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Home > Archives (2006 on) > 2008 > May 31, 2008 > Causes and Consequences of Food Price Behaviour

Mainstream, Vol XLVI, No 24

Causes and Consequences of Food Price Behaviour

Monday 2 June 2008, by Kamala Prasad


After a long time, the price of basic foodstuffs is centre-stage. The balance of attention still remains on the overall agricultural crisis. The roots of that crisis are structural and deeper. They span structural issues in land, water and human relations. The time seems appropriate to review food prices in an autonomous regime. The economy of all agricultural production, more so commercial and industrial, concerns segments of the population. Price and availability of food concern all the population. These target the more vocal urban consumers despite their cash income improving or may be because of it. Food has a declining share in the urban consumption expenditure and this group resists the larger share of the new income going for food. Protection of new luxury items demands cheap food. No wonder, then, that the Finance Minister has assured on May 2 that food prices will come down sooner than other commodity prices. This has not happened but is indicative of a known bias and yet delayed medication to tame the overall food inflation.

However, is this not an immediate term view of the food crisis? Newer variables have joined what we may appropriately consider the old and cyclical ‘food problem’. These variables include forced alienation of well-developed farmland for industrial-commercial purposes; soil sickness from over use in main food surplus regions; adverse impact of climate change on food crops; declining income from basic foodstuffs in relation to the public policy for diversification to commercial crops; reduced volumes and increased costs of water and other purchased inputs; and failure of incentives to upgrade technology and productivity. There are, then, the second generation problems of post-production safety, adequacy of operating margins for those involved in post-harvest operations; failure to introduce farm-gate incentive price; and modernising the food distribution chain of whole grains to reach the consumers in quality. Food price inflation for the consumer today is the cumulative outcome of neglect of the food distribution strategy or the total lack of it in public policy.

The economic reforms phase initiated in 1991 added another dimension to the economics and sociology of staple grains. There was a shift from the inherited thinking of the old model “private-public partnership” in the food distribution chain in the direction of turning over the entire operation to private trade. Public sector performance is derided by those assumed to defend and reform where needed. Did not the Agriculture and Food Minister raise his voice against the FCI and dub it as a “white elephant”? Food has a fiscal dimension too. Food subsidy never distinguished between consumption subsidy and production incentive, nor quantified in holding security stocks; it has been a misunderstood component in the total subsidy. The policy- making sentiment was directed to reduce the fiscal outlay with the ultimate objective of ensuring the market-determined consumer price of the basic staples. It led to introducing a rigid “targeting” of beneficiaries for income transfer to through the PDS. Food was incorporated into the fiscal determination of poverty, since poverty levels, statutory minimum wages, working wage and conditions in the overwhelming informal economy provided jobs to the bulk of the labour force, and the indigent portion of the population in times normal as well as during disasters. All this had the direct impact of shrinking consumption and releasing public stocks for FCI-market operations as well as subsidised exports. A mismatch between public procurement and reduced off-take from the PDS led to heavy build-up of public stock. A partial reduction of the price of PDS supply was forced when price increase-induced distress of the poor brought public protest. The economics of food has passed through a policy muddle and deterioration in administrative oversight. Banker K.V. Kamath, of the ICICI Bank and now Chairperson of the CII, is right in suggesting that fiscal steps taken now should have been taken earlier. This is specifically so in respect of food staples, which work by crop cycles.

Globalisation-induced policy-making has been full of riddles. Looking back, there is a lack of food insight. Lessons learnt during the four decades of building institutions and infrastructure for socially fair sharing of available food resources between classes have been undermined. The focus on the domestic dimension of the fiscal commitment ignored the evolving global scenario of tightening food availability leading to a grave impact for the price of food. The global perspective changed in the meantime. Despite the emphasis of the World Food Conference in 1974 on “food security” and despite the re-emphasis of the global summit during the decade of the nineties to ensure the access and economy of food consumption, food became a strategic commodity in trade. The WTO-I provided not any comprehensive framework for food security in global trade but only a token commitment to the least developed countries. Privatisation led to taking vital research in food commodities from the public to the private domain. Economics and ethics of the “genetically modified” (GM) food and the actual experience of the pricing of seeds and open trials in developing countries have run into the zone of suspicion. In any case, despite two decades of that research in biotechnological alternative nothing in staple food has appeared unlike when research was largely in the public domain. Finally, if there was focus on the diversion of staples to animal feed during the food and energy crisis of the seventies, then a major diversion of certain staples to bio-fuels with substantial subsidies and ambitious targets of production of ethanol by 2015, as in the USA, the grain basket of the world, is the focus now. The web of the WTO rules, specifically the intellectual property right regime, is binding global food trade in knots. India cannot but face the consequences of policy neglect of the “discomforts of globalisation”. The last two years have brought to the fore the harsh realities of iniquitous globalisa-tion of food for its proponents in the country. In his latest comment the Prime Minister has offered assurances on stable supply if the monsoon were normal. We are back to looking at the sky!

Availability and Price of Food

ECONOMIC reforms in the food sector had no open commitment to self-sufficiency and domestic food security. The underlying sentiment has been to accumulate foreign exchange and import food as and when needed. Two assumptions inherent in this policy regime have failed the short span of the current crisis. The first was that food would be easily and cheaply available from the world surplus and the second that India was happy accumulating foreign reserves. The import experience of the last two years is there for every body to judge. First, the oversight on dwindling global reserve to levels of insecurity was lax. Import of wheat was opened to private trade on the same terms as the government but they could not manage a modest targeted quantity of 1.5 million tonne. The forex reserve is not lacking but is not based on a positive balance of payment; it is based on the RBI currency management task. Unlike China and the East Asian countries we are not running current account surplus; our import bill even last year was 35 per cent higher than the export receipt. In this situation, the rising global price of staples introduced a risk factor as well as the politics of domestic pricing of procurement to thwart adequate imports. Finally, therefore, the Budget speech reverted to the commitment for self-sufficiency but not yet unequivocally for food security for all.

Food security for all has, by implication, a strong commitment on the public sector performance. The current policy shift is for trading and transferring food trade in the hands of large corporate entities. Multinationals, such as Cargill, Monsanto, ITC, and domestic companies, such as Reliance, have entered the realm of wholesale procurement and trading. In fact, the government has liberalised the market produce Acts in States to facilitate their operations escape the statutory regulation and marketing levies. And, there is no overall Regulator in the food sector. Forward trade in basic staples has turned controversial for this reason also apart from the inherent risks of speculative capital and big business manipulating this trade. If the government had promoted a policy for farmers’ organisations/associations to be given financial and managerial incentives to take on private traders, forward markets in food commodities would not have been that controversial. It would have appeared as benefiting farmers and not traders shifting investment to food commodities for larger profit. Then, there is no policy in place to bring other viable States with land and water resources into surplus and its trading through differential price incentives. So, all trading is confined to existing rather than prospective surplus. It is not designed to develop under-performing areas but to divert existing stocks for profit booking. By its very nature this has delivered tight supply and high open market prices.

It is doubtful if the government has accurate statistics of marketable surplus in each State of the basic staples. It has, at the best, some figures of marketed stocks in established trading States. Therefore, government agencies bring out a series of advance estimates of production but not of marketing- related traded stocks for policy-making for distribution and its adequacy or otherwise for satisfying consumption. Overall availability is, therefore, a rough guesstimate. Another uncertainty is introduced by discounts estimated in availability for consumption. The antiquated figure of 12.5 per cent for seed, feed and wastage is still in use. The National Commission for Agriculture during the 1970s had estimated a substantially higher proportion for these items. Besides, industrial use and commercial feed use has expanded, more so after economic liberalisation. Therefore, not less than 20 per cent of the total produce can be discounted for human consumption. Taking wheat and rice alone, the lower figure would be about 22 million tonnes and the updated one about 34 million tonnes. What is left is, then, grossly inadequate for a healthy diet for the country. When account is taken of the growing income inequality and the expansion of outdoor eating facilities in metros and large and small cities, those not availing of reasonable income may be having declining consumption. The NSSO cannot capture this disparity. There is no mechanism of diet and nutrition surveys and independent evaluation of the situation to get at the reality. Indirect evidence is to be found from child malnutrition in the country standing at 47 per cent at overall aggregate levels. This is much higher than in the famine zone of sub-Saharan countries, not to speak of the developing Asian countries.

There is much joy displayed in the large procurement by the FCI of wheat in the current season. The initial target of 15 million tonnes has been exceeded and FCI is racing to reach a level of 20 million tonnes or almost 25 per cent of the total wheat production. Will this leave the larger open market trade supply tight? That may not be unusual considering that the reach of that trade is much wide than that of the TPDS. How will price decline then? The rice story may be unfolding now. T. Haque, the past Chairman of the CACP, is on record stating that the gap between MSP and the market price received has been “huge”. The Commission has recommended a large increase this year. The government has prohibited the export of wheat and non-basmati rice. The hope is pinned now on a normal monsoon to save the rice situation. However, the government has been taking gradual measures to reduce the supply in the PDS. Even when TPDS supplies remain intact, a substantial reduction in APL supply has been effected. The level of cut differs from State to State. One thing is certain though. The run on the PDS has been a natural process in periods of tightening supplies as at present. The risk of misdirection of stocks because of malpractices still being practised by private trade is rightly suspected. The unforeseen consequences of policy-induced slack administration of the public sector food supply cannot be discounted.

A realistic view is that period-to-period discontinuity in public food distribution even without severe weather aberration is the lesson from the history of food distribution. The overall impression is that the level of vigilance required on the availability and price front has been missing. In terms of food security requirements our position is comparable only to China because of the large population pressure. According to the Chinese Premier Wen Jiabao, that country had grain reserve of 150-200 million tonnes. Compared to our own reserve of 20-30 million tonnes the Chinese reserve constitutes 30-40 per cent of the production compared to a normal 15-20 per cent in our country. The ratio of reserves to estimated consumption in China is reported to be much higher than the normative FAO target of 17-18 per cent. In India, it is highly fluctuating and now there is talk of another strategic reserve of further five million tonnes or so. Compart-mentalisation can bring only managerial complexity and charges of inefficiency. There is then the peak and trough of consumption resulting from market availability and prices. A pragmatic balancing between public and private supplies keeps a reasonable margin between the two prices. From all calculation this is going to be hazardous this year. The chances are that consumption for vulnerable groups may get further reduced.

A study published in the October-December issue of Margin journal is revealing in many respects. It has food scarcity as well as poverty as part of six variables in judging regional backwardness. The study has prioritised 100 districts in the country that are backward in each of the variables. First, out of the food scarcity districts, the highest level of scarcity covers from 20 per cent to 47 per cent of households. But up to 10 per cent scarcity also prevails in about 50 other districts across the country. These are families that do not have food for all its members. Poverty is correlated with scarcity of food. In this category, 45 districts out of hundred have more than 50 per cent level of poverty, 19 have more than 60 per cent; and four have more than 80 per cent. These four are all in Arunachal Pradesh where China contests our sovereignty! What lessons can we draw from this? Aggregate measures of food security reveal only half the story about food availability and prices. The percentage of poor in the country at the aggregate all India level strengthens this tendency. They have bias against the vulnerable and in favour of the more fortunate income groups. They shield political failures of policy to target more equalising growth at least in the basic food and bare essentials of life. When the Agriculture Minister asserts that there is “no shortage of foodgrains”, he is accurate at the aggregate trade level of availability. This is no reason to assume that the minimum consumption needs of all are being met. But this is the core issue in the policy about food security.

And this has implications for the price of food, in the PDS and more so in the open market. That price, from records, will not be quite comfortable. The government will plead that the old instrument of control can be revived in a “switch on-switch off” scenario to tide over the immediate crisis. This urgency is dictated by the impact of food prices on voters. But the reality is harsher. First, even if production is reasonable, the demand cannot be accurately estimated. The basis is changed in the changing income scenario as also incentives for “modernised” eating habits. Secondly, small traders buy in small lots and pay the prevailing price to producers. This level has gone up commensurate with the rise in the government procurement price by about 15 per cent at the least. So, retail price cannot come down even if the availability is adequate. Thirdly, even if the wholesale price stabilises at the current levels, the retail prices will be up unevenly in the States of the Union since retail rates reflect lower wholesale rates only gradually. This seesaw between wholesale and retail prices will deliver inequitable outcome. Finally, prices in the food sector that go up once hardly come down and only set a new threshold of price level for future rises. This will mean that adequacy of availability for the vulnerable groups of the population will depend on equalising the levels of wages and incomes in agriculture, industry and service sectors of the economy. The country lacks today any mechanism for food security related level of such income. The new economy has unfolded, on the other hand, opportunities for alternative spending. Overall, then, the prospects for health and nutrition for the vulnerable group that constitutes upwards of 70 per cent of the increased level of food prices are not promising.
Politics of Food

FOOD has political dimensions in policy-making, in pricing and in regional allocation. Public intervention is only the more important aspect that people see. We do hear the blame game between the Centre and some States all the time in times of stressed supplies. The States, faced with public grievance or protest, throw the blame on the Centre and vice- versa. This rivalry in sharing responsibility is highly played up in the media. However, there is scant attention to the behaviour of private trade and informal credit market in food trade. Both these sources immensely influence the general as well as the overall market and price of food. The new policy bias does not seem to have made for any more responsible or public interest-oriented operations to moderate distortions in access and prices of basic foodstuffs. Are we ignoring this essential task by focusing just on modernising retail marketing and introducing corporatisation of food? Is it part of the global politics of food marked by “agri-business” in land-access developed market economies and forgetting even our subsistence farmers who are also dependent on the market? This is another independent variable in food security and needs looking into seriously. India’s demographic advantage is still faced with problems in removing the emerging talent crunch. Food and health will complicate the problem further. Politics of food is entering a new era and its outcome is important for the economic and social health of our polity and society.

The author, a distinguished administrator, is a former Chief Secretary of Bihar (now retired).

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