Reasons for high food inflation...

Tue, 31 Dec Pre-Open

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Inappropriate storage facilities, wastages and supply shocks are deemed to be the primary reasons for rising food inflation. However, this is a myth. While these factors do influence food prices, neither of them are responsible for the double digit food inflation currently witnessed. India's food inflation problem is self inflicted. In other words, apart from demand and supply, there are other external factors that have resulted in food inflation.

Recently, onion prices breached the Rs 100 mark. Neither was there a supply crunch due to lower harvest nor was there any wastage resulting from inadequate storage facilities. Yet, onion prices rose sharply. And then TOO came down rapidly after a brief period of time. Why? The demand supply economics had not changed dramatically in such a short span of time to justify such a volatile price movement. This suggests there is more to food inflation than it meets the common man's eye.

Well, a draconian regulation named as Agricultural Produce Marketing Committee (APMC) act may have been the primary reason for high volatility in food prices. Let us first understand why the law came into existence and then we will see how it is responsible for rising food inflation in the country.

APMC act is a 50 year old law. It was established to protect the interests of the farmers and traders as well as regulate trade in agricultural commodities. The act provides a platform, called mandis, for farmers to sell their produce. This ensures a ready market for farmers to sell their crop and results in price discovery.

However, a deeper look reveals that mandis have become a breeding ground where auctions are rigged and the interests of the farmers are exploited. A farmer generally comes to the mandi to sell his produce. The traders in the mandi enter into an auction to buy the produce. However, these auctions are generally rigged. Sometimes the price that the farmer gets through auction is even lower than the market price. Thus, the farmer has to sell his produce for pittance as he has no other option to part with it. Also, if the commodity is in demand, traders create artificial scarcity by not conducting an auction. This inflates the prices. Further, there are so many middlemen in this entire trade that by the time the produce reaches the end consumer prices increase significantly.

One solution to this problem is that gradually most fruits and vegetables should be excluded from the APMC purview and should be sold directly to the consumer. This eliminates middlemen in this trade. However, eliminating mandis all together may also not be a good idea since they are a platform through which farmers sell their produce. Again most of these mandis are owned by politicians. Hence, there are very little chances that mandis will get eliminated overnight. Eliminating mandis means eliminating the cream which politicians make by exploiting farmers and the common man.

If the mandi trade cannot be abolished, the government should at least take some efforts to improve the auction mechanism and bring in some transparency to the system. Also, buying the produce directly from farmers and creating alternative trading platforms are some of the means through which food inflation can be controlled.