Price Rise

By- Kushagra Aniket, Cornell University.

The Food Availability Decline theory is a basic microeconomic tool that explains the inflationary rise in the prices of foodgrains as a result of a reduction in the supply of staple food in a particular area. Applied to the current circumstances, food inflation can be said have occurred due to particularly cost push factors and not demand pull factors. Though it would be too simplistic to hold any one factor as solely responsible for the overall inflationary rise in prices, it would not be perfectly rational to identify declining agricultural productivity as the major cause behind the inflation in recent times.

Bearing this in mind, during the last 5 years, production of foodgrains especially rice, wheat, pulses, potato and onion has first shown stagnation and then a sustained deceleration, whereas the population has been growing at the level of 1.5% per annum. This was came simultaneously to a decline in the world’s total food grain output by 2.5% amidst predictions of a future food-crisis looming large over the globe. But the government overwhelmed by the GDP growth rates during 2004-07 driven by the high growth in industry and services, neglected the production of foodgrains. Then appeared the sceptre of recession and the emphasis on agriculture was further diffused. This is evident from the fact that public investment in agriculture, especially irrigation has rounded off to 0.5% of the GDP. The government resorted to banning the export of basmati rice, pulses and edible oils while scrapping the duties on maize and edible oil imports. But this fire fighting approach did not produce the desired effect. One year of poor monsoons and the food security of the poorer sections of the population would have been seriously affected.

Thus the present food-crisis was very much within sight about two years back and a number of precautions on the part of the government were obviously expected. The government has been long since under the impression that microeconomic policies- monetary or fiscal measures would contain inflation. Unfortunately, these have proved to be inadequate and supply management is the dire need of the hour. The UPA government which attributes its re-election to the mandate of the common man had regarded inflation as its top economic priority. Thus it is only imperative that it takes concerted steps instead of becoming a victim to the growing anxiety.

Food grain production reached a peak level of 216 million tonnes in 2005-06 and 2006-07 contributing to a large buffer stock before falling to the current levels. It is time that the government should release an additional 8-10 million tonnes of rice through the Public Distribution System. An even important factor is the arrival of foodgrains in open market. A sustained demand and supply of foodgrains can prevent the market from being erratic and the prices unstable. By fixing and controlling prices of essential goods like sugar, vanaspati oil and soap, the government has, rather than supporting the marginal farmers, provided a greater scope for rampant black marketing. This is due to fact that at one time hoarding was done only by middlemen and traders, but now big farmers have also joined in their endeavour. Even small farmers of agriculturally prosperous belts have greater hoarding capacity than before, particularly evident from the recent incidences in Western Uttar Pradesh. Dual pricing was introduced to meet the basic needs of the weaker sections but it eventually created confusion in the market and led to erratic price movements.

There are now strong pressure groups which argue the dropping of all farm support prices and agricultural subsidies. To expect a populist government to concede to these demands would be to ask for too much. Instead agricultural subsidies should be implemented for a target group of small and marginal farmers. The excessive production of sugarcane, a crop that requires large quantities of water in the most fertile regions of the country rather than minor cereals, pulses and oilseeds that are comparatively water conserving and form an essential food component of a sizeable population is a testimony to this fact.

It is often argued that some degree of inflation is inherent in any growth oriented economy, however scarcity is not. The need of the hour is to move away from the cliché solutions of this age-old problem of inflation and allow scope for innovative and bold decision making.


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