Causes of food inflation

Food Inflation

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Last Updated: May 2023 (Food Inflation)

Food Inflation

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.

Introduction

Following the green revolution, India has achieved a surplus in cereal production, especially in wheat and rice. However, producing fruits and vegetables remains a challenge for the country. The seasonal fluctuations in onions, tomatoes, and pulses continue to be a primary concern for Indians.

Recent trends in food inflation are as follows

Food Inflation

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 leads 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, the 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 touched the Rs 100/kg mark in 2020 due to excessive rainfall in Nagpur and the surrounding area, destroying 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.

Inflation in Pulses

Reasons for the price rise of pulses

  1. 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.  
  2. 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.
  3. 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. 
  4. 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.
  5. 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 depends on Pulses for protein, causing a Supply-Demand gap. 

Case of Inflation of Edible Oil

Inflation of Edible Oil

Reasons for the inflation in Edible Oil

  1. La-Nina conditions affect edible soybean oil production in Argentina and Brazil.
  2. Fluctuation in international prices: India imports 60% of its edible oil consumption, making it vulnerable to international movements in prices. The fluctuations in international prices and volatility in the rupee conversion rate impact the prices of edible oil.
  3. Sunflower oil, which makes up 15 per cent of our total edible oil imports, is procured mainly from Ukraine and Russia. It suffered due to the Russia-Ukraine war.
  4. Due to a shortfall in production and to secure their supplies, producer countries levied high export taxes, increasing the price for oil importers (like India).
  5. Edible oil is diverted for the generation of biofuels.
  6. Supply chain disruptions due to Covid.
  7. Edible oil is grown on unirrigated land in India, thus making it susceptible to the vagaries of climate.

Trends of inflation in Edible Oil

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 Islands.
    • The main components of the scheme include
      1. Price Assurance to the producers.  
      2. Training farmers for cultivation and seed management.
      3. Support industries to set up oil palm processing units.
    • The Indian government is concentrating on Oil Palm because it gives 10 to 46 times more oil per hectare than other oil crops.
  • National Food Security Mission (Oilseeds)
    • Government intervenes to produce foundation and certified oil seeds.
    • The government distributes mini-kits of High Yielding Varieties (HYV) of oil seeds.
  • 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.  
  • Promotion of alternates: The government of India is promoting the production of secondary oils, especially rice bran oil, to decrease India’s import dependence on edible oil.
Reduction of Food Inflation in India

Steps taken by the government to control Food Inflation

1. Creating Buffer

  • The government has created a buffer of food items susceptible to inflation, especially Pulses and onions. E.g., the buffer of 23 LMT of pulses and 2.08 LMT of onions was created in 2021-22 and released in a calibrated manner to contain the price rise.

2. 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.

3. Fiscal Policy Measures

  • The government has imposed higher export duties on items such as wheat, rice and pulses (to make exports expensive). On the other hand, it has reduced import duties on items such as palm oil, sunflower oil

4. 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.

5. 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.

6. 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.

7. Open Market Sale Scheme

  • FCI sells the grain in the open market to increase supply and curb price rise in food inflation.

8. 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.

9. Free distribution of seeds

  • The government has started the free distribution of seeds to attain self-sufficiency in pulses.

10. New Monetary Policy Framework

  • Under the new Monetary Policy Framework, RBI has been mandated to keep inflation at 2-6%. 

11. Kisan Rails

  • The government of India has started the Kisan Rail service for the speedy transportation of perishable food items from areas of production to areas of consumption.