Food inflation in India By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

September 21, 2016 | Posted by bobbysrinivasan << back to blog

The current rate of food inflation (September 5, 2016) is around 6% and threatening to move up. What worries is the disconnect between prices in in India and the global commodity price. This is a conversation between a student and his professor.

Student: Professor, you showed us in the class that the price of wheat per bushel in the Chicago Mercantile Exchange (CME) is around US $ 3.10. I read in the internet that a bushel is equal to 60 bounds. All that CME is saying is that price per Pound of wheat is 5 Cents and 11 Cents a Kilo (around Rs. 8 per Kilo). I checked the retail price of wheat in India. It is closer to Rs. 40 a Kilo. Why is there so much difference?

Professor: You are right. Currently wheat price is only around US $ 3 per bushel. This I believe is a 10 year low. At the peak wheat was selling at $ 13 a bushel, it has dropped nearly 75%.

Student: If it so cheap in the US why not India buy wheat from them? The imported wheat will definitely push the local price way down. Will this not lower our high inflation rate?

Professor: First, you must understand the Indian agriculture. 60 to 65% of the population in India lives in villages. Raising crops and harvesting them is their main activity. Most of the land owned by individual farmers is less than 1 acre and there is a small segment of them are called agriculture land lords and who own around 5 hectares or more. Food production in India is highly inefficient. If we look at the labour force, in Indian agriculture employs very very large numbers. With no productivity standards inefficiency creeps at every level. Relying on human labour instead of agriculture machinery the cost of production is way too high. For example, thousands of acres are cultivated by a handful of farmers in the US. Thanks to the use of technology, they are able to achieve the economy of scale. Infact, the output is so much that the feed a cow 7 pounds of corn and wheat to produce 1 pound of beef. Next, if we import wheat from the US, just think what would be its impact on Indian agriculture? On the basis of price and competition, the Indian agriculture will not survive. Poverty and suicide will become the order of the day. Social unrest with teeming unemployed farmers is the last thing India needs. Indian government knowing this reality has done several things.

First, they fixed a minimum support price. This is the price at which the government is willing to buy wheat. Through Food Corporation of India and other state enterprise godowns they store very large quantities of inventory. Second to subsidize the cost of food production they give seeds, fertilizer and energy at a very low cost. This requires enormous funding and in our budget nearly 12 to 15% goes towards this subsidy. You may ask the question will it ever change. The answer is our manufacturing sector should grow leaps and bounds and absorb the excess farm labour. PM Modi has been talking about ‘Made in India’ and it should become real. This will be a long story. We will do it another time.

Student: OK, Professor.

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