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Agricultural Outlook Forum
U.S. Department of Agriculture
Presented: February 23-24, 2012
India’s Food Price Inflation:
Is Demand Outpacing Policy?
Maurice Landes
India’s Food Price Inflation:
Is Demand Outpacing Policy?
Maurice Landes
Economic Research Service
U.S. Department of Agriculture
India’s Food Price Inflation
 In many ways instructive on the sources of
recent global food price inflation
 Also instructive on the ways in which
inflationary pressures influence food trade
India’s Food Price Inflation
 Historically, food prices have been relatively
stable
• Relatively weak underlying demand until the
1990s
• Instability linked primarily to weather-driven
cereal supply shocks
• Food price stability a top policy priority
Historical Food Price Stability
Food Price Inflation in India
15%
Wholesale prices
Percent change
10%
Consumer prices
5%
0%
-5%
-10%
Sources: Office of the Economic Adviser, Ministry of Commerce and Industry, Government of
India; Labour Bureau, Ministry of Labour and Employment, Government of India.
Food Items Now a Driver of Inflation
Increases in Real Food Prices
2004-06 vs 2009-11
Food articles
Cereals
Pulses
Vegetables & fruit
Milk
Eggs, meat & fish
Edible oils
-15% -10%
-5%
0%
5%
10%
15%
20%
25%
Source: Office of the Economic Adviser, Ministry of Commerce and Industry, Government of India.
30%
Drivers of Food Price Inflation
 Demand
• Growth & diversification of food consumption
 Supply
• Slow growth in farm productivity & output
 Policy
• More aggressive farm price support policy
• Focus on subsidies rather than public investment
• Poor climate for private investment in
agriculture
Diversifying Food Consumption
Indian consumption growth by food group
1990-2007
6%
Consumption growth
Growth rate
5%
Population growth
4%
3%
2%
1%
0%
Source: Food and Agriculture Organization, FAOSTAT database
.
Trends in GDP and Farm Output
India's Total and Agricultural GDP
15.0%
Percent growth
10.0%
5.0%
0.0%
-5.0%
Total GDP
Agricultural GDP
-10.0%
Source: Reserve Bank of India
.
Rising Government Subsidies
India's input and food subsidies
Inflation adjusted
Billion 1999/00 rupees
600
500
Food subsidy
Fertilizer
400
Irrigation, power & other
300
200
100
0
Source: GOI, Ministry of Finance, Economic Survey.
Subsidies
totaled 14% of
farm output
value in 2008/09
Weak Investment in Agriculture
Agriculture's terms of trade and share of gross fixed
capital formation (GFCF) in India
20%
1.60
Index of terms of trade between agriculture and nonagriculture
1.40
1.20
1.00
15%
0.80
10%
5%
0.60
0.40
Agriculture's share of gross fixed capital formation
0%
Sources: Government of India, Central Statistical Organization, National Accounts Statistics;
Government of India, Ministry of Finance, Economic Survey.
0.20
0.00
Terms of trade for agriculture
Agriculture share of total GFCF
25%
The Policy Response
 Reduced tariffs
• Primarily affects the major imports: edible oils &
pulses
 Export restrictions
• Mostly to limit global-domestic price transmission
• Recently eased
 Increasingly restrictive monetary policy
• But, is this a case of excess liquidity or of low
investment & productivity?
The Policy Response
 New programs to boost productivity
• Funding is a small fraction of subsidy outlays
 Slow improvement in private investment climate
• Political consensus on market reform remains elusive
• A State government issue…some are on the move
• Improved governance in eastern States may be most
significant recent news
 New Food Security Bill in the offing
• Will significantly expand food grain subsidy
Trade Implications
India's agricultural imports
12
Dairy products
Billion dollars
10
8
Agricultural imports grew 13%
annually during 2000-2010
6
Oilseeds
Tea & spices
Fibers
Sugar
4
2
0
Cereals & prep
Fruits & nuts
Pulses
Fats & oils
Sources: Reserve Bank of India; Government of India, Ministry of Finance, Economic Survey.
Trade Implications
 Agricultural imports have been growing
 Import growth led by edible oils & pulses
• Essential foods
• Low comparative advantage
• Liberal import policy…likely to continue
 Grain surplus continues
• Low growth in food use/substantial yield potential
• Food Security Bill may reduce net exports
Trade Implications
 Fruits & vegetables
• Some trade growth in fresh & processed segments
• Large scope for domestic gains with improved marketing &
processing
 Animal products
• Dairy, eggs, poultry & mutton are income-elastic
• Substantial growth potential evidenced in poultry & egg
sectors
 Strongest emerging opportunity may be for investment
• Input & output markets
• FDI unrestricted, except for multi-brand retail
Trade Implications
40
35
Billion dollars
30
25
FDI (left axis)
FDI share of GFCF (right axis)
20
15
10
5
0
Source: Government of India, Central Statistical Organization; Government of India, Ministry of Finance,
Economic Survey.
10
9
8
7
6
5
4
3
2
1
0
Percent
Foreign direct investment (FDI) & share of gross
fixed capital formation (GFCF) in India