series has wider coverage. For example, the number of price quotations has increased from 1,918 in the old series to 5,482 in the new series. The new series, therefore, is better representative of overall commodity price inflation.”

What is curious is that these trends have taken place during a phase of rapid growth in India’s formal economy. Gokarn explained that what was most significant from the monetary policy perspective was the growing visibility of demand-side pressures. He examined the price dynamics of the manufacturing sector – overall and without the food processing component. The latter, he said, has been used by many analysts as a reasonable proxy of demand-side inflation, which is the phenomenon that monetary policy can and should influence. Both sectors he said, and particularly non-food manufacturing inflation, “show a tremendous acceleration from a significantly negative rate of inflation during 2009 to reach rather worrisome levels by the middle of 2010”.

Mohanty finds that the new series of WPI inflation marks a major change in terms of scope and coverage of commodities and is more representative of the underlying economic structure. As per the new series, the manufactured products inflation is lower than what was seen on the basis of the old series, he said. The food price inflation, on the other hand, is higher than what was seen on the basis of the old series. “The high level of food prices is The 100th postindeed a matter of concern as the prices of protein-based items, which have a higher share in the consumption basket, are showing larger increases”. Moreover, Mohanty said, there is continuing shortage of food items such as pulses and edible oils. “If the supply response doesn’t improve, there is a risk that food price inflation could acquire a structural character”.

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India’s 2008 food flows mystery

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CPI for Agricultural Labour data from 2007-10 March and FAO food index data over the same period

CPI for Agricultural Labour data from 2007-10 March and FAO food index data over the same period

My working experience with a central agriculture ministry programme (the NAIP – National Agricultural Innovation Project) has left me with some impressions of the perspective of the central institutional approach to agriculture, and these aren’t encouraging. My finding is (although I have little access to academic output on agriculture which is not crop science):

1. We in India lack an independent food retail price gathering and monitoring network. The data gathered by the Ministry of Agriculture (through its Directorate of Economics and Statistics) and by the Ministry of Consumer Affairs, Food and Public Distribution use different formats and schedules. Validating these is a huge task, and that is the reason why the unit level (place, food item, time) extraction becomes so very cumbersome.

2. We have even less knowledge (outside the commercial circuit) of the flows of agricultural produce: (a) From mandis to urban centres. Large transfers of foodgrains are logged by Indian Railways, but at district level, we have very little reliable data of the flows of cereals, pulses, vegetables and fruit, within district centres and outside; (b) From mandis (and contract farms, now strengthened by a draft national agriculture produce marketing committee act, APMC) to the food processing industry, and to commercial storage depots for use by either food processing sector and by the agri commodities exchanges.

3. Agriculture continues to be seen by central and state governments mainly as an APY (area, production, yield) activity, only rarely as a livelihood activity for a rural household (institutes such as Crida buck this trend, but we need more of them). That is why our organised state-level assessments are also still APY-centric (with a few scattered instances of enlightenment in the form of recognition of conservation agriculture). This is frustrating at a systemic level, because for example the Planning Commission has at hand any number of NGO and commissioned studies and assessments that place cultivation as a socio-cultural livelihood activity.

I’d say there that are technology answers to points 1 and 2 (see how commercial ventures like Nokia Lifetools, Reuters Market Light, Hariyali Kisan Bazar have used tech) but point 3 needs a lot of work.

This chart that I’ve made shows why. It uses the consumer price index (CPI) for Agricultural Labour data from 2007-10 March and FAO food index data over the same period. The eight states I’ve chosen (Haryana, Karnataka, Punjab, West Bengal, Maharashtra, Rajasthan, Tamil Nadu, Andhra Pradesh) recorded the highest increases among large states of CPI-AL over the period.

The FAO indices climb steeply till around Feb 2008. By December 2008 the FAO cereal index is back to the level it was at in August 2007. For that time the CPI-AL 8-state rise is relatively gradual and disconnected from the FAO trend. Between around Jan 2009 and July 2009 both FAO indices show some volatility in the 100-125% band. The 8 states’ CPI-AL however continue their rising trend. Only in December 2009 is there evidence of some congruence between the FAO set and the 8 states CPI-AL set, although the FAO pair are 105-120% up from March 2007 and the all-India CPI-AL is more than 135% up.

The big question for us is: what happened with food movements in India between 2007 July and 2008 November, when India and FAO data diverged so dramatically, and then from 2009 May onward, when the movements showed some similarity, although at different levels of the comparative index? Do the agricultural commodities markets hold the answer?