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Five steps that government can take to reduce food inflation

Food Inflation

India could wipe out $49 billion from its GDP if global food prices double, says new research by the United Nations Environment Programme (UNEP) and the Global Footprint Network. China could lose $161billion in GDP. The two countries will be the worst affected among 110 countries in terms of absolute loss of GDP.

The next global food shock will be created by the lethal combination of rising consumer demand and fluctuating supply, thanks to climate change, water scarcity and environmental degradation. And it will likely result in India’s GDP dropping 2.4%, the consumer price index (CPI) rising 13.8% and the sovereign credit rating plummeting by three notches, the report says.

Runaway food inflation will force households to spend even more on food from the present 44% of their income. Imported food staples will become expensive, distorting the trade balance.

Government subsidies to make food affordable will widen the budget deficit. Together, these will emerge as material risks to our creditworthiness.

The UNEP study underlines two facts. One, food inflation has the potential to sink the entire economy. Second, India and China are enormous players within the global food system, accounting for more than a third of the world cereal, cooking oil, soya bean, sugar and meat consumption. This means that the biggest threat could be brewing at home and not overseas.

India’s average food inflation during 2006-13 was one of the highest among emerging market economies, and nearly double the inflation we saw during the previous decade. Indeed, food inflation beat non-food inflation by about 3.5 percentage points on average during 2006-13. Higher incomes have increased consumer demand.

But inflation is also the result of inefficiencies in the food supply chain: agriculture, the food processing industry and the food wholesale and retail distribution sectors.

Can we prevent the crisis forecast by the UNEP report? Here are five steps that the government can take to reduce food inflation:

Take tech seriously: GoI should accelerate technology dissemination, especially relating to environmental sustainability, climate change, crop yields and mechanisation. This will reduce dependence on costly inputs, labour and chemicals, and stimulate food supply.

The Indian Council of Agricultural Research estimates that each of its Krishi Vigyan Kendras transfer on an average 7.5 technologies annually. Government extension workers have been able to reach only 7% of farm households. The private sector is, therefore, important. Around 120 million hectares is suffering from soil, wind and water erosion, and chemical and physical degradation.

Info supply chain: The government should invest in a market information system for accurate and timely data of crop production, trade and prices. This will send right price signals from consumers to the supply chain, improve bargaining power and reduce business risk and response time. Research shows that information raises net income per hectare by more than 12%.

Real competition: GoI should end rent-seeking in the food supply chain by encouraging competition through efficient markets. Removing barriers such as mandi licences and state taxation laws will puncture marketing margins. Consumers rarely benefit from any crop price fall because of the marketing margin commanded by the biggest players.

A rise in crop prices, however, is quickly passed through to protect profits. The case of onions shows how both farmers and consumers are exploited by powerful cartels. The more intense the competition, the lower price levels are likely to be. ]

Calm volatility: GoI should encourage strengthening of the supply pipeline by the private sector to reduce price volatility. There is an inverse relationship between stocks in the pipeline and prices. Smaller the stocks lying in godowns, higher the prices shoot.

Since there is virtually no chana left over from last season, price of the new crop harvested in March 2016 is spiking. Instead of treating stockists as criminals under the Essential Commodities Act (ESA), a transparent online mechanism to track commodities lying in warehouses should be introduced.

Don’t keep poking: The government should stop market interventions in its zeal to balance consumer and farmer interests. Last year, import duty was raised and an export
was announced to raise sugar prices so that mills could pay sugarcane farmers. Now, GoI is hurrying to protect consumers by removing the subsidy, imposing stock limits and lowering import duty.

Ultimately, both farmers and consumers were left dissatisfied while business risk has heightened. Rising food prices are the outcome of farm costs, business risk premium and market concentration. We can lower all three through a smarter mix of technology, institutions and policies.

The consumer is more prosperous and demanding. But the hand that feeds her is shaky. Unless we act urgently, our economy is in double jeopardy.

The writer is chief marketing officer, NCDEX

DISCLAIMER : Views expressed above are the author’s own.