Friday, December 16, 2011

Marching towards Global food prices regime

In the first week of December 2010, as I was packing my stuff to return to Pune ( my hometown in India) from Singapore, I thought of making a trip to a department store there, popularly known as Mustafa. Since this store sells almost everything under the sun, I was not able to say ‘No’ to a request to buy a packet of Lentils(Toor Dal) from my wife for use in the kitchen. After I returned from the shop, I casually checked the invoice. For that one kilogram packet of Lentils, I had paid 3.90 Singapore Dollars or about 140 Indian Rupees. No doubt, I was unhappy about this price and I expressed my resentment about this heavy mark up on prices as I remembered, that during July-August of this year, the same stuff did cost me about 60 Indian Rupees in India. This meant that I had to pay about 120% mark up to buy the same stuff in Singapore.
After I returned to India, I went to buy groceries and was astonished to see that the packet of Lentils which did cost me about 60 Indian Rupees in July was now priced around 90 Rupees. Which meant that the price of Lentils had gone up by about 30% in last three or four months. As I checked the prices of other food stuff, I realized that there has been an increase in the prices varying between 12 % to 20% for almost all the items. For few items like onions, there has been astronomical rise in prices in a fortnight. Few years ago, I would not have even believed if someone would have told me that a guava ( a local fruit grown around) fruit would cost me about two rupees per piece. Yet, today a single onion bulb costs that much. Garlic bulbs were being sold at Rupees 300/- per kilogram. I felt bit alarmed and started searching on the internet. I found an astonishing chart published in January 2010 giving increases in price of common food items over last two years. This table showed me that the price of Rice had increased as much as between 48 to 58% over two years. For Atta or wheat floor, the rise was modest, between 13 to 25 %. Sugar prices had increased between 109 to156 %. In the year 2009, there has been an increase of 20% in the cost of common food items whereas in 2010 the prices are growing between 15 to 17%. Then I looked for the prices of vegetables. I found that Compound Annual Growth rate( in percent) in the prices of certain vegetables was on the impossible side to believe. Since 2006 the prices. Price growth rate in case of most of the veggies was around 10 %. However prices of onions and Brinjals, the increase was at the rate of 26% and 20 % respectively.

When I was studying in the engineering college, we had a subject called Principles of Economics in our course of studies. I distinctly remember our lecturer telling us that price for any commodity depends only on two variables. Firstly, availability of that commodity in the market and secondly the surplus money available with the consumer. The first variable tells us about the supply of that commodity to the market and the second variable tells us about the likely demand for that commodity in the market.

If we consider these two variables in context of the food grain situation in the Indian market, it is seen that the prices, no doubt, have responded to the availability of that commodity. Recently, due to untimely rains in the onion producing regions of India, the onion crop was more or less completely destroyed and this resulted into abnormal rise in the price of onions. The sudden increase in the price of sugar in the beginning of the year 2010, could also be similarly traced to non availability of sugar cane for crushing.
Turning our attention to excess or surplus money available with the Indian consumer, we can try to have some estimates regarding this. In 2000-01 the average income of a person in India was 16688/- Indian Rupees per year. In 2004-05 it increased to 23241/- Indian Rupees. In 2008-09 the income rose up to 37490/- Indian Rupees and this year it is likely to be in the range of 38 K or 39K Indian Rupees. Obviously the increase in per capita GDP over the years, can not be considered as surplus or excess money generated, as prices of all commodities have been also rising during this period. After adjusting for the increase in the prices of commodities, if we calculate the % increase in GDP, we can see that during 1991 to 1995, consumers had 5% surplus or excess income with them. During 1995 to 2000 this surplus income became 6% , in 2000-2005 it was 6.5% and rose to 8.75% during 2005 to 2008.

We can see from this analysis that if prices of food grains had increased in proportion to this corrected percentage increase in per capita GDP, there was no real cause for worry. However, the actual food prices have been rising at an alarming rate which bears no relationship with this rise in GDP. If we try to look for the reasons behind this abnormal rise in prices, it appears that there are some additional reasons or the causes which have impacted this price rise. One obvious reason for this price rise is the apparent delay of Government machinery in reacting to market situations by timely allowing or banning imports and exports of such sensitive commodities. For example when there was untimely and heavy rain in November, it was known that the onion crop is ruined. However the agriculture ministry never took any decisions to ban exports and allow duty free imports of onions in time, which would have surely controlled the prices. (They took these decisions in December 2010, when the prices had already risen abnormally. ) The international prices of commodities also make an impact on the prices of those commodities in India. We must however understand that such factors can impact the prices for short term only. Over a long period, say 5 years, the prices would have to be dependent only on supply position and surplus spending power of the consumer. Since this is not happening(as seen from charts above) and the prices are increasing well above the per capita GDP rise rates, we need to look for the reasons.
After giving a thought to this, I came to realize that in the present scenario of globalization, no country can remain isolated from the global markets and laws of economics can not be applied to a country in isolation. We seem to me moving towards a global food price regime. It is possible that in India, there may not be enough surplus money available with the consumers to drive the prices upwards, however if such surplus money is available with consumers in other countries, then prices are going to rise globally which would also includes India. As an example, we can consider the prices of cooking oil. Perhaps at present Indian consumers find that the cooking oil prices are unaffordable and they are cutting their demand. Even then, since people in other nations do not think so, the cooking oil prices would keep on increasing even when demand in India has actually reduced.
Is there any solution for this apparently abnormal market behaviour. I can think of one measure, which has been adopted by the Governments of Singapore and Australia since June 2010 and have managed to achieve a fairly good control over the rise in prices. This measure is relatively a simple affair. It requires that Reserve Bank of India makes the Indian Rupee rise slowly in proportion to the difference between per capita GDP increase rates and the rise of actual consumer price index for food grains. To do this RBI would have to release excess foreign exchange in the market. Any excess in the supply would strengthen the Rupee. This can be done initially by using Foreign Exchange reserves to an extent. Later RBI would have to ensure that the exchange outgo is less than the inflow. This would mean some belt tightening and cutting down unnecessary expenditure such as money spent on Commonwealth games. This would also require the current account deficit to be reduced within manageable levels.
Exporter’s lobby would not be very pleased with such a plan of action as they have to face and bear the direct consequences of such increase in strength of the Rupee. However, if we consider the effects over long term, major ill effects seem unlikely as Indian economy is not overly dependent on exports like Chinese economy. We should also remember the fact that Germany with one of the strongest currencies in the world (Earlier Deutschmark, now Euro) also happens to be a top exporter.
If no action is envisaged and taken by the Government of India, the Indian economy, monetary system and the politics are likely to face major challenges in the future. We can remember that India’s erstwhile Prime minister, Mrs. Indira Gandhi, had managed to win elections on single issue of onion price rise.
To make food grains and vegetables available to the common man at affordable rates is the basic duty of the government and any Government which fails to do so may not be facing a very bright future.
4 January 2011


  1. True... but do we have enough reserve of foreign currency ?

    Just remembered German Mark exchange rate around 1930-40 was 1$=40,000 Mark... Now I can imagine, what Germans might have experienced in that era. Hitler did something to improve Mark upto 1$=4 marks. Donot know how, if possible could you throw some light on it? I am poor in economics, so I will be happy to read it in Marathi, if possible.

    Thanks for nice post.

  2. Vijay
    You might see my latest article in Marathi