This article deals with ‘Food Inflation.’ This is part of our series on ‘Economics’ which is an important pillar of the GS-3 syllabus. For more articles, you can click here.
With the green revolution, India became surplus in cereal production, especially wheat and rice. But the production of fruits and vegetables have remained our Achilles’ heel. Seasonal spikes in onion, tomatoes & pulses is a recurring nightmare for Indians.
Recent trends in food inflation are as follows
Causes of Food Inflation
1 . Supply side bottlenecks
- Shortage of commodities due to poor monsoon or excessive monsoon as Indian agriculture is excessively dependent on monsoon.
- Post-harvest losses due to unavailability of cold storage and warehouse.
- The Food Processing Industry is not well developed in India, leading to inflation of particular vegetables or fruits in the offseason.
- Hoarding by the merchants led to artificial scarcity.
2. Demand-side factors
- Due to the growth of the middle class in India, their disposable income has increased. As a result, demand for green veggies and fruits has also increased. It pushes the prices upward.
3. Faulty government policies
- Successive governments have increased the MSP of wheat and rice due to vote bank politics. On the other hand, the MSP of fruits and green vegetables is not announced. Although the MSP of pulses is announced, it is very low compared to wheat and rice. Hence, farmers prefer to grow wheat and rice instead of pulses or vegetables, leading to inflation.
4. Climate change and global warming
- Due to global warming, the weather has become erratic. Frequent heat waves lead to the destruction of nascent flower buds of vegetables.
- Rains have become erratic as well. For example, onion prices were touching Rs 100/kg mark in 2020 due to excessive rainfall in Nagpur and the surrounding area, leading to the destruction of onions.
- The frequency and severity of pest attacks have increased as well. E.g., the locust attack of 2020 in Rajasthan, Madhya Pradesh etc. which destroyed crops at a large scale, was the result of global warming.
5. Inefficient supply-chain with many mediators
- The end product reaches the consumer in India after passing through various intermediaries. Each mediator tries to profit by increasing the original cost without adding value. As a result, the end price becomes higher than the actual price.
Case of inflation in Pulses
Prices of pulses are prone to inflation which can be corroborated by the following graph showing trends in the price of Tur dal.
Reasons for price rise of pulses
- Wheat and rice cultivation was promoted after the green revolution. Due to the introduction of a new HYV of wheat & rice, their productivity increased. Such HYVs were not introduced for pulses. As a result, their productivity is low.
- The economic survey reveals that most of the irrigated & fertile land is dedicated to wheat, rice & sugarcane, and pulses are grown on unirrigated lands. It decreases the productivity of pulses further.
- Despite the increase in the MSP of pulses, the farming community has a lack of interest to produce them as there are no proper infrastructural facilities for their procurement at MSP compared to Wheat and Rice.
- Rise of Middle Class in India: There is a well-known economic law that when the income of people rises, they move towards a high protein diet. Due to this, the demand for Pulses has increased, resulting in higher prices.
- The peculiarity of Indian Society: With the increase in income, people go towards a protein-rich diet & this phenomenon is seen in all societies. But other societies, unlike India, diversify their diet to a large number of livestock products, as seen in China. Empirical evidence shows that dietary diversification towards livestock products, particularly meat products, in India has been slow due to cultural factors. Most of the population depend on Pulses for protein, causing a Supply-Demand gap.
Case of Inflation of Edible Oil
Reasons for the inflation in Edible Oil
- La-Nina conditions affect edible soybean oil production in Argentina and Brazil.
- Edible oil is diverted for the generation of biofuels.
- Supply chain disruptions due to Covid.
- Edible oil is grown on unirrigated land in India, thus making it susceptible to vagaries of climate.
Steps taken by the government
- National Mission on Edible Oil- Oil Palm (NMEO-OP)
- Aim: To make India self-sufficient in edible oil.
- The scheme will focus on North East and Andaman, and Nicobar Island.
- The main components of the scheme include
- Price Assurance to the producers.
- Training to farmers for cultivation and seed management.
- Support to industries to set up oil palm processing units.
- Increasing MSP: Government has increased the MSP of oilseeds to encourage farmers to grow oilseeds. For example, in 2021 Government increased the MSP of Rice and Wheat by 2%, whereas that of rapeseed-mustard by 8.6%.
- Import duty of crude soya bean, sunflower oil and soya bean oil has been reduced.
- Essential Commodities Act 1955 aimed at ensuring adequate availability of the scheduled essential commodities at fair prices to ordinary people.
- Targeting Rice Fallow Areas (TRFA) for the cultivation of Pulses and Oilseeds: The pulses and oilseeds can be harvested on the land where rice was harvested previously by using the residual moisture left in the soil.
Steps taken by the government
1. Minimum Export Price
- It is the minimum price below which agricultural products can’t be exported to other countries. To fight inflation in a particular product, the government raises the Minimum Export Price so that farmers are forced to sell their product in India, and its supply is increased in the local market.
2. MoUs with countries
- India has signed MoUs with top exporters of pulses like Mozambique and Myanmar to deal with the future shortage in the supply of pulses.
- Similar MoUs have been signed with Egypt and Turkey for the supply of onions.
3. Price Stabilisation Fund
- Under this scheme, the government has given interest-free loans to FCI, NAFED and other central agencies to procure pulses and green vegetables and sell them to the common public at a reasonable price in case of inflation.
4. Operation Greens for Tomato , Onion & Potato (TOP)
- Operation Greens was started for vegetables, similar to Operation White for milk. It aims to end the issue of inflation in vegetables as Operation White did for milk.
- Operation Greens targets Tomato, Onion & Potato in the first phase.
5. Open Market Sale Scheme
- FCI sells the grain in the open market to increase supply and curb price rise in food inflation.
6. Essential Commodities Act (ECA)
- Under the provisions of ECA, the Union government can declare any commodity as an Essential Commodity and notify the stock limit on that for a specific period. The government uses this to fight against hoarders who create artificial scarcity.
7. Free distribution of seeds
- The government has started the free distribution of seeds to attain self-sufficiency in pulses.
8. New Monetary Policy Framework
- Under the new Monetary Policy Framework, RBI has been mandated to keep inflation 2-6%.