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The real reasons behind India’s persistent food inflation

The News International Team

A heady mix of factors – from lack of investment in supply chain, increase in farm inputs as well as a tightly-regulated market – is behind the persistent food inflation India has witnessed over the past many years, according to analyses by experts.

Recently, Reserve Bank of India (RBI) governor Raghuram Rajan sought to put blame primarily on states decisions to hike minimum support prices (MSP) frequently as primarily being the reason behind high food prices.

The MSP (the rate at which states procure agricultural produce from farmers) for rice and wheat, for instance, has increased by more than 100 percent over the past 10 years.

The governor also conceded that the widely-blamed initiative, the UPA’s brainchild National Rural Employment Guarantee Scheme, also contributed at least 10 percent to high prices by raising rural wages.

Retail food inflation has averaged 9.5 percent since January 2012, a Reuters story recently said quoting government data. Vegetable prices have risen 64 percent over the same time.

But beyond MSP and NREGS that have ‘pushed’ food prices higher, there are other factors that have “pulled” price up as well – mainly a rise in input costs such as labour, land prices, transport costs, etc.

According to a recent paper by Ashok Gulati, Surbhi Jain and Nidhi Satija, farm wages have risen 6.8 percent between 2007-08 and 2011-12, after falling 1.8 percent between 2001-02 and 2006-07.

This could have stemmed from shortages of labour as millions of people left the workforce – some likely to pursue opportunities in cities as construction activity picked up.

Gulati argued that as agricultural areas around urban centres got converted to non-agricultural land, the transportation distance between farmlands and the final markets for the produce increased as well.

Some experts have also laid part of the blame India’s rusty supply chain system.

India mandates farmers to sell their produce only to mandis, long dominated by traders and middlemen. The government is now considering reforming the Agriculture Market Produce Committee (APMC) Act to allow farmers to sell directly to in the open market, the country supply chain system can remains in dire need of investment.

According to a recent Reuters article , India had 6,300 cold storage facilities with capacity of 30 million tonnes (half of what it needs), which leads to wastage of about 18 percent of crop it produces.

The same article estimates an investment need of USD 9 billion over the next three years (a fraction has been allocated in the budget) and the BJP’s opposition to foreign investment in retail puts paid to hopes of greater private investment — not that the previous government’s decision to allow FDI in the sector opened up the floodgates of capital.

For now, India has resorted to cracking down on hoarders, looked to unload more stock and announced a price stabilization fund.

But in the absence of longer-term reforms such as tweaking the supply chain, as well tackling tougher questions such as what to do with MSP and NREGS, food price inflation may have been structurally etched into the economy.

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