Rising food prices have been a significant driver of inflation in India over the past few years. In early 2008, there was a global surge in food prices, which certainly had an impact on the domestic situation. But, this subsided in a few months. Since then, the pressures seem to have been predominantly internal. If these trends are persistent, they may have significant implications both for inflation management and the broader issue of nutritional balance. The latter concern arises from the trends in relative prices across different food categories.
The table provides some perspective. The numbers displayed are the year-on-year rates of increase in the prices of specific food items. For comparison purposes, the changes in the aggregate Wholesale Price Index (WPI) — the headline rate of inflation — and the changes in the sub-index for food articles are also provided.
Let’s look at the last row first. This measures the total change in prices over the period 2004-05 to 2012-13 (since the index numbers are available till January, the April-January numbers are taken as representing the full year). Since the base year for the WPI is 2004-05, all items begin with an index value of 100. Therefore, the change over the entire period is an indication of the change in relative prices across different items. As regards the change in the relative price of food items as a whole, while the aggregate WPI increased by about 67 per cent during the period, food prices overall increased by about 111 per cent. A crude way of putting this is that food has become over 40 per cent more expensive relative to other items over the eight-year period. (Price changes: Y-o-Y and for the Period 2005-2013 (%))
However, as the table also indicates, “food” is not a homogenous category when it comes to price changes. The prices of rice and wheat increased by about 92 per cent each, significantly higher than the aggregate index, but lower than the food prices overall. Other food items were clearly driving the process. Some of them are displayed in the table. Three of them are protein sources — pulses, eggs-meat-fish and milk, while the fourth is vegetables.
Pulses, as a group, saw their prices increase by 143 per cent over the period. Put in the same crude way, pulses became about 50 per cent more expensive than rice and wheat over the period. Eggs, fish and meat, as a group, also saw their prices increase by about the same magnitude, 142 per cent, over the period. The most benign price increase in the protein category was in milk, which experienced an increase of 108 per cent over the period.
Overall, using a weighted sum, the price of protein sources increased by 124 per cent over the period, in effect, becoming more than 30 per cent more expensive than rice and wheat. The fourth item referred to, vegetables, saw prices increase by about 116 per cent over the period.
Prices of goods increase because demand outstrips supply. The aggregate pattern of price changes seen over the period indicates that the demand-supply gap in food became relatively larger than in non-food commodities; hence the apparent changes in relative prices. Again, within the food group, the relative price changes between different categories indicate that the demand-supply gap was larger for those items, whose prices increased more.
It is relatively easy to explain the dynamics of demand. Per capita incomes have increased significantly over the period. One would expect this to translate into not only higher demand for food in the aggregate as households at lower income levels seek to reach some desired nutritional benchmark. More importantly, rising incomes mean that a very large number of households will look for a more diversified and balanced diet. So, let us assume for the purposes of this story that rising demand is a strong trend, both for food overall and for food items other than cereals.
This implies that supply simply isn’t keeping pace. Such magnitudes of increase in prices over a relatively long period of time would suggest that supply constraints are structural, i.e., producers simply cannot produce more, even if they wanted to respond to the rather strong price signals they were receiving from the market. This is certainly an explanation consistent with the observed patterns.
But, perhaps there is something more at work. Let’s look at the rest of the table, which shows the annual rates of increase in the various indices and items/groups. It is a rather mixed pattern, but the essential message seems to be that there is significant volatility in the year-on-year changes. This suggests that, while a structural imbalance between demand and supply may be at work, short-term factors are also playing a visible role.
Let’s look at a few examples to illustrate the point. In the case of pulses, the year-on-year rates of increase were relatively benign in four of the eight years being considered. In the other four, rates of increase were quite high, exceeding 20 per cent in three of them. So, is this a strong underlying trend, mitigated periodically by favourable supply conditions, or a weak underlying trend exacerbated occasionally by unfavourable supply conditions?
By contrast, in the case of eggs, meat and fish, the first half of the period saw relatively small year-on-year increases, but the second half showed a clear and sustained acceleration. Was this a decisive increase in the trend in demand or was it a decisive breakdown in the supply system?
Clearly, there is no “one explanation fits all” solution. Individual items are being driven by different combinations of structural and transitory forces. But, on the basis of these patterns, particularly the magnitude of relative price changes within the food category, I would be inclined towards an explanation that combines a strong structural trend, i.e., a growing imbalance between demand and supply, which is either mitigated or exacerbated by temporary factors — e.g., a good or a bad monsoon.
If we are to visualise food security from a long-term perspective, it would have to encompass the concept of nutritional balance. Do people, regardless of their income levels, have reasonable access to different nutrients in the right mix? Obviously, people can't be forced to eat right, but they can be given legitimate choices. The recent patterns in relative price movements suggest that diets could remain relatively unbalanced even as incomes rise, as consumers substitute cheaper foods for more expensive ones. From this perspective, identifying and addressing the constraints that are preventing producers of proteins and vegetables from responding to price signals should be a key priority.
The writer is former Deputy Governor of the Reserve Bank of India. These views are his own
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
