Agrarian Performance and Food Price Inflation in India

 SPECIAL ARTICLE

Agrarian Performance and Food Price Inflation in India Pre- and Post-Economic Post-Economic Liberalisation

Sthanu R Nair, Leena Mary Eapen

Examining long-term trends trends in food foo d inflation in India in relation to the performance of the Indian agricultural sector under various agrarian policy regimes, this paper shows that despite the slowdown in the agricultural sector and higher increases in the cost of food productionduring production during the post-economic reforms period (1992– (1992–201 2013), 3), food prices pr ices were relatively low compared compar ed to the initial ini tial (1967–80) (1967–80) and the maturing (1980–92) (1980–92) stages of the Green Revolution. This, it is argued, is possibly due to more stable agricultural agricultural growth post 1991–92, higher buffer food stocks, greater coverage of the public distribution system, and better responses to food price fluctuations due to import/trade liberalisation liberalisation and a more comfortable foreign exchange reserves position.

1 Introduction

T

he post-economic reforms (post-ER ) period1 in India has been characteri sed by a slowdown in the growth rate of overall agricultural output and crop yields due to various reasons (Bhalla and Singh 2009; Desai et al 2011). In the context of persistently high food price inflation in India over the last few years, it was argued that the supply constraint causing high food prices was rooted in the slow growth of Indian agriculture in the post-ER s  period (Carrasco and Mukhopadhyay 2012; Desai et al 2011; GoI 2012). However, a clear understanding of the food price situation during the post-ER s  period as a whole and its connection with the slowdown slowdown in agricultura l growth during the same period is yet to emerge.  Against this background, this paper aims to examine the trends in food price inflation in India in relation to the growth of Indian agriculture pre- and post-ER s, so as to enhance our understanding of food price behaviour during the post-ER s period, which has been a period of slow agricultural growth. For this purpose, following Bhalla (2007), Bhalla and Singh (2009) (2009),, and Panagariya (2004), (2004), the growth path of India’s Indi a’s agriculture sector is divided into four phases: the pre-Green Revolution period (1950–51 to 1964–65),2  the initial stage of the Green Revolution (1967–68 to 1979–80), the maturing stage (1980– 81 to 1991–92), 1991–92), and the t he post-ER s period (1992–93 to 2012–13).3 The paper is organised as follows. Section 2 presents a brief performance analysis of Indian agriculture under various agrarian policy phases in terms of growth in agricultura l gross domestic product (GDP) and food output. In Section 3, the trends in wholesale price index (WPI) food inflation witnessed during various agrarian policy periods are discussed. Section 4 offers possible reasons for the price trends that emerged under agrarian policy regimes. The last section summa rises the findings of the paper and draws policy conclusions. 2 Performance of Indian Agriculture

The authors are thank ful for valuable comments and suggestions from an anonymous referee of this journal and participants of semina rs and conferences held at Central University of Kerala, IIM Calcutta, IIM Kozhikode, and the National Institute of Public Finance a nd Policy, New Delhi. The usual disclaimer applies. Sthanu R Nair ( [email protected] .in) and Leena Mary Eapen ( leenaeapen@ iimk.ac.in) are with the Indian Institute of Management, Kozhikode. Economic & Political Weekly

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2.1 Pre-Green Pre- Green Revolution (1950–51 (1950–51 to 1964–65): At 1964–65): At the time of independence, India witnessed an acute shortage of food due to the disruption caused to the agricultural sector following the partition of British India in 1947 (Bhalla 2007; Swaminathan 2012). 2012). Partition led to loss of rich fert ile lands to Pakista n and large-scale migration of populations across the borders. borders. The 49

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government met the country’s immediate food requirement through large-scale import of food aid, primarily using the PL 480 programme of the United States (US). In addition, serious attempts were made to attain self-sufficiency in food production by way of large public investment in agricultural infrastructure, implementation of land reforms and rural developmental schemes (Bhalla 2007; Chandra, Mukherjee and Mukherjee 2008). 2.2 Initial Stage (1967–68 to 1979–80):  The agrarian stagnation during the first half of the 1960s  eventually led to the introduction of a new high yielding varieties (HYV)– seed–fertiliser strategy, popularly known as the Green Revolution, starting from 1966.4  The influence of this new strategy on the performance parameters of Indian agriculture  was not encouraging during the initial stage (1967–68 to 1979–80). This is evident from the noticeable drop in the growth rate of agricultural GDP, output and yield of all the major crops except wheat during this stage (Tables 1 and 2).5 Several factors are believed to have contributed to this outcome (Bhalla 2007; EPW 1967a, 1967b). They include mainly limited crop (only wheat) and geographical coverage (only Punjab, Haryana and Western Uttar Pradesh) of the Green Revolution strategy to start with; the after effects of the 1965 and 1971 India–Pakistan wars; and the oil crises of 1973–74 and 1978–79. 2.3 Maturing Stage (1980–81 to 1991–92): Consequent to the spread of the HYV –seed–fertiliser strategy to more crops and almost all geographical areas, India’s agrarian economy witnessed a revival during the Table 1: Compound Annual Growth Rates of Gross Domestic Product (GDP) and 1980s. Compared to the Agricultural GDP (Base: 2004–05) (%) initial stage of the Green Period Total Agricultural GDP GDP Revolution, the growth 1950–51 to 1964–65 3.95 2.66 rate of agricultural GDP, 1967–68 to 1979–80 3.45 2.19 output and yield of a ma1980–81 to 1991–92 5.21 3.09  jority of crops recorded 1992–93 to 2012–13 7.01 2.92 an improvement between Data for 2010–11 are second revised estimates 1980–81 and 1991–92 (RE), for 2011–12 are fir st RE a nd for 2012–13 are provisional. (Tables 1 and 2). The GDP Source: Handbook of Statistics on Indian Economy  growth figure of 3.09% (HSIE) 2012–13, Reserve Bank of In dia (RBI). pa achieved by the agricultural sector during t his period is the highest till date. Another landmark achievement was the emergence of yield as the predominant contributor to foodoutput growth.6 2.4 Post-Economic Reform (1992–93 to 2012–13): The economic liberalisation strategy introduced in India in June 1991 had no explicit mandate to liberalise the Indian agriculture sector and integrate it with the global economy (Bhalla 2007; Chand, Raju and Pandey 2007; Landes a nd Gulati 2004).7 This together with a host of other factors contributed to the deterioration in the overall performance of Indian agriculture during the post-ER s period.8 The growth rate of output and yield of a majority of food commodities decelerated significantly between 1992–93 and 2012–13 (Table 2). On the other hand, the growth 50

rate of agricultural GDP declined slightly to 2.92% pa during the same period (Table 1).9 3 Trends in Food Prices

We examined the monthly movements (Figures 1 and 2, p 51) of two components of WPI food inflation (Base: 2004–05), namely, primary food articles and manufactured food products, during the four agrarian periods described earlier to identify episo des of high and persistent food inflation during each period, and to calculate the average inflation rate in each such episode (Tables 3 and 4, p 52).10  Since most studies have suggested a threshold level of inflation of about 6% for India (Table 2 in Pattanaik and Nadhanael 2011) we considered the persistence of inflation of 6% and above as a high i nflationary episode. The average inflation rate recorded in an episode, say from June 1972 to May 1975, is calculated based on the change in the average  value of the WPI over this period with respect to the average value of the WPI over the corresponding period (June 1971 to May 1974) the year before. The findings of our analysis a re as follows: Since April 1954 India experienced 14 episodes of high food articles inflation (Table 3).11 On all these occasions, the impact of the price build-up was broad-based, implying that almost all the commodity subgroups under the food articles category  were subject to high inflation.12 The longest episode of high food articles inflation were the 62 months from July 1979 to  August 1984, followed closely by 61 months from March 2008 to March 2013, and 57 months from June 1963 to February 1968. The inflationary episode that had the highest average food articles inflation of 20.22% was during the 36-month period from June 1972 to May 1975. During the pre-Green Revolution period, high food articles price inflation occ urred on four occa sions (Table 3). The average inflation recorded during these inflationary episodes ranged from 8.5% to over 15%. In the 13 years covering the initial stage of the Green Revolution, India experienced three Table 2: Compound Annual Growth Rate of Production and Y ield of Various Food Commodities Items

1950–51 to 1964–65

1967–68 to 1979–80

1980–81 to 1991–92

(%)

1992–93 to 2012–13

Output

Yield

Output

Yield

Output

Yield

Output

Yield

Total foodgrai ns

3.54

2.12

2.16

1.73

2. 74

3.01

1.58

1.57

Cereal

3.76

2.43

2.47

2.08

2.87

3.20

1.59

1.68

Rice

4.35

2.86

1.95

1.18

3.71

3.12

1.38

1.34

Wheat

4.27

1.53

5.48

2.30

3.63

3.24

1.93

1.12

Coarse cereals

2.75

1.68

0.72

1.81 –0.01

1.73

1.45

2.58

Pulse s

2.19

0.40

-0.5 4

-1.08

1.33

1.27

1.34

0.91

Nine oilseeds

3.54

0.89

1.83

0.67

6.06

2.73

2.03

1.75

Sugar cane

6.36

3.07

2.79

1.16

3.67

1.44

1.48

0.01

-

-

3.33*

-

2.76

1.87

1.99

0.03

Tea Coffee

-

-

5.01*

-

2.67

1.17

2.33

-0.23

Milk

1.64 

-

2.23

-

5.14

-

4.15

-

Egg

4.63 

-

6.49

-

7.71

-

5.95

-

Fish

-

-

-

-

5.14

-

3.35

-

- Not available; * From 1970–71 to 1979–80;  From 1950–51 to 1960–61 based on pointto-point data; - From 1960–61 to 1979–80 based on point-to-point data. Source (Basic Data): (i) Department of Agriculture and Cooperation (DAC), Ministry of Agriculture (MoA), Governm ent of India (GoI) (For foo dgrains, oilse eds); (ii) HSIE 2012–13 (for sugar cane, tea, coffee); (iii) Annual Report 2012–13, Department of Animal Husbandry, Dairying and Fisheries, MoA, GoI (for milk, egg, fish).  augu st 1, 201 5

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Figure 1: Monthly Movements in Food Artic les Inflation Rate (April 1954 to March 2013) 40

Initial stage of Green Revolution

Pre-Green Revolution Period

Maturing stage of Green Revolution

Post-economic reforms period

35 30 25 20 15 10 5 0 -5 -10 -15 -20 -25

    0     0     4     5     9     0     1     2     1     2     3     4     5     7     8     9     0     1     2     3     4     5     6     7     8     0     1     2     3     4     5     6     7     8     9     0     1     3     4     5     6     7     9     0     1     7     8     5     6     7     8     4     5     6     6     9     0     8     8     8     8     8     8     8     9     9     9     9     9     5     6     2     9     7     0     1   -     5     6     8     0     7     9     2     6     0     0     5     9     6     7     7     6     6     7     6     8     8     5     7     9     6     9         7       -     0     l     7           -   -     1   -   -    y   -     7   -   -    y   -     -   -    y   -     -     0   -   -   -   -   -   -    r   -   -   -   -   -   -    r   -   -   -   -   -   -    r   -   -   -     0   -     1     i   -     0   -    y   -     5   -    y     -   -    r    v    v    v    r    y      r      r    r    r    g    p    t    c    n    b    a    g    p    t    c    n     b    a    y    g    p    t    c    n     b    a    y    g    p    t    v    c     b    n     l    n     l    n     l    n     l    n     l    g    p    t    n    a    a    a    a    a    a    c    o    e    c    o    e    c    o    e    c    o    e    p    p    p    p    p    u    e    u    e    u    e    u    e    e    e    e    e    u    u    u    e    c    u    u    a    u    u    a    u    u    a    u    u    a     A    M    J     J     A    S     O    N    D    J     F     M    A    M    J     J     A    S     O    N    D    J     F     M    A    M    J     J     A    S     O    N    D    J     F     M    A    M    J     J     A    S     O    N    D    J     F     M    A    M    J     J     A    S     O

See Table 3. Source (Basic Data): (i) HSIE (March 2006), RBI and Central Statistics Office (CSO) (http://eaindustry.nic.in/).

Figure 2: Monthly Movements in Food Produc ts Inflation Rate (April 1972 to March 2013) 80 75 70 65 60 55 50 45 40 35 30 25 20 15 10 5 0 -5 -10 -15 -20 -25

Initial stage of Green Revolution

Maturing Stage of Green Revolution

Post-economic reforms period

    0     0     0     0     2     3     3     4     5     6     6     7     8     9     9     0     1     2     2     3     4     5     5     6     7     8     8     9     0     1     1     2     3     4     4     5     6     7     7     8     9     0     0     1     2     3     3     4     5     6     6     7     8     9     9     0     1     2     2     0     0     0     0     0     0     0     0     0     0     0     8     8     8     9     9     9     9     8     8     8     9     9     9     7     7     7     8     8     8     9     9     9     1     7     7     7     7     7     7   -   -    t   -   -    t   -   -    t   -   -    t   -   -    t   -   -    t   -   -    t   -   -    t   -   -    t   -     2   -   -    t   -   -    t   -   -    t   -     1   -     7   -     7   -     8   -     8   -     8   -     8   -     9   -     9   -     9   -     0   -   -    r   -   -    r   -     1     -     2   -     1    r      r      r      r      r      r      r      r      r      r   -    r   -    r    t    t    c     l    c     l    c     l    c     l    c     l    c     l    c     l    c     l    c     l    c     l    c     l    c     l    c     l    c    p    n    p    n    p    n    p    n    p    n    p    n    p    n    p    n    p    n    p    n    p    n    p    n    p    n    p    n    u    a    u    a    u    a    u    u    a    u    a    u    a    u    a    u    a    u    a    u    a    u    a    u    a    a    a     A    J     O    J     A    J     O    J     A    J     O    J     A    J     O    J     A    J     O    J     A    J     O    J     A    J     O    J     A    J     O    J     A    J     O    J     A    J     O    J     A    J     O    J     A    J     O    J     A    J     O    J     A    J     O

See Table 4. Source: As in Figure 1.

episodes of high food articles inflation. The pea k average infla- periods from December 1976 to June 1977 and from April 2011 tion rate recorded during these episodes was 20.22% with t he to June 2012, on all other occasions, the impact of food products lowest being 10.96%. During the maturi ng stage of the Green price build-up was spread across a majority of food items.13 Revolution that spanned 12 years, food articles price build-up The initial and maturing stages of the Green Revolution had occurred on three occasions with average inflation rates ranging three episodes of high food products inflation each (Table 4). from 9.88% to 15.11%. Notably, the duration of t he inflationary The average inflation recorded during the three episodes of episodes witnessed during this stage was longer compared to high inflation in the initial stage of the Green Revolution other stages. Since the introduction of economic reforms, India ranged from 15% to 37.72%. The same figures for the maturing experienced four episodes of high food articles price inflation. stage were 8.68% to 10.86%. During the post-ER s period, India The average inflation rate recorded during these episodes experienced five episodes of high food products price inflation ranged from 9.22% to 12.99%.  with the average inflation rate ranging from 7.29% to 12.20%. Since April 1972, the period from which data is available, high Our literature survey reveals that each episode of food inflation of the food products group struck India on 11 occasions, articles and food products inflation identified were triggered the longest being the 72-month period from April 1989 to by a host of factors (Table 5, p 53). In addition, our analysis of March 1995 (Table 4). The period from April 1979 to June 1981  yearly movements in growth of food output and WPI inflation had the highest average i nflation rate of 37.72%. Except for the rates of food reveals that on most occasions the spike in food Economic & Political Weekly

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prices with respect to a particular food commodity was preceded by a supply shortfall.  A comparison of average food articles and food products inflation rates experienced during the various phases of agricultural growth reveal that despite the decline in agricultural GDP and food output growth rates, the post-ER s  period saw lower food inflation compared to the maturing stage of the Green Revolution (in case of food articles), and the initial and maturing stages of the Green Revolution (in case of food products). On an average, the food articles inflation rate recorded during the maturing stage of was 10.20% against 7.86% recorded during the post-ER s period (Table 3). In the case of food products, the postER s  period saw an average inflation of only 5.94% as against 12.57% and 7.24 % recorded during the initial and maturing stages, respectively (Table 4).14 The prices of the majority of individual food articles and food products turned out to be lower, on average, in the post-ER s  period compared with the maturing stage of the Green Revolution (Table 6, p 54). Moreover, the peak average inflation rate recorded in any given episode of high food inflation was the lowest during the post-ER s period for food articles (12.99%) and second lowest for food products (12.20%). 4 Understanding the Food Price Trends

We offer the following explanations for the relatively low food price inflation during the post-ER s period notwithstanding the slowdown in agricultural growt h. Table 3: Average WPI Inflation Rate (Base: 2004– 05) Recorded during Various Episodes of Food Articles Price Infla tion Period

Pre-Gre en Revolution period (1954–55 to 1964–65) March 1956 to August 1957 July 1958 to May 1959 May 1962 to November 1962 June 1963 to March 1965 Overall period (April 1954 to March 1965) Initial stage of Green Revolu tion (1967–68 to 1979–80) June 1972 to May 1975

Duration (in Months)

18

Inflation Rate (%)

15.02

11

9.91

7

8.50

22

13.70

-

4.48

36

20.22

February 1977 to Januar y 1978

12

13.15

July 1979 to March 1981

21

10.96

-

5.98

Overall period (April 1968 to March 1981) # Maturing stage of Green Revoluti on (1980–81 to 1991–92) April 1981 to August 1984

4.1 More Stable Food Production: A striking feature of India’s agrarian performa nce during the post-ER s period was the growth of agricultural output and GDP, though lower, was more stable. This is ev ident from the low standard deviation of the year-on-year growth rate of output of a majority of food commodities, and of agricultural GDP in the post-ER s  period compared with earlier periods (Table 7, p 54). The implication of this finding is that even if the rate of agricultural growth is slow, low fluctuations in growt h cause few disruptions in food supply, thereby contributing to low food price inflat ion. On the other hand, high agricultural growth may not guarantee low food prices if it is accompanied by frequent fluctuations in growth. This is evident from the experience of the maturing stage of the Green Revolution. The high growth performance of Indian agriculture dur ing this period was made possible due to the extraordinary growth achieved in just three years, namely, 1980–81, 1983–84 and 1988–89. The year-on-year growth of agricultural GDP  during these three years was 14.44%, 10.75% and 16.85%, respect ively. The same figure for foodgrains output was 18.13%, 17.64% and 21.07%, respectively. In all the other years during the maturing phase, the growth rates of agricultural GDP and foodgrain output were either negative or quite low. 4.2 Shift in Food Consumption: An analysis of food expenditure patterns at current prices prior to the economic reforms period (1967–68 to 1993–94), based on the household consumer expenditure survey conducted by the National Sample Survey Office (NSSO) on a quinquennial basis, reveals that a “secular shift” in food consumption pattern in favour of high value food items has occurred in India during the maturing stage of the Green Revolution (1983 to 1994).15 This is evident Table 4: Average Inflation Rate (Base: 2004–05) during Various Episodes (%) of Food Products Price Inflation Period

Duration (in Months)

Initial stage of Green Revolution (1972–73 to 1979–80) April 1972 to June 1975 Dece mber 1976 to June 1977 April 1979 to June 1981 Overall period (April 1972 to June 1981)

Inflation Rate (%)

39

15.00

7

18.31

27

37.72

-

12.57

17

10.57

41

11.67

April 1986 to February 1989

35

9.88

April 1990 to February 1993 @

35

15.11

February 1986 to October 1988

33

8.68

-

10.20

April 1989 to March 1993 @

48

10.86

35

11.47

-

7.24

May 1998 to April 1999

12

12.99

24

12.20

October 2005 to September 2007

24

9.22

March 2008 to March 2013

61

11.16

-

7.86

Overall period (April 1981 to February 1993) Post-economic reforms period (1992–93 to 2012–13) June 1994 to April 1997

Overall period (March 1993 to March 2013)

 The period up to March 1981 is included under initial stage of GR because the reason

for high food inflation recorded during April 1980 to March 1981 was the decline in food production in 1979–80, which falls under initial stage of GR. # The year 1967–68 is not included under initial stage of GR because the high food inflation witnessed during this year was due to crop failure for two successive years in 1965–66 and 1966–67. The year 1967–68 was an excellent year for Indian agriculture. @ The period up to February 1993 is included under maturing stage of GR because the root cause of high food inflation experienced during April 1992 to February 1993 was the poor growth of agriculture sector in 1991–92, which falls under maturing stage of GR. Source (Basic Data): As in Figure 1.

52

Maturing stage of Green Revoluti on (1980–81 to 1991–92) April 1983 to August 1984

Overall period (July 1981 to March 1993) Post-economic reforms period (1992–93 to 2012–13) April 1993 to March 1995 December 1996 to March 1999

28

9.46

March 2003 to January 2005

23

7.29

January 2008 to July 2010

31

10.20

April 2011 to March 2013

24

7.64

-

5.94

Overall period (April 1993 to March 2013)

The period up to June 1981 is included under initial stage of GR because the cause of high food inflation recorded during April 1980 to June 1981 lies in negative growth of food production in 1979–80, which comes under initial stage of GR. @ The period up to March 1993 is included under maturing stage of GR because the root cause of high food inflation experienced during April 1992 to March 1993 was the poor growth of agriculture sector in 1991–92, which falls under maturing stage of GR. Source (Basic Data): As in Figure 1. 

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(%) from the following three trends that emerge from Tables 8 and 9 Figure 3: Contribution to Overall Food Inflati on 16 120 (p 57).  First, the drop experienced in the expenditure share of cereals both in rural and urban India during 1983–88 was Other food products not only significantly more than in other periods, but were his100 toric highs. Second, except sugar, all the high-value food comSugar, modities registered highest expenditure shares both in rural khandsari & gur and urban areas during 1983–94. Third, the highest percent80 Edible oils age point increase recorded in the expenditure shares of Condiments pulses, milk, sugar, edible oil, vegetables and fruits in rural and spices 60 India was during 1983–94. These trends suggest that the Fruits and vegetables rising demand for high-value agriculture products was one of the key factors contributing to the historically high average 40 food price inflation rate recorded during the matur ing stage of Protein foods the Green Revolution. This is clearly reflected in Figure 3, 20  which shows that besides the important role of edible oils, the contribution of high-value food commodities, namely protein Cereals foods, fruits and vegetables to overall food inflation has increase d 0 Initial State of GR Maturing State of GR Post-ERs Period markedly in the maturing stage of the Green Revolution 17 (a) Protein foods include pulses, milk, dairy products, egg, meat and fish; (b) Other food compared with the initial stage. products include grain mill products and oil cake. The shift in food consumption demand during the maturing Source (Basic Data): As in Table 3. stage of the Green Revolution might be due to two reasons. First, as documented in literature on India’s economic growth, independence, the diversification of Indian diets. Second, the after experiencing low and stagnant growth during the first significant increase in the real agricultural wages during three decades after independence, the Indian economy grew 1980s might have pushed up rural dema nd for high-value food. at a noticeably high rate during the 1980s  (De Long 2003; The growth of real agricultural wages was highest during the Nagaraj 2000; Panagariya 2004; Rodrik and Subramanian maturing stage of the Green Revolution. For instance, real 2008). This seems to have triggered, for the first time since  wages for male agricultura l labour grew 3.75% between 1983     t    n    e    c    r    e     P

Table 5: Factors Contributing to Various Episodes of Hig h Food Inflation in India Inflationa ry Episodes

Reasons for High Inflation

June 1972 to May 1975 (food articles) and April 1972 to June 1975 (food products)

Crop loss in 1971 due to flood situation, in 1972 due to drought and in 1974; uncertainty caused by the 1971 Indo–Pak war; additional demand for food due to influx of Bangladesh refugees resulting from 1971 Indo–Pak war; successive increases in the procurement price; higher central issue prices; absence of a robust system of government procurem ent, buffer s tocking and public distribution; delay in importing food; panic situation created by the dwindling foreign exchange reserves; stoppage of concessional food imports using soft loans; and speculative behaviour by traders

February 1977 to January 1978 (food articles), December 1976 to June 1977 and April 1979 to June 1981 (food products)

Excess liquidity in the agricultural and trading sectors leading to bullishness in the grain market; short-fall in rice production due to scanty rain during 1976 kharif season; severe drought situation in 1979–80 leading to sharp drop in foodgrains produc tion and cornering of large quantities of market arrivals by private trader s.

July 1979 to August 1984 (food articles) and April 1983 to August 1984 (food products)

Short-fall/unimpressi ve growth in foodgrains production during 1979–80, 1981–82 and 1982–83; drought during the kharif season of 1982–83; self-impose d limits on open market purchases by government; inadequate spread of public distribution system; limited food imports due to difficult foreign exchange situation; depletion of buffer stock; and high support prices

April 1986 to February 1989 (food articles) and February 1986 to October 1988 (food products)

Short-fall/unimpressi ve growth in foodgrains production during 1984–85, 1985–86, 1986–87 and 1987–88; higher support prices; drought situation in 1987–88; and low foodgrains procurement in 1988–89 despite record production

April 1990 to February 1993, June 1994 to April 1997, May 1998 to April 1999 (food articles), April 1989 to March 1995 and December 1996 to March 1999 (food products)

Short-fall/unimpressi ve growth in foodgrains production during 1989–90, 1990–91, 1991–92, 1993–94, 1995–96, and 1997–98; large government procurement at high support prices; large increases in the issue price of foodgrains; more export of wheat and rice; and increase in speculative hoarding by private traders due to withdrawal of monitoring of stock limits under Essential Commoditi es Act and RBI's decision to exempt almost all commodities from selective credit controls effective from 21 October 1996

October 2005 to September 2007 (food article s)

Short-fall/unimpressi ve growth in foodgrains production during 2004–05 and 2005–06; higher aggregate demand; and government's failure to procure adequate quantities of wheat

March 2008 to March 2013 (Food articles), January 2008 to July 2010 and April 2011 to March 2013 (food products)

Supply-side bottlenecks; large increase in minimum support prices; inadequate sale of  rice under open market sales window of government; inflationary expec tations due to unfavourable climatic condition; increasing demand for food due to an increase in income, increase in cost of production; and high cost of imports and higher food expor ts.

Source: Economic & Political Weekly  (Analysis and Editorials published in various issues); Nair and Eapen (2011 and 2012); Nair (2013); Patnaik (2007) and the authors’ analysis of year-on-year growth of production of various food commodities. Economic & Political Weekly

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and 1993–94, against 1.33% and 0.59% recorded, respectively during the periods 1993–94 to 1999–2000 and 1999–2000 to 2010–11 (Himanshu 2005 a nd Usami 2012).18 Prior to the maturing stage of the Green Revolution (1964 to 1980) as well, the growth of real agricultural wages was slow as evident from the analysis presented in Chavan and Bedamatta (2006).19 4.3 Role of Minimum Support Prices: One of the key reasons attributed to the spikes in food prices witnessed during the post-ER s  period are the hefty increases in minimum support prices (MSP) of foodgrains (rice and wheat) (Balakrishnan 2000; Chand 2005; Dev and Rao 2010). The procurement of foodgrains by the government at higher MSP can cause high food inflation due to three reasons (GoI 2000; Nair and Eapen 2011). First, it sets a higher benchmark for market prices of foodgrains thereby feeding into food price inflation exp ectations. Second, it necessitates a hike in the prices of foodgrai ns supplied by the government through the public distribution system (PDS) and Open Market Sale Scheme (OMSS).20 Third, it edges out private trade thereby reducing the quantum of foodgrains available for consumption by ordinary consumers. The influence of a hike in MSP on foodgrain prices is ev ident from Figures 4 and 5 (p 55)  which show that generally, the rate of annual increases in MSP of rice and wheat and their respective annual inflation rates move in the same direction, indicating that a higher increase in the MSP translates into an increase in the market price of foodgrain s and vice versa. Long-term trends reveal that MSP for rice and  wheat in nominal terms rec orded much higher increase s during the post-ER s period than in the 1980s (Figure 6, p 55).21 Interestingly, however, cereals experienced lower average inflation rates during the post-ER s  period compared to the maturing stage of the Green Revolution (Table 6). We provide the following explanation for this counter-intuitive finding. Table 6: Average WPI Inflation Rate (Base: 2004 –05) of Diesel and Subgroups of Food Articles and Food Products under Various Agrarian Policy Regimes Items

Food articles Foodgr ains*

Pre-Green Revolution Period

Initial Stage of Green Revolution Period

(%)

Maturing Stage Post-Economic of Green Reforms Period Revolution Period

–

5.10

9.89

7.32

Cereal s

3.69

5.40

9.94

7.36

Pulses

8.34

7.54

9.00

8.44

Fruits and vegetables

6.62

6.87

9.81

7.68

Milk

4.09

5.07

10.28

8.04

Eggs, meat and fish

7.42

8.64

9.59

9.64

Condiments and spices*

–

4.34

18.89

6.14

Fuel (diesel)

–

10.57

8.39

9.82

Food products Dairy products

–

8.96

10.21

6.58

Grain mill products

–

6.17

9.43

5.21

Sugar, khands ari and gur

–

11.39

2.32

7.16

Edible oils

–

11.14

9.64

4.43

Oil cake

–

10.49

8.32

8.84

Tea and coffee proccessing**

–

–

6.66

5.69

Fuel (diese l)

–

15.81

7.87

9.79

* Prior to April 1963 foodgrains and condiments and spices classification are not available. ** Tea and coffee processing classification is available only from April 1982. Source (Basic Data): As in Figure 1.

54

Overall, though, the MSP increased substantially during the post-ER s period, a closer look at the annual increases in MSP reveals that between the five-year period from 2001–02 to 2005–06 in case of wheat and from 2002–03 to 2006–07 in case of rice the increase in MSP was moderate (circled portion in Figures 4 and 5). The annual increases in MSP during these periods ranged from 1.56% to 1.64% for wheat and 1.75% to 3.77% for rice.22 Both prior to and after these periods in the post-ER s period, annual Table 7: Standard Deviation of Year-on-Year increases in MSP  were Growth Rates of Food Production and Agricultural GDP (%) significantly larger. For 1951–52 1967–68 1980–81 1992–93 instance, from 1993–94 to to to to 1964–65 1979–80 1991–92 2012–13 to 2001–02 (2000–01 8.40 12.52 9.51 8.45 in case of wheat) the Foodgrains Total cereal s 7.75 11.90 9.36 8.24 annual increases in MSP Rice 10.20 14.80 13.43 9.38 ranged from 3.92% to Wheat 12.74 14.91 8.10 6.45 14.81%, and 2.86% to Pulses 14.66 19.27 13.94 13.74 25.39% for rice and Nine oilseeds 10.32 18.91 18.00 20.68  wheat, respectively. In- Sugar cane 16.51 13.04 8.37 11.33 terestingly, during this Tea – 3.49 4.34 4.21 phase of moderate in- Coffee – 24.06 46.16 10.35 – – 2.19 0.96 creases in MSP, inflation Milk Egg – – 3.31 4.33 rates of both rice and – – 5.65 2.69  wheat were ruling low Fish (total) Agricultural GDP 5.05 9.05 6.49 4.65  with a period average of Source (Basic Data): As in Tables 1 and 2. 2.1% and 1.9%, respectively (circled portion in Figures 4 and 5). Incidentally, it is this fairly long phase of significantly low rice and wheat inflation rates which has pulled down the average cereal inflation rate after the economic reforms.  Apart from the modest increases i n MSP, which might have reduced the expectation of an all pervasive increase in food prices, the other reason for low rice and wheat price inflation between 2001–02 and 2006–07 appears to be the reduction followed by no revision in Central Issue Pr ice (CIP) of rice and  wheat since July 2000 for below poverty line (BPL) families, and since July 2001–02 for above poverty line  (APL) families (Tables 10 and 11, p 57). The combined effect of the marginal increases in MSP, and reduction and no upward revision in the CIP are the following: (a) starting from 2000–01, the government’s food subsidy bill increased substantially both in absolute terms and as a percentage of GDP (at market prices) (Figure 7, p 56), (b) the offtake of rice and wheat both by BPL and APL beneficiaries under targeted public distribution system (TPDS) increased between 2001 and 2007 (Table 12, p 58).23 Thus, it is evident that the moderate hikes in procurement prices during 2001–02 to 2006–07 coupled with reduction in and freeze on PDS prices resulted in a fall in wholesale price of cereals and increase in offtake of cereals from PDS  and open market.  Although increased offtake led to steep falls in foodgrains buffer stocks bet ween 2002–03 and 2006–07 (Figure 8, p 56), consumers paid lower prices for cereals thanks to modest increases in MSP and downward/no revision in CIP.24 In sharp contrast to the situation during 2001 to 2007, between the period 1993–94 and 1999–2000 (2000–01 in case of wheat) annual increases in MSP were substantial (Figures 4 and 5).  augu st 1, 201 5

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during this period (Figure 8, p 56) thanks to high levels of procurement, it has not translated into lower cereal prices for most years 35 MSP due to (a) procurement at higher MSP, and (b) increase in CIP at fre25 quent intervals. In fact, the upward Inflation Rate revision of CIP has accelerated the 15 rate of accretion to public stocks of foodgrains, particularly in case of 5  wheat during 1997–2001, by way of reducing the offtake of grains under the PDS (Figure 8 and Table 12).25 -5  As regards the other important phase (2007 to 2012)26 of high MSP -15     7     8     9     0     1     2     3     4     5     6     7     8     9     0     1     2     3     4     5     6     7     8     9     0     1     2     3     4     5     6     7     8     9     0     1     2     3 prevailing during the post-ER s period     7     7     7     8     8     8     8     8     8     8     8     8     8     9     9     9     9     9     9     9     9     9     9     0     0     0     0     0     0     0     0     0     0     1     1     1     1   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –    0   –   –   –   –   –   –   –   –   –   –   –   –   –     2     6     7     8     9     0     1     2     3     4     5     6     7     8     9     0     1     2     3     4     5     6     7     8     2     0     1     2     3     4     5     6     7     8     9     0     1     1     7     7     7     7     8     8     8     8     8     8     8     8     8     8     9     9     9     9     9     9     9     9     9   –    0     0     0     0     0     0     0     0     0     0     1     1 to overcome the situation of falling     0     9     9     9     9     9     9     9     9     9     9     9     9     9     9     9     9     9     9     9     9     9     9     9     9     0     0     0     0     0     0     0     0     0     0     0     0     1     1     1     1     1     1     1     1     1     1     1     1     1     1     1     1     1     1     1     1     1     1     1     9     2     2     2     2     2     2     2     2     2     2     2     2     2     9     1 foodgrain stock from 2002–03 to Source: HSIE (RBI) (for MSP) and CSO (for Inflation) 2006–07 and to incentivise farmers (%) Figure 5: Movements in Year-on-Year Growth of MSP and Inf lation Rate of Wheat to increase grain production and 40 productivity (GoI  2012) a sharp 35 hike in MSP  of rice and wheat  was effected from 2007–08 and MSP 30 2006–07, respectively.27 As a result, 25 cereal prices rose despite rising 20 grain buffer stock.28  However, since CIP remained unrevised dur15 Inflation Rate ing this period thereby widening 10 the gap between CIP and the mar5 ket price of grains, the offtake of foodgrains under TPDS, even by 0  APL beneficiaries, was high. -5 Finally, considering the matur-10 ing stage of GR , though in absolute     7     8     9     0     1     2     3     4     5     6     7     8     9     0     1     2     3     4     5     6     7     8     9     0     1     2     3     4     5     6     7     8     9     0     1     2     3     7     7     7     8     8     8     8     8     8     8     8     8     8     9     9     9     9     9     9     9     9     9     9     0     0     0     0     0     0     0     0     0     0     1     1     1     1   –   –   –   –   –   –     0   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –   – terms the nominal MSP of rice and     2     6     7     8     9     0     1     2     3     4     5     6     7     8     9     0     1     2     3     4     5     6     7     8     2     0     1     2     3     4     5     6     7     8     9     0     1     1     1     7     7     7     7     8     8     8     8     8     8     8     8     8     8     9     9     9     9     9     9     9     9     9   –    0     0     0     0     0     0     0     0     0     1     0     0     9     9     9     9     9     9     9     9     9     9     9     9     9     9     9     9     9     9     9     9     9     9     9     9     0     0     0     0     0     0     0     0     0     0     0     2     2     2     1     1     1     1     1     1     1     1     1     1     1     1     1     1     1     1     1     1     1     1     1     1     1     9     2     2     2     2     0  wheat was lower during this period     2     2     2     2     2     2     9     1 than the post-ER s period, a major Source: As in Figure 4. shift in the level of nominal MSP (Rupees per quintal) Figure 6: Minimum Support Price of Wheat and Rice occurred since 1988–89 (circled 1400 portion in Figure 6). The average 1200 MSP offered to rice increased from Rs 131 during 1980–81 to 1987–88 to 1000 Rs 210 during 1988–89 to 1992–93, Wheat 800 a huge increase of 60%. The MSP of  wheat also increased to a similar 600 magnitude from Rs 154 to Rs 247 400 Rice during the same period. More 200 importantly, the CIP  of both rice and wheat was subject to upward 0     6     7     8     9     0     1     2     3     4     5     6     7     8     9     0     1     2     3     4     5     6     7     8     9     0     1     2     3     4     5     6     7     8     9     0     1     2     3     7     7     7     7     8     8     8     8     8     8     8     8     8     8     9     9     9     9     9     9     9     9     9     9     0     0     0     0     0     0     0     0     0     0     1     1     1     1 revision throughout the maturing   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –    0   –   –   –   –   –   –   –   –   –   –   –   –   –     2     5     6     7     8     9     0     1     2     3     4     5     6     7     8     9     0     1     2     3     4     5     6     7     8     2     0     1     2     3     4     5     6     7     8     9     0     1     1 state of Green Revolution (Tables 10     7     7     7     7     7     8     8     8     8     8     8     8     8     8     8     9     9     9     9     9     9     9     9     9   –    0     0     0     0     0     0     0     0     0     0     1     1     0     9     9     9     9     9     9     9     9     9     9     9     9     9     9     9     9     9     9     9     9     9     9     9     9     9     0     0     0     0     0     0     0     0     0     0     0     0     1     1     1     1     1     1     1     1     1     1     1     1     1     1     1     1     1     1     1     1     1     1     1     1     9     2     2     2     2     2     2     2     2     2     2     2     2     2     9 and 11). Thus, it turns out that the     1 Source: HSIE (RBI). high level of MSP in the later part Notably, there were frequent upward adjustments in the CIP of the maturing stage of the Green Revolution and upward consequent to the increases in the MSP  (Tables 10 and 11). adjustments in the PDS issue price at regular intervals have put Though the food stock with the government was healthy pressure on cereal prices. Figure 4: Movements in Year-on-Year Growth of MSP and Inf lation Rate of Rice

(%)

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might have contributed to lower food inflation during the post-ER s 80,000 period by enhancing the govern1.00 ment’s ability to stabilise prices 70,000 As % of GDP through sale of foodgrains to the 60,000 0.80 30    e open market.  Another closely re   e    r    g    o    a    r    t    c50,000    n lated factor could be the improve   s 0.60    e    e    c    r    e    e 40,000    p     P ment in coverage and effective   u     R ness of the PDS overtime. Though 30,000 0.40 In rupees crore the PDS played an important role 20,000 since independence in making 0.20 10,000 available foodgrains to consumers 0 0.00 at reasonable price, it remained     5    6    7    8    9    0    1    2    3    4    5    6    7    8    9    0    1    2    3    4    5    6    7    8    9    0    1    2    3    4    5    6    7    8    9    0    1    2    3     7    7    7    7    7    8    8    8    8    8    8    8    8    8    8    9    9    9    9    9    9    9    9    9    9    0    0    0    0    0    0    0    0    0    0    1    1    1    1   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –    0   –   –   –   –   –   –   –   –   –   –   –   –   –     1    2 predominantly urban and ineffec    4    5    6    7    8    9    0    1    2    3    4    5    6    7    8    9    0    1    2    3    4    5    6    7    8    2    0    1    2    3    4    5    6    7    8    9    0    1     7    7    7    7    7    7    8    8    8    8    8    8    8    8    8    8    9    9    9    9    9    9    9    9    9   –    0    0    0    0    0    0    0    0    0    0    1    0    1     0     9    9    9    9    9    9    9    9    9    9    9    9    9    9    9    9    9    9    9    9    9    9    9    9    9    9    0    0    0    0    0    0    0    0    0    0    0     1    1    1    1    1    1    1    1    1    1    1    1    1    1    1    1    1    1    1    1    1    1    1    1    1    9    2    2    2    2    2    2    2    2    2    2    2    2    2 tive in reaching the poor until the     9     1 Source: Radhakr ishna and Subbara o (1997) and Sharma (2012) (For Subsidy); HSIE, RBI (For GDP). mid-1980s  (Howes and Jha 1992; Figure 8: Yearly Movements in Cerea l (Wheat & Rice) Stocks (in Mil lion Tonnes) and WPI Inflation Rate of Nawani 1994). However, starting Cereals (Base: 2004–05) (1972–73 to 2012–13) from the early 1990s, serious pol50 70 icy interventions such as re40 60  vamped PDS and TPDS were made Cereal inflation rate (%) to ensure the effective reach of 30 50 Cereal stocks in million tonne PDS to the traditionally deficit ar   e    n 20 40    e    n eas and vulnerable people (GoI    g    o    t    a    t    n 2005; Nawani 1994). Recent stud   n    o     i    e 10 30     l    c     l     i    r    e ies have found that PDS  has im    M     P 0 20 proved overtime in term s of coverage and function (Khera 2011; -10 10 Rahman 2014). -20 0 4.5 Import Liberalisation: It seems     3    4    5    6    7    8    9    0    1    2    3    4    5    6    7    8    9    0    1    2    3    4    5    6    7    8    9    0    1    2    3    4    5    6    7    8    9    0    1    2    3     7    7    7    7    7    7    7    8    8    8    8    8    8    8    8    8    8    9    9    9    9    9    9    9    9    9    9    0    0    0    0    0    0    0    0    0    0    1    1    1    1   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –    0   –   –   –   –   –   –   –   –   –   –   –   –   –     2     2    3    4    5    6    7    8    9    0    1    2    3    4    5    6    7    8    9    0    1    2    3    4    5    6    7    8    2    0    1    2    3    4    5    6    7    8    9    0    1 that liberalisation of agricultural     1     7    7    7    7    7    7    7    7    8    8    8    8    8    8    8    8    8    8    9    9    9    9    9    9    9    9    9   –    0    0    0    0    0    0    0    0    0    0    1    1     0     9    9    9    9    9    9    9    9    9    9    9    9    9    9    9    9    9    9    9    9    9    9    9    9    9    9    9    9    0    0    0    0    0    0    0    0    0    0    0    0     1    1    1    1    1    1    1    1    1    1    1    1    1    1    1    1    1    1    1    1    1    1    1    1    1    1    1    9    2    2    2    2    2    2    2    2    2    2    2    2    2 imports and less stringent foreign     9     1 Source: CSO (for Inflation) and HSIE (RBI) (for cereal stocks). exchange constraints—both an Figure 9: Yearly Movements in Index Number (Base: 1999–2000) of Food Imports (Quantum) and outcome of opening up of the InWPI Food Inflation Rate (Base: 2004–05) (1960–61 to 2009–10) dian economy since 1991—have 250 60 enabled India to import more 50 quantities of various food items to 200 Food Products Inflation 40 meet food requirements at times Index No of Food Import Food Articles Inflation of domestic shortage and escalat30 150 ing domestic food prices, thereby 20 helping to reduce food inflation 100 10 during the post-ER s period. This is 0 50 evident from Figure 9, Figures 10 -10 to 12 (p 58), which reveal the fol0 -20     1     3     5     7     9     1     3     5     7     9     1     3     5     7     9     1     3     5     7     9     1     3     5     7     9    0 lowing trends.     6     6     6     6     6     7     7     7     7     7     8     8     8     8     8     9     9     9     9     9     0     0     0     0     0    1   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –   –     0     2     4     6     8     0     2     4     6     8     0     2     4     6     8     0     2     4     6     8     0     2     4     6     8    9 (a) Since 1960–61, the quantum of     7     7     8     8     6     6     6     6     6     7     7     7     8     8     9     9     9     9     9     0     0     0     0     0    0     9     9     9     9     9     9     8     9     9     9     9     9     9     9     9     9     9     9     9     9     9     0     0     0     0     0    0     1     1     1     1     1     1     1     1     1     1     1     1     1     1     1     1     1     1     1     1     2     2     2     2     2    2 aggregate food imports responded Source: HSIE RBI (For Import Index) and CSO (For Inflation). mostly to food price shocks until 4.4 Role of Buffer Stocks and PDS: As pointed out by Gokarn 1975–76, followed by a phase of substantially lower food (2011), a credible level of food stocks can dampen price volatil- imports covering a 10-year period from 1976–77 to 1986–87 ity, possibly by keeping a check on speculative tendencies in (Figure 9). Food imports started responding to food price the market. Figure 8 reveals t hat historically, by and large, ce- spikes again from 1987–88 to 1995–96 though in a subdued real inflation rates and cereal stock levels have behaved simi- and erratic fashion. And from 1996–97 onwards food imports larly.29 Barring the period from 2002 to 2007, foodgrains (rice have responded overwhelmingly to domestic food price escaand wheat) buffer stock with t he government was significantly lation. Thus, India’s aggregate food imports remained at a higher in the post-ER s  period compared with other agrarian high level and were adequately responsive to food price escalapolicy regimes (Figure 8). As such, the higher food stocks tions before the mid-1970s  and after the mid-1990s. In the Figure 7: Food Subsidy in India 90,000

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interim period (1976–77 to 1995–96), India’s food imports were relatively low.31 (b) A commodity-wise analysis of trends in food imports32  vis-à-vi s food inflation since 1960–61 reveals that prior to the opening up of the Indian economy only the import of cereals, milk and milk products have responded adequately to the inflationary pressures witnessed in these commodities.33 The import of other food commodities, though responded positively to price escalation, was very limited during the same period (Figures 10 to 12, for example).34 On the other hand, after the opening up of the Indian economy, import of several Table 8: Trends in Percentage Composition of MPCE (at Current Pric es) on Groups of Food Items in Rural India (Share in Total Consumer Expenditure on Food) 1967– 68

Cereal Gram Cereal substitutes

1972– 73

1977– 78

1983

1987– 88

1993– 94

1999– 2000

2004– 05

2011– 12

58.69 55.72 50.96 49.25 40.99 38.30 37.31 32.72 24.62 (-2.97) (-4.76) (-1.71) (-8.2 5) (-2.69) (-0.99) (-4.59) (-8.10) 1.08 0.78 0.65 0.39 0.38 0.28 0.22 0.24 0.35 (-0.31) (-0.12) (-0.26) (-0.02) (-0.10) (-0.0 6) (0.02) (0.11) 1.08

0.75 0.52 0.28 0.21 0.17 0.12 0.13 0.14 (-0.34) (-0.23) (-0.23) (-0.08) (-0.04) (-0.04) (0.00) (0.01)

Pulses and pulse 5.69 5.88 5.93 5.37 6.22 6.02 6.41 5.59 6.39 products (0.19) (0.06) (-0.56) (0.85) (-0. 20) (0.39) (-0.82) (0.80) Milk and milk products

9.56 10.01 11.93 11.46 13.52 15.02 14.74 15.38 18.67 (0.45) (1.92) (-0.47) (2.06) (1.50) (-0.28) (0.64) (3.29)

Sugar

5.07

5.16 4.11 4.29 4.47 4.84 4.01 4.31 3.8 (0.09) (-1.06) (0.18) (0.19) (0.36) (-0. 83) (0.30) (-0.51)

Edible oil

3.76

4.82 5.55 6.14 7.82 7.03 6.29 8.36 7.75 (1.06) (0.73) (0.59) (1.67) (-0.79) (-0.74) (2.07) (-0.61)

Egg, fish and meat

3.10

3. 39 4.15 4.61 5.07 5.29 5.59 6.05 7.33 (0.29) (0.76) (0.46) (0.46) (0.22) (0.30) (0.46) (1.28)

Vegetables

4.22

4.94 5.87 7.19 8.16 9.56 10.38 11.08 9.95 (0.72) (0.92) (1.32) (0.97) (1.40) (0.82) (0.70) (-1.13)

Fruit s and nuts 1.16

1.40 1.74 2.12 2.55 2.76 2.89 3.39 3 .08 (0.24) (0.34) (0.38) (0.43) (0.21) (0.14) (0.49) (-0.31)

Figures in the brackets are percentage points change over the years. Percentage shares of individual food items do not add to 100 since salt and spices and beverages etc are excluded. MPCE = Monthly per capita expenditure. Source (Basic Data): NSSO (For 1967–68 to 1983); Household Consumer Expenditure in India, 2007–08; NSS 64th Round (Report No 530) (For 1987–88 to 2004–05); and Key Indicators of Household Consumer Expenditure in India, 2011–12; NSS 68th Round.

Table 9: Trends in Percentage Composition of MPCE (at Current Pric es) on Groups of Food Items in Urban India (Share in Total Consumer Expenditure on Food) 1967– 68

Cereal

1972– 73

1977– 78

1983

1987– 88

1993– 94

1999– 2000

2004– 05

2011– 12

38.06 36.17 34.09 32.85 26.46 25.69 25.70 23.65 19.02 (-1.90) (-2.08) (-1.25) (-6.39) (-0.77 ) (0.01) (-2.04) (-4.63)

Gram

0.47

0.49 0.42 0.32 0.29 0.32 0.23 0.25 0.32 (0.02) (-0.07) (-0.10) (-0.03) (0.03) (-0.0 9) (0.01) (0.07)

Cereal substitutes

0.23

0.20 0.17 0.13 0.12 0.12 0.09 0.12 0.14 (-0.04) (-0.02) (-0.04) (-0.01) (0.00) (-0.03) (0.03) (0.02)

Pulses and 5.63 5.29 5.95 5.46 6.04 5.55 5.90 5.03 5.59 pulse products (-0.3 4) (0.66) (-0.49) (0.58) (-0.49) (0.35) (-0.87 ) (0.56) Milk and milk 14.12 14.47 15.8 8 15.62 17.06 17.94 18.05 18.62 20.2 products (0.35) (1.41) (-0.26) (1.44) (0.88) (0.11) (0.57) (1.58) Sugar

5.40

5.58 4.40 4.16 4.19 4.35 3.41 3.55 3.0 (0.18) (-1.18) (-0. 25) (0.04) (0.16) (-0.95) (0.14) (-0.55)

Edible oil

6.14

7.52 7.73 8.19 9.47 8.03 6.53 8.13 6.89 (1.38) (0.22) (0.45) (1.28) (-1.44) (-1.50) (1.60) (-1.24)

Egg, fish and meat

4.86

5.07 5.77 6.10 6.33 6.19 6.52 6.36 7.25 (0.21) (0.71) (0.33) (0.23) (-0.14) (0.33) (-0.16) (0.89)

Vegetables

6.24

6.78 7.33 8.43 9.39 9.99 10.69 10.47 8.82 (0.55) (0.55) (1.09) (0.96) (0.60) (0.70) (-0.2 2) (-1.65)

Fruit s and nuts 2.75

3.11 3.26 3.57 4.49 4.87 5.03 5.29 4.55 (0.36) (0.15) (0.31) (0.92) (0.39) (0.16) (0.25) (-0.74)

– MPCE = Monthly per capita expenditure. Source: As in Table 8. Economic & Political Weekly

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agricultural products, Table 10: Central Issue Price (CIP) of Rice (Rs/quintal) namely, pulses, vegetaDate of Revision Common Fine Superfine bles, fruits, spices, milk 1982 (October) 188 200 215 products, edible oils, 1984 (January) 208 220 235 oil cake and sugar have 1985 (October) 217 229 244 increased significantly 1986 (February) 231 243 253 in response to the price 1986 (October) 239 251 266 239 264 279 shocks that occurred in 1987 (October) 244 304 325 these products. In par- 1989 (January) 1990 (June) 289 349 370 ticular, the increase in 1991 (December) 377 437 458 imports of many of these 1993 (Janua ry) 437 497 518 products was pheno1994 (February) 537 617 648 menal since the early Above Poverty Below Poverty 2000s and this may be Line (APL) Line (BPL) Common Grade A Common/Grade A the outcome of removal 350 of quantitative restric- 1997 (December) 550 700 1999 (January) 700 905 350 tions on farm imports 2000 (Apri l) 1,135 1,180 590 starting from 2001. 2000 (Jul y) 1,087 1,130 565 The implication of this 2001 (July) 795 830 565 food import pattern 2002 (April) 695 730 565 from the point of view 2002 (July) 795 830 565 of understanding food The classification of beneficiary category and grain variety changed since the introduction of TPDS in 1997. price behaviour is that has Source: Economic Survey  (Various Issues) and DAC, the positive import res- MoA, GoI. ponse to food price esca- Table 11: Central Is sue Price of Wheat lation witnessed prior to (Rs/quintal) Date of Revision Central Issue Price 1975–76 was restricted 1982 (Augus t) 160 NA only to cereals, milk and 1983 (Apri l) 172 NA milk products. In con- 1986 (February) 190 NA trast, the highly favour- 1987 (May) 195 NA 204 NA able import response to 1988 (March) 1990 (May) 234 NA food price escalation 280 NA recorded since the mid- 1991 (December) 1993 (January) 330 NA 1990s was broad-based, 1994 (February) 402 NA involving several agriAPL BPL cultural commodities. 1997 (June) 450 250 Farm imports were 1999 (January) 650 250 682 250 liberalised through three 1999 (April) 2000 (April) 900 450 key measures, namely, 2000 (July) 830 415 removal of quantitative 2001 (Jul y) 610 415 restrictions (from 2001), 2002 (Apri l) 510 415 lowering of tariff barri2002 (July) 610 415 ers and increasing the NA: Not Applicable. role of private traders Source: As in Table 10. in agricultural imports by way of decanalisation of imports.35 While these measures have enabled import of large quantities of food, decanalisation of imports might have produced an additional benefit in terms of adequate response of private sector imports to price rise against the pre-1990s  situation of only government controlled imports via state trading bodies/enterprises. 4.6 Cost of Production: One major factor determining food price inflation is the cost of production (CoP) in agriculture. In absolute terms, the trends in nominal C2 C oP36 in agriculture represented by two major food crops, namely, rice and wheat 57

SPECIAL ARTICLE

Figure 10: Yearly Movements in Cereal I mports (in Tonnes) and WPI Inflation Rate of Cerea ls (Base: 2004 –05) (1961–62 to 2009–10) 50

1,20,00,000

Inflationrate

1,00,00,000

40 30

80,00,000    e    n    n    o     T

60,00,000

   e    g    a    t    n    e    r 10    c    e     P

20

Import

40,00,000

Table 12: Offtake under the Public Distribution System/TPDS (in Million Tonnes) Year

Rice

1990–91

7.87

NA

Wheat

7.08

NA

1991–92

10.17

NA

8.83

NA

1992–93

9.55

NA

7.47

NA

1993–94

8.87

NA

5.91

NA

1994–95

8.03

NA

4.83

NA

0

1995–96

9.75

NA

5.81

NA

0

-10

1996–97

11.14

NA

8.52

NA

-20,00,000

-20

9.9

NA

7.08

NA

20,00,000

    2     6   –     1     6     9     1

    4     6   –     3     6     9     1

    6     6   –     5     6     9     1

    8     6   –     7     6     9     1

    0     7   –     9     6     9     1

    2     7   –     1     7     9     1

    4     7   –     3     7     9     1

    6     7   –     5     7     9     1

    8     7   –     7     7     9     1

    0     8   –     9     7     9     1

    2     8   –     1     8     9     1

    4     8   –     3     8     9     1

    6     8   –     5     8     9     1

    8     8   –     7     8     9     1

    0     9   –     9     8     9     1

    2     9   –     1     9     9     1

    4     9   –     3     9     9     1

    6     9   –     5     9     9     1

    8     9   –     7     9     9     1

Source: Food and Agriculture Organization STAT (FAOSTAT) (for imports) and CSO (for inflation).

    0     0     0     2   –     9     9     9     1

    2     0   –     1     0     0     2

    4     0   –     3     0     0     2

    6     0   –     5     0     0     2

    8     0   –     7     0     0     2

    0     1   –     9     0     0     2

Figure 11: Yearly Movements in Pulse s Imports (in Tonnes) and WPI Inflation Rate of Puls es (Base: 2004 –05) (1961–62 to 2009 –10) 60

40,00,000

50

Import

Inflation rate

35,00,000

40 30,00,000

30

25,00,000

20

20,00,000

10

5,00,000 0

    2     6   –     1     6     9     1

    4     6   –     3     6     9     1

    6     6   –     5     6     9     1

    8     6   –     7     6     9     1

    0     7   –     9     6     9     1

    2     7   –     1     7     9     1

    4     7   –     3     7     9     1

    6     7   –     5     7     9     1

    8     7   –     7     7     9     1

    0     8   –     9     7     9     1

    2     8   –     1     8     9     1

    4     8   –     3     8     9     1

    6     8   –     5     8     9     1

    8     8   –     7     8     9     1

    0     9   –     9     8     9     1

    2     9   –     1     9     9     1

    4     9   –     3     9     9     1

Source: As in Figure 10.

Figure 12: Yearly Movements in Edible Oils Im ports (in Tonnes) and WPI Inflation Rate of Edile Oi ls (Base: 2004–05) (1961–62 to 2009–10) 90,00,000 80,00,000 70,00,000 60,00,000 50,00,000 40,00,000 30,00,000 20,00,000 10,00,000 0

Inflation rate rate Inflation

Import Import

60 50 40 30 20 10 0 -10 -20 -30

       2        4        6        8        0        2        4        6        8        0        2        4        6        8        0        2        4        6        8        0        2        4        6        8        0        6        6        6        6        7        7        7        7        7        8        8        8        8        8        9        9        9        9        9        0        0        0        0        0        1    –    –    –    –    –    –    –    –    –    –    –    –    –    –    –    –    –    –    –        0    –    –    –    –    –        1        3        5        7        9        1        3        5        7        9        1        3        5        7        9        1        3        5        7        2        1        3        5        7        9        6        6        6        6        6        7        7        7        7        7        8        8        8        8        8        9        9        9        9    –       0        0        0        0        0        9        9        9        9        9        9        9        9        9        9        9        9        9        9        9        9        9        9        9        9        0        0        0        0        0        1        1        1        1        1        1        1        1        1        1        1        1        1        1        1        1        1        1        1        9        2        2        2        2        2        9        1

    6     9   –     5     9     9     1

    8     9   –     7     9     9     1

    0     0     0     2   –     9     9     9     1

    2     0   –     1     0     0     2

    4     0   –     3     0     0     2

    6     0   –     5     0     0     2

    8     0   –     7     0     0     2

    0     1   –     9     0     0     2

BPL+AAY APL

1998–99

3.35

7.27

2.62

5.20

1999–200 0

3.98

7.21

3.02

2.60

2000 –01

5.92

1.94

3.76

0.17

2001–02

6.74

1.30

4.99

0.53 1.64

2002–03

9.28

1.17

7.98

2003– 04

11.41

1.86

8.56

2.11

2004–05

13.24

3.23

9.69

3.20

2005–06

14.40

4.66

8.69

3.36

2006–07

15.30

5.82

7.60

2.65

2007–08

16.66

5.79

7.91

2.93

16.36

5.71

8.82

3.71

2009 –10

16.88

6.54

9.47

9.53

2010–11

17.97

6.87

9.13

9.75

2011–12

17.91

6.41

9.10

9.68

-20

2012–13

18.20

7.03

9.78

9.87

-30

NA: Not Applicable; As in Table 10. Source: Economic Survey  (various issues) and IndiaStat.Com (from 1998–99).

-10 10,00,000

BPL+AAY APL

2008–09

0

15,00,000

1997–98

-40

2010).37 As regards fuel prices, the average diesel price inflation witnessed during the post-ER s period  was higher than t he maturing stage of the Green Revolution (Table 6). However, interestingly, as indicated earlier, the real agricultural wages increased at a much slower rate during the post-ER s period compared to maturing stage of the Green Revolution. These trends suggest that the higher increase in CoP in Indian agriculture after the economic reforms period was not attributed to higher increases in cost of farm labour.38 Thus, the relatively low food price inflation in the post-ER s period despite the higher overall cost of food production was due to an over whelming response of other factors discussed above.

Source: As in Figure 10.

Figure 13: C2 Cost of Production of Rice a nd Wheat (Rs/quintal)

5 Summary and Policy Conclusions

In this paper, we have analysed the trends in food price inflati on in India in relation to the performance of the agricultural sector 500 Rice Rice during the pre- and post-ER s periods. It is revealed that, on aver400 age, food price inflation was lower during the post-ER s  as a 300  whole compared to the initial and maturing stages of the Green Wheat Wheat 200 Revolution. This is despite the decline in the agricultural sector 100 during the post-ER s period and the persistently high food inflation witnessed in recent years which, among others, was caused 0 due to supply-side constraints, growing demand for protein-rich food items and rising cost of food production (for details see Source: Dev and Rao (2010). Basu 2011; Chand 2010; Nair and Eapen 2012; Nair 2013). Surreveals that post-ER s period saw faster increases in CoP than the prisingly, the maturing stage of the Green Revolution, which is maturing stage of the Green Revolution (Figure 13). A similar considered a turning point in India’s agricultural development trend was recorded in the growth rate of real CoP (Dev and Rao (Bhalla and Singh 2009), has not turned out to be price friendly, 600

       2        3        4        5        6        7        8        9        0        1        2        3        5        6        7        8        9        0        1        2        3        4        5        6        7        8        8        8        8        8        8        8        8        9        9        9        9        9        9        9        9        9        0        0        0        0        0        0        0        0    –    –    –    –    –    –    –    –    –    –    –    –    –    –    –    –    –        0    –    –    –    –    –    –    –        1        2        3        4        5        6        7        8        9        0        1        2        4        5        6        7        8        2        0        1        2        3        4        5        6        8        8        8        8        8        8        8        8        8        9        9        9        9        9        9        9        9    –        0        0        0        0        0        0        0        9        9        9        9        9        9        9        9        9        9        9        9        9        9        9        9        9        9        0        0        0        0        0        0        0        1        1        1        1        1        1        1        1        1        1        1        1        1        1        1        1        1        9        2        2        2        2        2        2        2        9        1

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 with both food articles and food products inflation rates ruling high on average during this phase. In our view, the following factors explain these results. First, agricultural growth was more stable during the postER s period than the initial and maturing stages of the Green Revolution. Second, there was a major shift in food consumption towards high-value food commodities during the maturing stage of the Green Revolution. Third, the moderate increases in MSP from 2001 to 2007 significantly reduced cereal prices and inflationary expectations during this period thereby helping achieve lower average food inflation in the post-ER s period. Fourth, the downward revision in a nd freeze onCIP since the early 2000s resulted in higher offtake of foodgrains from PDS  at highly subsidised prices. Fifth, the foodgrains buffer stock situation improved significantly in the post-ER s  period thereby strengthening the government’s capacity to release grains in the open market to check price rise. Fifth, the coverage and performance of PDS has improved over the years. Sixth, thanks to the opening up of foreign trade, and a comfortable foreign exchange reserve s position since 1992, India succeeded in importing adequate food to meet domestic shortages and to Notes

  1 Post-economic reforms period refers to the period after 1991. 2 Following literature, we exclude 1965–66 and 1966–67 as they experienced two unprecedented droughts and a war (India–Pakista n). 3 As the economic reform programme was introduced from July 1991, its effect on the economy could not have been felt prior to 1992–93 (Panagariya 2004). 4 For details of this strategy, see Bhalla (2007); Swaminathan (2012). 5 It is be noted that output performance of a few food commodities, namely, milk, egg, fish and meat included in our analysis are not linked to the Green Revolution strategy as it was guided by sector-specific policy interventions such as the Operation Flood programme launched in 1970 to boost milk production and “Blue Revolution” efforts to modernise Indian capture fisheries from the mid-1950s onward. 6 During 1980–81 to 1990–91, the yield growth accounted for 80.25% of growth of output, against the figures of 58.45% and 38.41% recorded during 1949–50 to 1964–65 and 1967– 68 to 1980–81 respectively (Bhal la 2007). 7 However, the changes introduced in India’s macroeconomic, industrial and trade policies as part of economic liberalisation have influenced the agrarian environment in varied  ways. For details see Landes and Gulati (2004). 8 For details about factors responsible for agrarian slowdown, see Bhalla (2007); Chand, Raju and Pandey (2007); Landes and Gulati (2004).   9 The underperformanc e of growth rate of agricultural GDP after the economic reforms is more evident from the robust overall GDP growth rate experienced during the same period. 10 The WPI available in various bases is converted into a common (2004–05) base using linking factor. 11 The data on food articles inflation rate is available only from 1954–55. 12 The complete data sets are available from the authors upon request. 13 See footnote 12. Economic & Political Weekly

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control price shocks.39  In contrast, the periods before economic liberalisation were constrained by a restricted trade regime, perennial foreign exchange shortages, and an unfavourable international community, all of which made it difficult to exercise the import option liberally. The policy implications of our findings are as follows: (a) it seems that, in the long run, a combination of a liberal foreign trade regime and stable, but not necessarily high, agricultural growth and food output can be helpful to keep food inflation under control;40 (b) along with the level of agricultural growt h, attention must be paid to the stability of growth (Chand 2010); (c) moderate hikes in MSP and lower PDS price can have a softening effect on food prices, but at the cost of an enlarged food subsidy bill; (d) a better level of buffer stock a nd increase in accessibility of the PDS can help stabilise food prices; (e) from an inflation angle, the concerns about the deceleration of agricultural growth during the post-ER s period are unfounded; and (f) the notion that economic (trade) liberalisation and the consequent strengthening of the foreign exchange reserve position have led the government to be less focused on agricultural selfsufficiency since 1992 (Landes and Gulati 2004) has substance.

14 We measured policy regime-wise average food inflation rate after taking into account the spill-over effect of output shock occurring in one policy regime on the price situation in another regime. For details, see notes to Tables 3 and 4. The conclusions remain the same if average inflation rate is measured  without this adjustment. 15 After the economic reforms a similar shift in food consumption pattern was experienced between 2004 a nd 2012 (Tables 8 and 9). Also, see Nair (2013). 16 Being drought year we exclude MPCE data for 2009–10. As the number of years is not uniform across the NSSO survey rounds, the percentage point change reported in Tables 8 and 9 are not strictly comparable. 17 Interestingly, the proportion of total food inflation contributed by protein foods increased further after the economic reforms, while the contribution from fruits and vegetables remained the same. The trends emanating from Figure 3 largely confirm Gokarn’s (2011) finding that over the years, protein foods and fruits and  vegetables emerged as the predominant contributor to food inflation in India. 18 See Table 1 in Himanshu (2005) and Table 1A in Usami (2012) (for raw data). 19 In particular, see Table 6 in Chavan and Bedamatta (2006). 20 The price at which foodgrains are supplied under PDS is called central issue price (CIP). Under Open Market Sale Scheme (OMSS), the government through the Food Corporation of India (FCI) sells foodgrains at predetermined prices in the open market to check the rise in their market prices and to dispose part of surplus food stock with the government. 21 Similar trend was witnessed in the growth of MSP in real ter ms (see Dev and Rao 2010). Several factors have contributed to the higher MSP after the economic reforms. For details see Dev and Rao 2010; Landes and Gulati (2004); Saini and Kozicka (2014); Tripathi (2014). 22 This is the outcome of the policy of restraint in announcing hike in the MSP followed by the government during the first half of the last decade with the goals of removing market vol l no 31

23 24

25

26 27

28

29 30

31

32

33

distortions and restoring the role of private trade in the grain market, thereby reducing the pressure on government to procure more foodgrains (GoI 2005: 2006). The offtake under OMSS was also high during most of the years in this per iod. The other major factor contributing to easing of buffer stock was the higher export of rice and wheat permitted by the government at a heavy discount price and lower wheat procurement in 2005–06 and 2006– 07. For details, see Nair and Eapen (2011; 2012). The offtake declined due to reduced difference between the PDS price and open market prices,  which induced a large sec tion of APL beneficiaries to move out of the PDS, and due to introduction of TPDS since 1997 (Chand 2005; GoI 2002). 2006 to 2012 in case of wheat. For a detailed account of circumstances leading to the sharp increase in MSP from these periods, see Nair and Eapen (2011; 2012). During 2010–11 and 2011–12 the prices of rice and wheat remained low despite high MSP. This was due to record output on the back of good monsoon (GoI 2011; 2012). See Gokarn (2011) for similar trends in 1990s and 2000s. In fact, long-term trends reveal that the offtake of cereals from the central pool increased significantly after the economic reforms compared to earlier periods. The decline in the food imports during this period was contributed by the significant reduction witnessed in the cereals imports (Figure 10). Cereal imports dec lined due to attai nment of higher degree of foodgrain self-sufficiency by India thanks to Green Revolution (Sathe and Deshpande 2006). Except milk and milk products, the import figures analysed in t his paper consists only of raw component. Milk imports contain both raw and processed forms. The better import response to inflation of foodgrains, cereals, and milk is reflected in their lower average inflation before the Green Revolution and during its in itial stages (Table 6).

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34 Only the figures for selected commodities are presented here. The figures for other commodities are available from the authors upon request. 35 Decana lisation involves reduction of state agencies monopoly rights over imports. 36 CoP includes actual paid out costs on purchased inputs plus imputed value of family labour, rental value of owned land and interest on value of owned fixed capital assets (De v and Rao 2010). 37 CoP of rice in consta nt prices has grown by 1.46% during 1994–95 to 2006–07, while the rate was -0.13% between 1981–82 and 1992–93. The growth figures for wheat respectively, are 1.41% and -1.96%. 38 It is another matter that, due to various reasons, real farm wages increase d sharply from 2007–08 thereby pushing up the food prices in the recent times. For details, see Gulati and Saini (2013) and Gulati, Jain and Satija (2013). 39 This finding supports the proposition that low food output and low food prices can coexist in a liberal import policy environment (Dev and Rao 2010). 40 For similar conclusion, see Ganesh-Kumar and Parik h (1998). They, using Monte Carlo simulations, show that a trade liberalisation along with a suitable level of buffer stocks can ensure food price stability. However, too much dependence on liberal trade for meeting country’s food requirement can at any time in vite the risks of stoppage of trade owing to “politics of trade” (Ba su 2011) and of short-supply in the international market due to climatic reasons. Hence, the need for maintaining some reasonable level of self-sufficiency in food cannot be ignored.

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