Indian Government Struggles to Keep Food Prices Under Control

by Medindia Content Team on  February 17, 2008 at 2:34 PM General Health News   - G J E 4
Anand's restaurant has served flat bread, lentils and vegetables to loyal customers every day for four decades but for the past year he's been on the receiving end of almost non-stop complaints.
Indian Government Struggles to Keep Food Prices Under Control
Indian Government Struggles to Keep Food Prices Under Control

"They argue because we've raised prices. But we had to increase them because everything -- wheat, butter and vegetables -- has gone up," says Sanjay Anand, second-generation owner of the restaurant in New Delhi's Connaught Place.

Small restaurants like his, as well as hundreds of millions of people across India have been hit by a huge surge in demand and prices for food worldwide.

The price hikes have triggered government anxiety over whether it can continue to ensure supply of affordable food for the country's 1.1 billion people.

Analysts say India -- which produces most of its own food, exports surplus items such as sugar and heavily subsidises supplies for the poor -- has so far managed to avoid severe price shocks.

But it is facing the same mix of factors as other nations that are grappling with rising food prices -- higher incomes are boosting demand for protein, surging demand for energy is pressuring oil prices, and diversion of agricultural land to urbanisation and industrialisation, as well as grain production for biofuels, is pushing land values sky high.

"Of course India is impacted by global events," said Saumitra Chaudhuri, economic advisor at Indian credit rating agency ICRA.

"The question is whether there'll be a supply response. Better yielding seeds, irrigation, technology and more efficient distribution can and probably will have a major impact.

"But it will take a little time and we're likely to see no slack in demand or costs soon."

The price of wheat on the Chicago Board of Trade more than doubled in the past year to a record high above 10.60 dollars a bushel for March delivery.

That means India's government will have to boost the subsidies it pays to wheat farmers -- and those extra costs have to be passed on to customers in restaurants like Anand's.

His price for one roti, or flat bread, has risen 33 percent to three rupees (one US cent) in the past year.

For the Indian government, subsidies to feed the poor have more than doubled in the past five years to seven billion dollars.

Along with other efforts such as selling transport fuel below market rates to stem inflation, India now spends more than 15 percent of its budget attempting to control food prices.

"The government would never scrap food and fuel subsidies. It's politically impossible and as we've seen can lead to strikes and protests," Chaudhuri said.

"It's also not sustainable beyond a point and if costs such as wages and other inputs keep going up, other things will fall by the wayside, like roads, power and other infrastructure which just aggravate the problem."

Inflation in India, measured by wholesale prices, is running at around four percent. Consumer prices, less widely cited, have gained around five percent.

But for Saba, a housewife from Kashmir having lunch at Anand's, the official figure lags far behind the hikes she has seen in her weekly food budget for staples such as cooking oil and wheat.

"Prices are going up across the world, but in India they're rising even faster," Saba, who uses one name, said, adding that the prices she pays for wheat and cooking oil have doubled in the past year.

The wide gap between the government figures and consumer anecdotes comes amid an unprecedented economic boom in India.

India's economy is forecast to grow 8.7 percent in the year ending March, a slowdown from a torrid 9.6 percent rate for the previous year.

Rising incomes have created a surge in demand for food supplies from a growing middle class, even as almost two-thirds of the country continues to survive on less than a dollar a day.

This has created a dichotomy in supply and pricing, illustrated by the spike in demand created by newly-established retail chains using grain and cooking oil to produce ranges of processed foods while the government sells bulk items below cost through its public distribution system for the poor.

"The Indian government procures wheat and edible oils domestically and offshore and sells below world rates for the poor," said Si Kannan, associate vice president at Kotak Commodity Services in Mumbai.

"But if they pay the local farmer below global prices, he's not going to grow the crop unless demand from private companies makes the price attractive.

"India's farmers are much more sophisticated about world markets now, they know the price of soy in China and palm oil in Malaysia.

"So there's a structural problem and prices for items like wheat, soy and oils are going to remain high in India like the rest of the world because demand is so strong and supply is limited," he said.

Record prices of wheat, soy meal and corn impact economic growth patterns worldwide. In India one outcome is that farmers, like their counterparts elsewhere, switch to high-priced crops and set off a chain reaction for other commodities.

As a result, the government has been forced to sharply raise domestic support prices to ensure production stays high enough to avoid large imports.

The price of wheat in India is more than international benchmarks such as the CBOT and many farmers have switched out of soy and palm oils to take advantage of the high wheat price.

As a result, India has become the world's second biggest importer of edible oils.

"Any commodity is priced subject to supply and demand," said Hindol Sengupta, a Mumbai commodity trader.

"It's like the Hollywood movie 'The Butterfly Effect' -- change in demand for corn to make biofuels in the US means less wheat planted or less edible oils, and then those prices rise on the global market."

Source: AFP

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