India is experiencing double digit food inflation. The government claims it is doing everything possible and the inflation should come down in a few weeks. Many weeks have passed, but inflation does not seem to be heeding the pleas of the government. Every time the food inflation figure comes down a bit, the government claims it is because of its policies. But every time the figure goes up, the government says it is because of factors beyond their control.
The government, its spokespersons and most of the media commentators cite many reasons for the high food inflation. The PM says he has no magic wand to control inflation. Of course, he is right. The minister for agriculture says they are doing everything possible to bring it down. The deputy chairman of planning commission, an eminent economist, says food prices are high because the incomes of the poor are rising and they are eating more. He is right. But it is not a crime for people to eat more. Is it not the duty of the government to lift the poor out of poverty?
Some policy makers, business heads and columnists regularly come forward and try to explain the reasons for high prices and suggest remedial measures to be taken. Everything they say is a myth. Let me show you how.
(present price - year ago price)
inflation = ----------------------------------------- * 100
year ago price
It is always relative to the prices a year ago. If the prices a year ago were high, inflation will remain low because of base effect. It does not necessarily mean current prices are low. So the inflation figure will eventually come down after a few months because of base effect, as we will see a full year of high prices. I would not be surprised if the government comes out and trumpets it as their achievement.
The real reason behind inflation is that the demand for food is exceeding supply in our country, with the growth in demand outpacing the growth in food production. We have seen 5 years of consistently high food inflation since 2006 though all the 5 years were blessed with a reasonably good monsoon. Imagine what will happen in the year of a bad monsoon? Even worse, can we stand successive years of drought as we had seen from 2001 to 2003? We are in a precarious situation. Imports from other nations also can not help as we are too big a nation to support.
It is time our government recognizes the real cause and initiates serious long term measures to increase food production.
There are again many myths published on increasing agricultural productivity. Let me shatter those myths in another post.
The government, its spokespersons and most of the media commentators cite many reasons for the high food inflation. The PM says he has no magic wand to control inflation. Of course, he is right. The minister for agriculture says they are doing everything possible to bring it down. The deputy chairman of planning commission, an eminent economist, says food prices are high because the incomes of the poor are rising and they are eating more. He is right. But it is not a crime for people to eat more. Is it not the duty of the government to lift the poor out of poverty?
Some policy makers, business heads and columnists regularly come forward and try to explain the reasons for high prices and suggest remedial measures to be taken. Everything they say is a myth. Let me show you how.
- Myth 1: 'It is a random, one time phenomenon. Things should be normal next year.' - No, it is not. It is the price of onions this year, of pulses last year, of rice in the year before and of wheat in the before that. Food inflation has been consistently high for last 4 to 5 years.
- Myth 2: 'We don't have enough cold storage facilities in India. Building more of them should solve the problem.' May be true. But that does not explain the high prices of rice, wheat, pulses or even onions (onions have a higher shelf life).
- Myth 3: 'Speculative futures trading in agricultural produce is causing the prices to rise.' Futures trading in rice, wheat, pulses was banned long back. There is no futures trading in onions either. It can not be the cause.
- Myth 4: 'Middle men are hoarding the produce and artificially creating a shortage which is causing the prices to rise.' Do you believe some middle men can hoard enough stocks to jack up the prices, that too in a huge country like ours? This is simply not true.
(present price - year ago price)
inflation = ----------------------------------------- * 100
year ago price
It is always relative to the prices a year ago. If the prices a year ago were high, inflation will remain low because of base effect. It does not necessarily mean current prices are low. So the inflation figure will eventually come down after a few months because of base effect, as we will see a full year of high prices. I would not be surprised if the government comes out and trumpets it as their achievement.
The real reason behind inflation is that the demand for food is exceeding supply in our country, with the growth in demand outpacing the growth in food production. We have seen 5 years of consistently high food inflation since 2006 though all the 5 years were blessed with a reasonably good monsoon. Imagine what will happen in the year of a bad monsoon? Even worse, can we stand successive years of drought as we had seen from 2001 to 2003? We are in a precarious situation. Imports from other nations also can not help as we are too big a nation to support.
It is time our government recognizes the real cause and initiates serious long term measures to increase food production.
There are again many myths published on increasing agricultural productivity. Let me shatter those myths in another post.
1 comment:
Good one Gopala...makes sense
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