Why food inflation continues to remains sticky in India?

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Why food inflation continues to remains sticky in India?
It would be alarming in the developed world to see food inflation jump more than 18 per cent annually. But, in India, food inflation is consistently around that level and most certainly always in the double digits.

The main reasons for rising food inflation

Change in consumption of diet

There has been a remarkable shift towards protein rich food, which has pushed foods prices higher. In fact, the shift towards protein rich foods has pushed this basket higher, increasing overall food inflation. The shift in this consumption is more dramatic in the rural areas, as wages have increased.

Minimum Support price

In a recent speech, RBI Governor, Raghuram Rajan had this to say. "One obvious cause for higher food price inflation that analysts have pointed to is higher minimum support prices (MSP). The minimum support price is set by the government on the recommendations of the CACP, based on a variety of factors including primarily the cost of production and price trends in the market (domestic and international). The crops covered under MSP constitute more than a third of the category ‘primary articles' in the WPI. Since minimum support prices are intended to be a floor for market prices, and have sometimes directly set the market price when increases have been substantial, for key crops the rate of price inflation seems to relate to the increase in MSP in recent years."


Wastage has been another reason why food inflation is high. Replying to a parliamentarian's question, agriculture minister Sharad Pawar recently told Parliament that agriculture produce to the tune of Rs. 50,000 crore - 40 per cent of the total produce was wasted every year in the country, according to a report in the Hindustan Times. Food rotting in FCI godowns is not news any longer.

Lack of chilling facilities

India is simply not able to preserve food because of lack of infrastructure, particularly refrigeration and chilling. According to reports almost one third of food goes waste because of poor storage and transport. We have just not been able to create cold chains to preserve what we produce. This has over the years led to a sharp increase in food prices.

Increase in rural wages

A recent RBI presentation on food inflation nominal read thus: "Rural wages have grown at a sharp pace during the last five years. Because so many Indian workers are at subsistence wages, higher food prices do drive rural wages higher, and there is some evidence for this before 2007. From 2007 onwards, however, econometric tests suggest causality has flowed from wages to prices, underscoring the role of rural wages as a major determinant in food price increases."

Clearly, as income levels rise and we are unable to get our infrastructure in order, do not expect food inflation to come down anytime soon.


Read more about: food inflation
Story first published: Tuesday, March 4, 2014, 6:25 [IST]
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