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The wholesale fibs party and its propaganda

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(This article was first published by Vijayvaani and is available here.)

The Congress disinformation machine is up and running so hard that now it’s reinventing economics. An article in The Hindustan Times, dated Jan. 15, 2019 on the wholesale price index (WPI), with a wild headline, “Worst price slump in 18 years shows scale of farm crisis”, shows the Congress-plus-opposition agitprop firing on all cylinders. The trouble with this shoddy report and its very obvious promoters is that the wholesale price index (a) hasn’t behaved the way they claim it has (b) is not an indicator of the income health of the kisan household.

These minor inconveniences did not stop The Hindustan Times report from pronouncing that “This financial year, 2018-19 could end up being the worst year for farm incomes in almost two decades, government data indicates in a revelation that emphasises the gravity of the ongoing agrarian crisis”. The government data cited is the WPI which, as the name makes clear, is an index of the change in prices at the level of bulk sale, which for primary agricultural produce is at the mandi, or “farm gate”, as this reporter calls it fashionably. “The WPI sub-component for primary food articles has been negative for six consecutive months beginning July 2018. This means their prices are falling,” says the report.

This is false. Here are the WPI numbers for the category ‘primary articles – food articles’, for the months July to December (the latest month) 2018: July 144.8, August 144.8, September 144.5, October 145.9, November 146.1 and December 144.0 – where is the “negative for six consecutive months”?

Even the simple math the report claims to have done – based on a misreading of the WPI – is wrong. “The WPI sub-component for food components was -0.1% in December. It was -2.1%, -4%, -0.2%, -1.4% and -3.3% in the preceding five months,” says the report. Also false. The sequence of change, from December running backwards to July, is -2.1, 0.2, 1.4, -0.3, 0 and 3. And the change is a number, not a per cent, because the WPI and its components are indices.

But the HT report ploughs on unmindful: “The last time WPI for primary food articles showed negative annual growth for two consecutive quarters was in 1990. The disinflation in farm prices has also led to a collapse in nominal farm incomes, which was last seen in 2000-01.”

So many non-sequiturs in two sentences. A sequence of WPI numbers over several months is not an indicator of annual growth or contraction for what is being measured. As any Food Corporation of India warehouse manager could have told the reporter, what is indexed is the change.

Did the newspaper scrutinise WPI data back until 1990? If it did – and if the sponsors of this “data revelation” did – they would not have failed to notice that the current WPI series has the base year (from which index numbers of 697 different components are calculated) of 2011-12. The previous base year was 2004-05, before that it was 1993-94 and before even that it was 1981-82.

What happened instead is that The Hindustan Times was told to reference the Centre for Monitoring Indian Economy which maintains the WPI data back to the 1981-82 series, but has shown a chart with the news report that draws the 2004-05 series. The rider while comparing indices from different series – that they be recalculated with a specific linking factor that makes two series intelligible to each other – is not mentioned at all by the reporter nor by those interviewed by the paper, and they are, in order of appearance: Himanshu, an associate professor of economics at the Jawaharlal Nehru University; Niranjan Rajadyaksha, research director and senior fellow at IDFC Institute, Mumbai; Praveen Chakravarty, chairman of the Congress data analytics department. And last, BJP spokesperson Gopal Agarwal.

Their quotes, and the confused graphs thrown in, are meant to prop up the sagging storyline – that the Doubling Farmers’ Income programme of the BJP is not working, that there is ‘agrarian distress’ all over India (the reason given for the INC-Left-NGO morcha to Delhi in November 2018), that the boost to minimum support prices are not working.

“To be sure,” the report says, so that we get the point that the data certainly does not make, “the current crisis in farming is related more to a crash in farm prices rather than output growth.” And immediately adds that in July 2018, “the central government increased the minimum support prices (MSPs) of 14 crops to give farmers a 50% return over their cost of production”. In fact, the MSP was raised so that it is now no less than 50% above the cost of production. Several crops have their MSPs pegged at 60% and even 70%.

Not content with the bashing of the BJP government by those the reporter has interviewed, the newspaper then brings in still another angle, GDP (gross domestic product) data. “That disinflation in farm-gate prices has put a squeeze on farm incomes can be seen from a comparison of growth in agricultural GDP at current and constant prices,” blithely says the report.

“The first advance estimates of GDP figures for 2018-19, which were released by the Central Statistical Office (CSO) last week, show that the difference between current and constant price growth in Gross Value Added (GVA) in agriculture and allied activities was -0.1 percentage point. This differential is 4.8 percentage points for overall GVA.”

It is surprising that The Hindustan Times appears to have no access to any of the Indian Council of Agricultural Research’s agronomists, who could have been asked to clarify what the connection is, if any, between GDP growth rates, gross value added and the income of a kisan household in any of our 350 (and rising) districts that produce food for markets near and far. What matters to that household is the income realised for crop grown and sold, and this is where eNam, the electronic national agriculture market, is making a difference with, till date, 585 markets in 16 states and 2 union territories being integrated.

But the newspaper wants to press every available economics button in its frantic attempt to convince its readers that there is an agrarian crisis being engineered by the BJP government. And so it enlists the Reserve Bank of India, too, claiming that “The failure of MSP hikes to arrest the decline in farm-gate prices was taken note of by RBI as well”. What has been quoted from the RBI monetary policy committee meeting held during 3-5 December 2018 does not say so at all.

“The prices of several food items are at unusually low levels and there is a risk of sudden reversal, especially of volatile perishable items,” is how the RBI has been quoted. And what this means is that the consumer of food could find the weekly food bill rising; as with the other crutches this report leans on heavily, the RBI has not said what The Hindustan Times tells readers it has. The risk of the price of some food items rising is not a “decline in farm-gate prices”.

Likewise, the second quote from the RBI meeting – “available data suggest that the effect of revision in minimum support prices (MSPs) announced in July on prices has been subdued so far” – is an encouragement, far from the burden it is made out to be by the report.

Typically, a rise in the MSP would have been transferred, at least some if not most of it, by the layers of crop collection, retail and distribution, to the consumer. This transfer, said the RBI, has been subdued, which shows that the measures taken by the government to cut out profiteering middlemen are working.

Six months in 1990 are not six months in 2018. Gross value added whether at constant or current prices is in no way a measure of income for harvested crop a kisan earns at a mandi or through eNam. These and every other trick used in this report show why it is a shabby, confused, hodge-podge of opposition party innuendo that is meant to ride on data which the reading public scarcely notice. Except, when it is noticed, the whiz-bang falls flat.

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Written by makanaka

January 26, 2019 at 08:38

What we know and don’t about the true price of dal

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If you look at only the official account (left), the price of dal has been comfortable, but the consumer experience (right) tells a quite different story.

If you look at only the official account (left), the price of dal has been comfortable, but the consumer experience (right) tells a quite different story.

How urgently our national food price measuring methods need a complete overhaul is best shown with the example of a staple everyone is familiar with: arhar or tur dal.

Price indexes or indices are useful because they help us view the change in the price of a particular food staple over time, not the price itself, but change in price when taken from a base year or month. Price records are useful because they log the price (per kilo for retail consumption) of a food staple in a week or month.

The three ministries concerned with food prices update their indices or actual price reports every month or week. These are: the Department of Consumer Affairs of the Ministry of Food and Consumer Affairs, the Directorate of Economics and Statistics of the Department of Agriculture and Cooperation of the Ministry of Agriculture, and the Labour Bureau of the Ministry of Labour. In addition, there is the wholesale price index prepared by the Office of the Economic Adviser, Ministry of Commerce.

arhar_true_price_chart_sm1Usually, movements and trends in these indices and price logs are examined by themselves, and conclusions are drawn about whether the price of a food staple has been held steady or is rising steadily or is rising seasonally and also annually (we never see prices and trends going downwards).

But this is not enough. We need also to examine whether these indices and price logs are describing what they are designed to in the same manner and – very much more important – whether their descriptions are reasonable or not.

In the two chart panels, I have plotted the descriptions for arhar/tur dal from several sources together. The left chart has solid coloured price lines from the Department of Consumer Affairs and from the Directorate of Economics and Statistics. Each has two lines, the higher at the 90th percentile and the lower at the 10th percentile of all monthly prices logged from 2009 January until 2014 June. The two dashed lines are indices – the wholesale price index for arhar/tur and the Labour Bureau’s retail price index for arhar/tur over the same period. The price logs are plotted against the left index and the price indices are plotted against the right index.

Between the two indices the WPI for arhar appears lower than the Labour Bureau index, but that has only to do with a difference base period. The overall pattern they describe is the same. The two sets of price logs shows the two different levels for the 90th and 10th percentiles – in both cases the prices recorded by the Directorate of Economics and Statistics are higher than those recorded by the Department of Consumer Affairs. However they all follow a similar pattern over the 66 months illustrated here.

arhar_true_price_chart_sm2And so to the question: how true is what these indices and price logs are describing?

The answer is in the right chart. Here, two more lines are seen. These are both ascending relatively evenly over the 66 months, one at a slightly steeper rate. These I have called the ‘real retail’ price lines, one low and the other high. They describe the prices paid by urban consumers for a kilogram of arhar/tur dal based on what has been charged by ordinary retail outlets in towns and cities, with the price readings collected informally. They have also been ‘straightened’ by applying a 12%-14% true inflation that has been experienced by urban food consumers over these 66 months.

The effect, as you can see, is startling. The ‘real retail’ price lines explain why the consumption of pulses has been dropping and continues to drop especially amongst urban households whose livelihoods depend on multiple informal jobs. At Rs 90 to Rs 110 per kilogram, this dal (like other pulses) is almost beyond reach. At Rs 120 to Rs 130 per kilogram – these are levels that began to be recorded by consumers, but not consistently by the government price monitoring agencies, even two years ago – the dal can be consumed only by the upper strata of the urban middle class.

The question that immediately arises is: why is the real food price inflation being experienced by consumers not reflected in the official food price logs and indices? I will take up this question in the next posting.

Expanding India’s WPI, neglecting its CPI

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There are some 130 food items in the proposed WPI whereas the retail price collection basket with the most items has only 46.

There are some 130 food items in the proposed WPI whereas the retail price collection basket with the most items has only 46.

The Planning Commission is to agree by the end of 2014 March on the composition of an expanded set of items for the wholesale price index. The expanded index – with a few new categories and some reclassifications – is a proposal, formally, by the Office of the Economic Adviser, Ministry of Commerce and Industry.

But there are retail wheels within wholesale ones, and there are indications provided by the financial and business press that it is the Prime Minister’s Office that is backing the revision – which will also allow the Reserve Bank of India to make decisions about interest rates that could benefit industry.

My interest was drawn to the several additions that have been made to the category of ‘food articles’ (some of which has been covered by media reportage, which quite typically has ignored the changes proposed in the rest of the categories). More important than these few changes to the components of wholesale food price are the additions made under the ‘manufactured products – food products’ category.

This is a greater expansion of items (although the weightages for the new items have not yet been made public) and reflects the shift in what is being purchased by households – more packaged and processed food in place of raw cereals, pulses, fruit and vegetables. The expanded list also signals the dietary shift – a nutritional time-bomb whose effects can already be seen in the rising rates of youth becoming overweight – towards processed cereals, sugary drinks, edible oils, and snack foods.

The tall and narrow chart you see here shows the difference between the sets of items covered by the proposed new WPI and the current sets of items that are monitored for consumer retail prices. The three sets that do this are from: (1) the Ministry of Agriculture, Directorate of Economics and Statistics, (2) Ministry of Labour and Employment, Labour Bureau, and (3) Ministry of Consumer Affairs, Food and Public Distribution, Department of Consumer Affairs.

This is the second expansion in the number of items that make up the WPI in the last three years, whereas the relatively much smaller list of items that are used to monitor the prices of food for consumers has remained the same over the same period (the last revision was about five years ago in the Ministry of CAF&PD system).

As usual, there is little or no public discussion on the additions to the WPI and the continuing neglect of the items that are used to compute the consumer price index – some of those collection systems are 30 years old. The proposed expansion of the WPI food and food-related items will deepen the already very serious lack of correspondence between the WPI and CPI.

More troubling is the deepening meaninglessness of the CPI numbers – rural and urban for major states doesn’t help one bit if the list of items is not expanded to reflect more accurately what households actually buy, rather than ignore the growing list of items they do. Continuing to ignore this long overdue need for correction will short-change India’s salaried workers and wage earners, and very seriously under-report true inflation especially for food.

FAO 2011 October Food Index down, food prices still up, what’s going on?

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FAO has released its Food Price Index for October 2011, saying the index has dropped dropped to an 11-month low, declining 4 percent, or nine points, to 216 points from September. Indeed the index has dropped, declined and has certainly not risen. But does this mean food prices for the poor in many countries, for labour, for informal workers, for cultivators too – has the cost of food dropped for any of them?

The answer is a flat and unequivocal ‘No’. FAO has said so too: “Nonetheless prices still remain generally higher than last year and very volatile.” At the same time, the Rome-based food agency has said that the “drop was triggered by sharp declines in international prices of cereals, oils, sugar and dairy products”.

The FAO has said that an “improved supply outlook for a number of commodities and uncertainty about global economic prospects is putting downward pressure on international prices, although to some extent this has been offset by strong underlying demand in emerging countries where economic growth remains robust”.

Once again, the FAO is speaking in two or more voices. It should stop doing so. A very small drop in its food price index does not – repeat, does not – indicate that prices for food staples in the world’s towns and cities has dropped and people can afford to buy and cook a square meal a day for themselves and their children. Not so at all.

I am going to contrast what FAO has said about its October food price index with very recent reportage about food and food price conditions in various parts of the world.

FAO: “In the case of cereals, where a record harvest is expected in 2011, the general picture points to prices staying relatively firm, although at reduced levels, well into 2012. International cereal prices have declined in recent months, with the FAO Cereal Price Index registering an eleven month-low of 232 points in October. But nonetheless cereal prices, on average, remain 5 percent higher than last year’s already high level.”

Business Week reported that rising food prices in Djibouti have left 88 percent of the nation’s rural population dependent on food aid, the Famine Early Warning Systems Network said. A ban on charcoal and firewood production, which provides about half of the income of poor people in the country’s southeast region, may further increase hunger, the Washington- based agency, known as Fewsnet, said in an e-mailed statement today. Average monthly food costs for a poor urban family are about 33,907 Djibouti francs ($191), about 12,550 francs more than the average household income, Fewsnet said. Urban residents in the Horn of Africa nation don’t receive food aid, it said.

FAO: “According to [FAO’s November 2011] Food Outlook prices generally remain ‘extremely volatile’, moving in tandem with unstable financial and equity markets. ‘Fluctuations in exchange rates and uncertainties in energy markets are also contributing to sharp price swings in agricultural markets,’ FAO Grains Analyst Abdolreza Abbassian noted.”

A Reuters AlertNet report quoted Brendan Cox, Save the Children’s policy and advocacy director, having said that rising food prices are making it impossible for some families to put a decent meal on the table, and that the G20 meeting [currently under way in Cannes, France] must use this summit to agree an action plan to address the food crisis. Malnutrition contributes to nearly a third of child deaths. One in three children in the developing world are stunted, leaving them weak and less likely to do well at school or find a job. Prices of staples like rice and wheat have increased by a quarter globally and maize by three quarters, Save the Children says. Some countries have been particularly hard hit. In Bangladesh the price of wheat increased by 45 percent in the second half of 2010. In new research, Save the Children analysed the relationship between rising food prices and child deaths. It concluded that a rise in cereal prices – up 40 percent between 2009 and 2011 – could put 400,000 children’s lives at risk.

FAO: “Most agricultural commodity prices could thus remain below their recent highs in the months ahead, according to FAO’s biannual Food Outlook report also published today.  The publication reports on and analyzes developments in global food and feed markets. In the case of cereals, where a record harvest is expected in 2011, the general picture points to prices staying relatively firm, although at reduced levels, well into 2012.”

IRIN News reported that food production is expected to be lower than usual in parts of western Niger, Chad’s Sahelian zone, southern Mauritania, western Mali, eastern Burkina Faso, northern Senegal and Nigeria, according to a report by the World Food Programme (WFP) and the Food and Agriculture Organization (FAO), and a separate assessment by USAID’s food security monitor Fews Net. “We are worried because these irregular rainfalls have occurred in very vulnerable areas where people’s resilience is already very weakened,” said livelihoods specialist at WFP Jean-Martin Bauer. Many Sahelian households live in a state of chronic food insecurity, he said. “They are the ones with no access to land, lost livestock, without able-bodied men who can find work in cities – they are particularly affected by a decrease in production.” A government-NGO April 2011 study in 14 agro-pastoral departments of Niger noted that pastoralists with small herds lost on average 90 percent of their livestock in the 2009-2010 drought, while those with large herds lost one quarter. Those who had lost the bulk of their assets have already reduced the quality and quantity of food they are consuming.

FAO: “Food Outlook forecast 2011 cereal production at a record 2 325 million tonnes,  3.7 percent above the previous year. The overall increase comprises a 6.0 percent rise in wheat production, and increases of 2.6 percent for coarse grains and 3.4 percent for rice. Globally, annual cereal food consumption is expected to keep pace with population growth, remaining steady at about 153 kg per person.”

The Business Line reported that in India, food inflation inched up to 11.43 per cent in mid-October, sharply higher than the previous week’s annual rise of 10.6 per cent, mainly on account of the statistical base effect of the previous year. Inflation in the case of non-food items and the fuels group, however, eased during the latest reported week. According to data released by the Government on Thursday, an increase in the year-on-year price levels of vegetables and pulses contributed to the surge in the annual WPI-based food inflation for the week ended October 15, apart from the base effect. Sequentially food inflation was up 0.25 per cent.

FAO: “The continuing decline in the monthly value of the FAO Cereal Price Index reflects this year’s prospect for a strong production recovery and slow economic growth in many developed countries weighing on overall demand, particularly from the feed and biofuels sectors.”

Al Ahram reported that Egyptian household budgets had mixed news in September with prices for some basic foods tumbling month-on-month and others showing small climbs, according to state statistics agency CAPMAS. Figures released this week show the price of local unpacked rice fell 15.6 per cent to LE4.96 per kilo between August and September 2011. It was the commodity’s first decline in nearly a year, although the per kilo price remains 68 per cent higher than the LE2.95 that rice cost in October 2010. Chicken also fell 5.8 per cent to LE16.26 per kilo between August and September. Other staples, however, continued to rise; the price of potatoes climbed 14 per cent to LE4.89 per kilo, while a kilo of tomatoes gained a monthly 14.8 per cent to cost LE4.65.

FAO food price index tops the 2008 peak

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The UN Food and Agriculture Organization’s food price index has risen to 214.7 for December 2010, which is above its peak of 213.5 in June 2008.

This new peak, at a time when the price of crude oil is above USD 90 a barrel, is the strongest signal yet that global foodgrain supply has entered a critical phase. The FAO index has been rising steadily through the second half of 2010 – we discussed it here.

The cereal price index stands at 237.6 which is almost 40 points below the peak of 274.3 (in April 2008). The oils price index stands at 263 which is just under 20 points less than the peak of 282.6 (in June 2008). The dairy price index stands at 208.4 which is 60 points under the peak of 268.6 (in November 2007).

But the sugar and meat price indices are at all-time highs. The meat price index is now at 142.2 (in September 2008 it was 137.4 and its previous all-time high was 139.3 in September 1990). The sugar price index is now at 398.4 which is an extraordinary 180 points above its all-time high of 218 (in March 1990 – it was 207 at the maximum during 2008). The sugar price index crossed 300 in August 2008 and remained above 300 until March 2010, and again crossed 300 in September 2010.

Comparing three-month averages for the FAO food index and its main index components helps us understand how the 2010-11 food price crisis compares with its predecessor in 2007-08:

Food     Meat       Dairy     Cereals    Oils       Sugar
3-month avg
at 2008 Jun    210.4    129.5    240.8    271.7    273.9    173.9
3-month avg
at 2010 Dec    206.4    141.2    206.3    227.0    242.1    373.7

A Bloomberg report quotes FAO senior economist Abdolreza Abbassian: “One might expect prices to come down in spring, and this may be in fact the worst. But given how unexpected the weather events have been, I for one would not want to bet on anything along those lines.” The report said that concern about drought doing harm to Argentine harvests helped corn jump 52% in Chicago last year and soybeans to rise 34%. Prices also gained as China, the world’s largest soybean buyer, became a net corn importer. Wheat added 47% in 2010 as Russia, hit by its worst drought in a half-century, banned all cereal exports.

“Eyes will be on the Argentina corn crop,” Abbassian said. “There is still, unfortunately, a potential for grain prices to strengthen on the back of a lot of uncertainty. If anything goes wrong with the South American crop, there is plenty of room for them to increase further.” Potential damage to South American soybean and corn crops is of greater concern for world grain prices than harm to wheat in Australia caused by floods, according to the economist. Argentina and Brazil are the world’s second- and third-biggest corn and soybean exporters after the US. “The watch is definitely on South America for the next two weeks,” Abbassian said. “Given the very tight corn market, and demand from China for soybeans and the tight soybean market, if those commodities start to rise more, that will also lift wheat.”

Agrimoney has a report polling commodities fund managers in several financial centres worldwide for their views. What they say about the impact major forecasts, such as the World Agricultural Supply and Demand Estimates, have is worth paying close attention to. The WASDE report provides the US Department of Agriculture’s comprehensive forecasts of supply and demand for major US and global crops.

Reuters has reported that India’s food inflation rose for the fifth straight week to the highest in more than a year, reinforcing fears it has spilt over to broader prices and cementing expectations of a January interest rate hike. “But the spurt in prices of many basic foodstuffs has also raised questions over the government’s ability to control price rises through monetary policy, with poor infrastructure, hoarding and supply bottlenecks contributing to stubbornly-high food inflation.”

Unseasonal rains are officially blamed for pushing up prices of vegetables such as onions and tomatoes, but some commentators point instead to poor agricultural productivity and transport after years of few reforms and weak government investment. Onion prices, a key food staple for Indian families, rose over 23% percent over the week to December 25. The food price index rose 18.3% in the year to December 25 and the fuel price index climbed 11.6%. This compared with 14.4% and 11.6% annual rises the previous week.

The Wall Street Journal has said that food prices in India are continuing their sharp rise, increasing concerns among economists about a prolonged spell of high prices and adding pressure to the central bank to raise interest rates later this month. “The Reserve Bank of India next meets on Jan. 25 to consider an interest rate rise after pushing up rates six times in 2010 – one of the most aggressive tightenings of any central bank. But calls for a further move keep coming, most recently with the International Monetary Fund saying in a report released Thursday that rates need to be higher to curb inflation.

“The central bank will need to walk a fine line, however, since liquidity within the bank system is tight and further rate hikes could exacerbate that problem, economists said. Data from the Ministry of Commerce and Industry Thursday showed that the wholesale price index for food articles rose 2.5% in the week ended December 25 from the previous week. The year-on-year inflation rate for food surged to 18.32% from 14.44% the week before. It was the fifth straight week of rising food prices, which have been hovering at elevated levels in recent months.”

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”.