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Food prices are retreating. For now, in our view. High and volatile food prices are a
structural problem for India and overcoming this problem requires far reaching reforms.
Variations from meteorological vagaries notwithstanding, food prices in India are being
influenced by a combination of rising demand and stable to declining growth in
agriculture productivity.
Raising productivity requires wholesale reforms – ranging from land consolidation,
rationalisation of subsidies to building a more efficient supply chain. Even these reforms
are carried out; it will take several years to reap the effects.
In the absence of these reforms, food prices will remain a structural pressure point on
inflation.
A critical feature of Indian agriculture has been the deceleration in food grain production. In
the 1980’s, agricultural production increased by a cumulative 32%. In the 1990s, it slowed to
24% and further to 19% in the next decade. In fact, output growth has not even kept pace
with population growth so much so, that the per capita availability of food has tapered off,
albeit marginally. In fact, this aggregate statistic of per capita availability would rate poorly
when considered against the backdrop of the country’s shifting demographics. By this we
specifically refer to the increase in the 15 yrs – 24 yrs age cohort in overall population. Food
consumption tends to be higher in this age group.
Of course, on its own, the availability of food is not an adequate measure. Food availability could
well be declining but may still exceed requirements. This however, is not the case in India. The
country suffers from a high level of undernourishment implying that requirements are not being
met. In an Asian context, only Bangladesh is reported to have a higher level of undernourishment
than India.
Why the slowdown in agriculture output? There are several reasons but the primary one is
slowing productivity growth, normally measured as the yield per hectare. As Figure 3 shows,
productivity growth has accelerated in the 1960s but has been slowing since. This slowdown
suggests that the gains from the ‘green revolution’ have been more or less exhausted. The green
revolution started in the mid-1960s was a programme aimed at attaining self-sufficiency in food.
From a technical aspect, it entailed the use of high yielding varieties of seeds, increased use of
fertilisers and a shift from single to multiple cropping. The attendant improvement in productivity
was exceptionally positive in the initial phase but in the subsequent phase, gains stagnated.
Other factors have also weighed on agriculture output. The area under cultivation has also
stagnated due to urbanisation/industrialisation and has not compensated for the loss in yields.
Wastage is also high and for fresh produce, is estimated to be as much as 20%. Finally, the
supply chain from the farmer to the end-consumer is littered by middlemen. Higher prices very
often accrue to these middlemen and not to the farmer. As a consequence, the conventional
argument that price signals will enable farmers to respond with higher output does not hold much
water.
On the flipside, demand for food has increased in line with the country’s rapid growth for several
reasons. India is still a low per capita income country (USD1200) and as mentioned earlier, the
level of undernourishment is high and demographics are shifting. According to estimates by the
World Bank, the income elasticity for food grains remains high at 0.4-0.6 for countries with per
capita incomes of up to USD3000. It is only at the upper end of this estimate that demand for food
grains gives way to higher demand for meat. In the Indian context, this implies that for every 10%
increase in per capita income, demand for food grains has increased by around 6%.
Put this in the context of India’s growth. From 2003, there has been a step elevation in India’s per
capita income growth. From an average of 4.8% during 1998-2003, per capita income (PPP
basis) growth has increased to 9.4% thereafter. As the trickle down effect of this growth came
through and the ruling Congress administration initiated spending programmes to promote
‘inclusive’ growth, the demand for food has risen sharply. Key amongst these has been the
administration’s flagship National Rural Employment Guarantee Act (NREGA) which provides 100
days of work per year to any rural household that requests it. This additional income arising from
this programme has lifted the demand for food in the rural sector.
In the coming years, demand for food could even accelerate further. India has one of the
youngest demographic profiles i.e. growth in the 15yrs-24yrs segment will be amongst the highest
globally. Government policy would be another influence. One of the legislations currently under
consideration is the Food Security Act. The Food Security Act is essentially a legal guarantee for
ensure subsidised food grain to the ‘below the poverty line (BPL)’ population. At this stage, it is
not clear whether the legislation will increase or decrease the demand for food. Much will depend
on political deliberations on the size of the population to be included in BPL. At present there are
four different estimates ranging from 27.5% to 77% of the population that are being contemplated.
Our view is that the only solution is to boost local production. Large scale importation of food is
not a feasible option for a populous country like India – this is bound to bid up prices in the
international market. Fortunately, the government has taken some steps towards improving the
supply of food, presumably in response to the recent surge in food prices. These steps include
higher outlays for agriculture production and incentives for improving storage. To improve
agriculture productivity, the government has also revamped the existing detrimental fertiliser
subsidy policy. Still, in the overall scheme of things, these remain baby steps. Many other steps
such as enhancing the area under irrigation, consolidating small and fragmented land holdings
and elimination of middlemen in the food supply chain are essential.
Until these measures are taken, food prices will remain a structural source of pressure on
inflation.
Apart from directly contributing to inflation, spill over from food inflation to core inflation is
generally high in low income economies like India. A recent study by the IMF estimated that a 1%
increase in food prices results in 0.15% increase in core inflation in the short run and a 0.4%
increase over the long term. This is because of the large impact food prices have on inflation
expectations. Moreover, public sector wages tend to be indexed to the cost of living. Of this food
is an important component.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Food prices are retreating. For now, in our view. High and volatile food prices are a
structural problem for India and overcoming this problem requires far reaching reforms.
Variations from meteorological vagaries notwithstanding, food prices in India are being
influenced by a combination of rising demand and stable to declining growth in
agriculture productivity.
Raising productivity requires wholesale reforms – ranging from land consolidation,
rationalisation of subsidies to building a more efficient supply chain. Even these reforms
are carried out; it will take several years to reap the effects.
In the absence of these reforms, food prices will remain a structural pressure point on
inflation.
A critical feature of Indian agriculture has been the deceleration in food grain production. In
the 1980’s, agricultural production increased by a cumulative 32%. In the 1990s, it slowed to
24% and further to 19% in the next decade. In fact, output growth has not even kept pace
with population growth so much so, that the per capita availability of food has tapered off,
albeit marginally. In fact, this aggregate statistic of per capita availability would rate poorly
when considered against the backdrop of the country’s shifting demographics. By this we
specifically refer to the increase in the 15 yrs – 24 yrs age cohort in overall population. Food
consumption tends to be higher in this age group.
Of course, on its own, the availability of food is not an adequate measure. Food availability could
well be declining but may still exceed requirements. This however, is not the case in India. The
country suffers from a high level of undernourishment implying that requirements are not being
met. In an Asian context, only Bangladesh is reported to have a higher level of undernourishment
than India.
Why the slowdown in agriculture output? There are several reasons but the primary one is
slowing productivity growth, normally measured as the yield per hectare. As Figure 3 shows,
productivity growth has accelerated in the 1960s but has been slowing since. This slowdown
suggests that the gains from the ‘green revolution’ have been more or less exhausted. The green
revolution started in the mid-1960s was a programme aimed at attaining self-sufficiency in food.
From a technical aspect, it entailed the use of high yielding varieties of seeds, increased use of
fertilisers and a shift from single to multiple cropping. The attendant improvement in productivity
was exceptionally positive in the initial phase but in the subsequent phase, gains stagnated.
Other factors have also weighed on agriculture output. The area under cultivation has also
stagnated due to urbanisation/industrialisation and has not compensated for the loss in yields.
Wastage is also high and for fresh produce, is estimated to be as much as 20%. Finally, the
supply chain from the farmer to the end-consumer is littered by middlemen. Higher prices very
often accrue to these middlemen and not to the farmer. As a consequence, the conventional
argument that price signals will enable farmers to respond with higher output does not hold much
water.
On the flipside, demand for food has increased in line with the country’s rapid growth for several
reasons. India is still a low per capita income country (USD1200) and as mentioned earlier, the
level of undernourishment is high and demographics are shifting. According to estimates by the
World Bank, the income elasticity for food grains remains high at 0.4-0.6 for countries with per
capita incomes of up to USD3000. It is only at the upper end of this estimate that demand for food
grains gives way to higher demand for meat. In the Indian context, this implies that for every 10%
increase in per capita income, demand for food grains has increased by around 6%.
Put this in the context of India’s growth. From 2003, there has been a step elevation in India’s per
capita income growth. From an average of 4.8% during 1998-2003, per capita income (PPP
basis) growth has increased to 9.4% thereafter. As the trickle down effect of this growth came
through and the ruling Congress administration initiated spending programmes to promote
‘inclusive’ growth, the demand for food has risen sharply. Key amongst these has been the
administration’s flagship National Rural Employment Guarantee Act (NREGA) which provides 100
days of work per year to any rural household that requests it. This additional income arising from
this programme has lifted the demand for food in the rural sector.
In the coming years, demand for food could even accelerate further. India has one of the
youngest demographic profiles i.e. growth in the 15yrs-24yrs segment will be amongst the highest
globally. Government policy would be another influence. One of the legislations currently under
consideration is the Food Security Act. The Food Security Act is essentially a legal guarantee for
ensure subsidised food grain to the ‘below the poverty line (BPL)’ population. At this stage, it is
not clear whether the legislation will increase or decrease the demand for food. Much will depend
on political deliberations on the size of the population to be included in BPL. At present there are
four different estimates ranging from 27.5% to 77% of the population that are being contemplated.
Our view is that the only solution is to boost local production. Large scale importation of food is
not a feasible option for a populous country like India – this is bound to bid up prices in the
international market. Fortunately, the government has taken some steps towards improving the
supply of food, presumably in response to the recent surge in food prices. These steps include
higher outlays for agriculture production and incentives for improving storage. To improve
agriculture productivity, the government has also revamped the existing detrimental fertiliser
subsidy policy. Still, in the overall scheme of things, these remain baby steps. Many other steps
such as enhancing the area under irrigation, consolidating small and fragmented land holdings
and elimination of middlemen in the food supply chain are essential.
Until these measures are taken, food prices will remain a structural source of pressure on
inflation.
Apart from directly contributing to inflation, spill over from food inflation to core inflation is
generally high in low income economies like India. A recent study by the IMF estimated that a 1%
increase in food prices results in 0.15% increase in core inflation in the short run and a 0.4%
increase over the long term. This is because of the large impact food prices have on inflation
expectations. Moreover, public sector wages tend to be indexed to the cost of living. Of this food
is an important component.
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