Feb 23rd 2010, C.P. Chandrasekhar and Jayati Ghosh

As usual when the Union Budget is presented, all eyes will be on the Finance Minister and his speech will be thoroughly scanned for all the implications on the economy. But this time, there is one particular reason why ordinary citizens will be specially focussed on the Budget: the hope that the Government is finally going to act decisively to contain food price inflation.

It is not surprising that questions of food security and the right to food have become such urgent political and social issues in India today. Rapid aggregate income growth over the past two decades has not addressed the basic issue of ensuring the food security of the population. Instead, nutrition indicators have stagnated and per capita calorie consumption has actually declined, suggesting that the problem of hunger may have got worse rather than better. So despite apparent material progress in the last decade, India is one of the worst countries in the world in terms of hunger among the population, and the number of hungry people in India is reported by the UN to have increased between the early 1990s and the mid-2000s.

These very depressing indicators were calculated even before the recent rise in food prices in India, which is likely to have made matters much worse. Indeed, the rise in food prices in the past two years has been higher than any period since the mid-1970s, when such inflation sparked widespread social unrest and political instability. What is especially remarkable is that food prices have been rising even when the general price index (for wholesale prices) has been almost flat; thus, when the overall inflation rate was only around 1-2 per cent in the past year, food prices increased by nearly 20 per cent!

Table 1 indicates the price increase in cities averaged across the major regions, for rice, atta and sugar, which are among the most essential food items in any household. It is evident that the price increase has been so rapid as to be alarming especially over the past two years, with rice prices increasing by nearly half in Northern cities and more than half in Southern cities. Atta prices have, on average, increased by around one-fifth from their level of two years ago. The most shocking increase has been in sugar prices, which have more than doubled across the country. Other food items, ranging from pulses and dal to milk and vegetables, have also shown dramatic increase especially in the past year.

Table 1: Table 1: Retail prices in major cities/towns, by zone.
	Average retail price on 27.01.10 (in Rupees)	Increase over 1 year (per cent)			Increase over two years (per cent)
Rice
North Zone	19.92	11.94			48.45
West Zone	19.33	9.78			29.37
East Zone	16.19	10.31			16.30
South Zone	22.25	32.84			58.93
Atta
North Zone	17.00	24.90			24.90
West Zone	17.17	15.73			21.85
East Zone	17.50	19.32			22.09
South Zone	20.38	5.16			13.19
Sugar
North Zone	36.17	64.08			156.05
West Zone	34.61	66.58			122.50
East Zone	37.88	74.64			118.77
South Zone	32.19	61.44			109.35
Source: Ministry of Food and Civil Supplies, Food Price Monitoring System, 12             February 2010.

Table 1 >> Click to Enlarge

There are many reasons why food prices have risen at such a rapid rate, and all of them point to major failures of state policy. Domestic food production has been adversely affected by neoliberal economic policies that have opened up trade and exposed farmers to volatile international prices, even as internal support systems have been dismantled and input prices have been rising continuously. Inadequate agricultural research, poor extension services, overuse of ground water, and incentives for unsuitable cropping patterns have caused degeneration of soil quality and reduced the productivity of land and other inputs. Women farmers, who constitute a large (and growing) proportion of those tilling the land, have been deprived of many of the rights of cultivators, ranging from land titles to access to institutional credit, knowledge and inputs, and this too has affected the productivity and viability of cultivation.

But in addition to production, poor distribution, growing concentration in the market and inadequate public involvement have all been crucial in allowing food prices to rise in this appalling manner. Successive governments at the Centre have been reducing the scope of the public food distribution system, and even now, in the face of the massive increase in prices, the Central government is delaying the allocation of food grain for the Above Poverty Line population to the states. This has prevented the public system from becoming a viable alternative for consumers and preventing private speculation and hoarding. In addition, allowing corporate (both domestic and foreign companies) to enter the market for grains and other food items has led to some increase in concentration of distribution. This has not been adequately studied, but it has many adverse implications, including the fact that farmers will benefit less from period of high prices even as consumers suffer, because the benefit will be garnered by middlemen.

Thus it has been found that the gap between farm gate and wholesale prices is widening. A similar story emerges in the gap between wholesale and retail prices, as evident in the charts. In rice, the gap between average wholesale and retail prices widened considerably - even doubled - across the four major zones of the country, as shown in Chart 1. In wheat (Chart 2), the pattern is more uneven but the retail margins are very large indeed, as expressed by the difference between the wholesale price of wheat and the retail price of atta (which is the most basic first stage of processing).

Sugar is slightly more complicated, as marketing margins appear to show different trends in different regions and also tend to be significantly lower than the other major crops. The dramatic increase in sugar prices is more a reflection of massive policy errors over the past two years, in terms of supply and domestic price management, and exports and imports.

Chart 1 >> Click to Enlarge 

Chart 2 >> Click to Enlarge 

Chart 3 >> Click to Enlarge

So what exactly is happening? It appears that there are forces that are allowing marketing margins - at both wholesale and retail levels - to increase. This means that the direct producers, the farmers, do not get the benefit of the rising prices which consumers in both rural and urabn areas are forced to pay. The factors behind these increasing retail margins needs to be studied in much more detail. The role of expectations, especially in the context of a poor monsoon that was bound to (and did) affect the kharif harvest adversely, should not be underplayed. But that refers only to the most recent period of rising prices, whereas this process has been marked for at least two years now.

In addition to this, there is also initial evidence that there has been a process of concentration of crop distribution, as more and more corporate entities get involved in this activity. Such companies are both national and multinational. On the basis of international experience, their involvement in food distribution initially tends to bring down marketing margins and then leads to their increase as concentration grows. This may have been the case in certain Indian markets, but this is an area that clearly merits further examination.

Many people have argued, convincingly, that increased and more stable food production is the key to food security in the country. This is certainly true, and it calls for concerted public action for agriculture, on the basis of many recommendations that have already been made by the Farmers' Commission and others. But another very important element cannot be ignored: food distribution. Here too, the recent trends make it evident that an efficiently functioning and widespread public system for distributing essential food items is important to prevent retail margins from rising.

So one major element of the Finance Minister's speech that will certainly be noticed is the outlay he proposes for the Food Corporation of India. The UPA government has already pledged to enact a Food Security Bill, but that needs to be universal in coverage (rather than confined to Below Poverty Line population) and provide enough volumes to meet minimum requirements. A universal system of public food distribution provides economies of scale; it reduces the transaction costs and administrative hassles involved in ascertaining the target group and making sure it reaches them; it allows for better public provision because even the better off groups with more political voice have a stake in making sure it works well; and it generates greater stability in government plans for ensuring food production and procurement.

But even before such a law is passed, it is clear that emergency measures are required to strengthen public food distribution, in addition to medium-term policies to improve domestic food supply. A properly funded, efficiently functioning and accountable system of public delivery of food items through a network of fair price shops and co-operatives is the best and most cost-effective way of limiting increases in food prices and ensuring that every citizen has access to enough food.

In a context in which the inflation is concentrated on food prices, measures like raising the interest rate are counterproductive because they affect all producers without striking at the heart of the problem. Instead, if he is serious about curtailing food inflation, the Finance Minister must provide substantially more funds to enable a proper and effective public food distribution system.