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By Linu Mathew Philip, Centad
The global agricultural market has been witnessing structural changes for the past two years wherein international prices of agricultural commodities had been rising alarmingly. This is a part of the structural pattern of the long-term trade cycle contributed by immediate short-term causes with long-term trends. Globally, the upward trend in food prices has been attributed to demand-supply imbalances. In India, rising food prices have come in the wake of an impressive growth in Gross Domestic Product (GDP). Rising food prices can reverse the growth in GDP since the poorest quartile of consumers spends about three-fourths of their income on food. India faces a daunting task of becoming an efficient producer and exporter of food while at the same time securing food access for more than two-thirds of its economically under-privileged population living on less than US$2 a day. This can be a tough call if volatility in foreign exchange rates destabilizes domestic prices or inflation outpaces the income growth.
Since both international and domestic prices have been rising simultaneously, many of the factors are found in common. There seem to be a high correlation between MCEX Comdex and the food prices trends. In the auction and market theory, one of the best options for stabilizing the prices is forward trading and hedging. But in India speculative future markets were stoking volatility into already surging food prices.
The asymmetric growth phenomenon wherein sub-sectors such as mining, manufacturing, construction and services reported higher valuation in domestic products thereby increasing cost structure across the supply chain is another factor contributing to the high prices in India. Higher liquidity in the economy contributed to inflation. The most disconcerting feature was that inflation outpaced growth in per capita income during this phase.
A serious challenge for India is its population growth that has been exceeding the rate of increase in foodgrain productivity. Domestic availability of wheat, pulses and edible oils have been diminishing over time. There is lack of preference for foodgrain crops cultivation and local foods are disappearing as farmers prefer cash crops and other high-value crops.
Lack of effective food policy interventions for mitigating rising prices is another big problem. These interventions fall short of expectations. For the last three years there has been sharp reduction in offtake of rice and wheat by the Government. Offtake has three components, viz the PDS supplying food grains to those below the poverty line, welfare schemes like the mid-day meal schemes and the release of foodgrains stocks to stabilise prices in the open market - popularly known as Open Market Sales Scheme (OMSS). There is a high negative correlation between the release of open market sales and the CPI of industrial workers. To download the full paper in PDF format click here.
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