Wednesday, January 13, 2010

The awfulness of food price inflation

Inflation, of any sort, is bad. Some stability in prices, is necessary for orderly economic activity and for growth. Countries which have experienced hyper inflation recall it with absolute horror. But the most awful form of inflation is when there is huge inflation in food prices. In non food products, one can curtail demand if prices rise. But what do you do with food ? After all, you have to eat.

In the last few months, food prices in India have gone through the roof. If you are living in India, you are experiencing it first hand. If you are abroad, you would have surely heard about it. The official food price inflation figure is 20%. In many key food items, the inflation has been much higher than that.

The first hint came in pulses, a vegetarian Indian’s main source of protein. A kilo of arhar dhal (pulses) has apparently touched the unbelievable level of Rs 100/kg. Then came vegetables. Onions at Rs 35/kg, potatoes at Rs 40/kg, and so on. Sugar is now at Rs 50/kg. Name a food item – prices are at levels never before seen.

Indian stoicism is legendary. Families simply tighten their belts more. Those who cannot afford it, just forego “luxuries” such as vegetables. Thankfully wheat prices haven’t gone up by too much, but rice prices have soared. Where does the poor man go ?

Economic growth is all very good, but some fundamentals have to be ensured in any country. Foremost amongst them is that food is affordable. The surest way to social unrest is through inflation in price of food. In the past, governments have been voted in or out of office, most famously on the price of onions.

Why is this happening in India now. Combination of circumstances unfortunately. This year the weather has not been kind to agriculture – both floods and drought have been significant factors in different parts of the country. Rising fuel prices is another cause. Supply demand mismatch, always the bane of agriculture, has been acute this year. A series of misguided policies have not exactly been helpful.

But I fear, food price rise is a structural thing and not easily reversible. While such a sharp increase will be reversed, I think the long term trend of significant price rises is, perhaps, inevitable. As populations grow, and agriculture declines as a profession of choice, the pressure on food availability will increase. The oil price rise will inexorably result in higher food prices as I have argued before in this blog.

What can be done ? I don’t know. I know very little of agricultural policy and economics. What I do know is that dhal at Rs 100/kg is neither sustainable nor acceptable.