More on food inflation story

As I have blogged earlier, the inflation story may be far more complex than issues of government failing to mount aggressive buffer-stock operations in time and in required quantities or increase imports. There are clearly important sub-plots within the larger inflation story.

The WPI-based headline inflation rate for February stood at 9.89%, with food inflation at 17.8%. And worryingly, inflation rate, especially, food inflation rate has been on a steeply rising trend.





In a highly informative article, Business Standard (15/3/2010) points to another dimension by highlighting the crucial role played by horticulture and animal husbandry perishables (milk, eggs, meat, fruits, and vegetables) in keeping food inflation high.

The average inflation trends for both 2008 and 2009 shows that perishables have risen faster than foodgrains. While the overall inflation rate was 9.09% and 2.12% in 2008 and 2009 repsectively, it was 6.62% and 12.43% for food articles. Even as the inflation rates were 6.36% and 14.27% respectivley for foodgrains (cereals and pulses), it was 7.9% and 9.03% for milk, 3.78% and 14.57% for meat, eggs, and fish, and 5.91% and 11.96% for fruits and vegetables for 2008 and 2009 respectively. And interestingly, perishables constitute 10% of the overall WPI-inflation index to 7.4% for foodgrains. In fact, the average inflation rates for milk, fruits, vegetables, eggs, and meat have been consistently high since 2003.

Given the high economic growth trajectory of the past decade, it is natural to presume that the demand for the high-quality perishable food products rose faster than their supply (the average growth in horticulture p[roduction has been 4-4.5% in the past three years whereas demand has been growing at a rate of 7%), putting upward pressure on their prices. Given the abysmally low gross capital formation in agricultural investments (especially the downstream storage linkages required for producing and marketing such perishables) and the marginal increases in productivity, these supply side constraints are no surprise. Unlike the non-perishables, without any buffer stock activity, governments have little control over their prices.