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Food inflation here to stay? - Views on News from Equitymaster

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Food inflation here to stay?
Dec 22, 2009

'Food prices rise 20%' screamed the headlines the other day. Why are food prices rising so much? Is it because the cultivable land is insufficient to keep pace with the growing demand? Could it be because of the rising minimum support price (MSPs)? Or maybe the subpar monsoons have affected the crop. The answer is a little complicated. Let us also explore whether food inflation will ever be in control.

Land availability
The first important question we have to ask is what is the available cultivable land? It is 182.57 m hectares as of 2005-06. Second important question is what is the total land under crops? It is 121.6 m hectares as of 2005-06. That means approximated 33% of the land which is cultivable is not under any crop as of now. Another important question to ask is what percentage of the land under crops is irrigated. The answer is 60%. Hence, 40% of the existing land under crop and 60% of the potential cultivable land is depended on monsoons.

Yield
Over the years the average yields per hectare have been increasing in India. As an example, the yield of wheat was 16.3 quintal per hectare in 1980-81. This increased to 26.2 quintal per hectare in 2005-06. The question that arises here is whether the average yield has stagnated. To test this we use an example. On comparing the average yield of wheat in India with the yield of wheat in Punjab we find that the yield in Punjab is higher by 60%. This means that the scope to increase wheat in the current area is 60%. Anecdotal evidence from our interaction with farmers, leads us to understand that the yield in other states are affected by various factors like unavailability of quality fertilizers, use of incorrect pesticides, use of seeds which are not of good quality and not following the required instructions for watering the crop.

Minimum support price (MSP)
Another important factor for food price increase is the MSP set by the government. An increase in this price is passed on directly to the consumer. However, when we examine the rise in MSP between 2008 and 2009 we find that barring rice which increased by 30%, the price for other commodities registered only a marginal increase.

Conclusion
From the above observations we concluded that there is no paucity of land which is leading to food shortage in the market. There is also an ample scope to increase the yield of crops. This is provided there is sufficient resources avail to the farmers and they receive proper guidance. Furthermore, the current price increase is not due to an increase in MSP. Instead it is as a result of weak monsoons as proper infrastructure is not in place for irrigation. Also the middle-men are responsible for this increase as they are further compounding the shortage by hoarding and artificially pushing up the prices. This leads us to believe that the food inflation we see is a temporary phenomenon and we can get relief from it if we have normal monsoons next year. However, this phenomenon can become a permanent feature if the government doent take adequate steps to support farmers and ensures that the supply chain from farmers to consumers is free from unscrupulous profit mongers.

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2 Responses to "Food inflation here to stay?"

Gorkhs Daju

Jan 6, 2010

The export and thereafter, the subsequent import of sugar (among other food items) could have been highlighted to shed light on the gross mismanagement of our Union Finance Minister Pranab Mukerjee's Economic Team and Leadership.

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s.suryaprakasam

Jan 6, 2010


eagerly looking forward to the population of India to cross 2 billion mark so that it will become another Somalia or Ethiopia with starvation and Malthusian effects. Hats of to our planners. At least in one aspect, we will surpass China.

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