Rising food prices: Blame the Government

Wed, 15 May Pre-Open

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Food is one of the basic needs for survival. Also, a key constituent of price index and a major cause of the rising fiscal deficit. Hence, any increase in food prices is a matter of concern, not just for the common man but economists and policy makers as well.

Unfortunately in India, food production is largely dependent on monsoons. The unpredictable weather has many a time wreaked havoc on farmers and troubled policy makers. Following the simple economic logic of demand and supply, when food supply goes down; the prices go up leading to overall increase in the inflation levels. However, as an article in Firstpost suggests, the converse might not be true. While the metrological department's prediction about monsoons bodes well for production, easing of food prices could remain a distant dream. So what is it distorting the laws of economics that suggests that price of a commodity should come down as supply increases?

No prizes for guessing the answer. As in most of the cases, it is Government policies that are distorting the market economics, without making much of a positive difference. Let us see how. As highlighted in an article on Firstpost, the Government procures wheat and rice from Food Corporation of India (FCI) and other state Government agencies at minimum support prices (MSPs) which farmers already know in advance. A trend of rising MSPs in the last few years has led to huge production of these two food crops by farmers. As such, the stock of these crops with the Government now stands at more than double of the minimum buffer. But the main issue here is that while the stock is going up, the distribution or supply in the market is not in line with the trend. Blame inefficient logistics and infrastructure, operational challenges or the lack of intent and ineffective implementation. Despite good production, there is an artificial shortage in the market. Infact, it wouldn't be an exaggeration to say that the Government is hoarding the food while there is an unmet demand in the market. No wonder the prices of food crops like wheat and rice have gone up manifold.

With a system of food subsidies, the level of inefficiency has gone up further. This is what the picture looks like - production and procurement costs are increasing (higher MSPs and storage, infrastructure and distribution costs) for the Government. At the same time, increasing food subsidies are leading to higher fiscal deficit. The same is likely to lead to higher inflation at a macro level.

You will be further surprised to know that there is no clear mechanism to determine MSPs. As per an official report, there is no clear correlation between cost of production and MSPs. The higher MSPs are creating artificial shortage of food grains in the market. This has adversely impacted the diversity in production basket (more focus on wheat and rice at the cost of other food grains) and crowded out private forces from the market thus leading to an adverse development in open market prices. Not to mention the rising fiscal deficit and inflation.With elections just around the corner, it is unlikely that MSPs will be rationalized. To conclude, irrespective of the production and procurement, one should not be surprised if food prices in India do not go down anytime soon.