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India has experienced persistent and high food inflation in the recent past. What could be the reasons? 1. Due to a gradual switchover to the cultivation of commercial crops, the area under the cultivation of food grains has steadily decreased in the last five years by about 30. 2. As a consequence of increasing incomes, the consumption patterns of the people have undergone a significant change. 3. The food supply chain has structural constraints. Which of the statements given above are correct?

India has experienced persistent and high food inflation in the recent past. What could be the reasons? 1. Due to a gradual switchover to the cultivation of commercial crops, the area under the cultivation of food grains has steadily decreased in the last five years by about 30. 2. As a consequence of increasing incomes, the consumption patterns of the people have undergone a significant change. 3. The food supply chain has structural constraints. Which of the statements given above are correct? Correct Answer 2 and 3 only

The correct answer is 2 and 3 only.

Key Points

  • Rising income and diversification of diets raising the demand for high-value food products, and thereby adding to inflationary pressures. 
    • Bhattacharya and Sen-Gupta (2015) calculate the demand-supply gap for major food commodities including, cereals, pulses, vegetables, fruits, milk, and meat and fish, and find empirical support for this hypothesis.
      • Using National Sample Survey Organisations household consumption expenditure survey data for 2009-10, the expenditure elasticities for all these commodities are estimated.
      • All the estimated expenditure elasticities are found to be positive, with those for milk, vegetables and fruits exceeding one, implying that a 1% increase in household expenditure is associated with a more than 1% increase in their demand.
      • Elasticity for meat and fish, although below one, is high enough to cause a significant rise in their demand with rising food expenditure.
      • In an emerging economy, with growing per capita income, high expenditure elasticities of vitamin and protein-rich commodities indicate growing demand pressure for these commodities.
      • Demand is found to persistently outstrip supply in the case of pulses, meat and fish, and in recent years in the case of milk and vegetables. Overall, an additional gap of 1 million tonnes in demand relative to supply would result in food prices increasing by 0.3% to 1.1% annually. Hence, statement 2 is correct.
  • Supply-side and external factors affecting food inflation: Fuel and agricultural wage inflation and international food price surge. Hence, statement 3 is correct.
    • On the supply side, the rise in prices of key inputs, including fuel and agricultural wages have impacted the prices of various commodities and aggregate food inflation. 
    • A varied combination of factors is found to drive different components of food inflation.
      • The rise in cost of production and MSP are the main drivers of cereal inflation, while inflation in milk, vegetables, and meat and fish are driven by input cost inflation and positive demand-supply gap.
      • These two factors along with MSP inflation mainly drive pulses inflation.
      • Global food inflation increases prices of edible oil and sugar, while the rise in MSP is an additional factor driving sugar price inflation.

Additional Information

  • Total production of food grains increased from 51 million tonnes in 1950-51 to 252 million tonnes in 2015-16.  According to the second advance estimate by the Ministry of Agriculture, food grains production is estimated to be 272 million tonnes in 2016-17. Hence, statement 1 is not correct.
  • The production of wheat and rice took off after the green revolution in the 1960s, and as of 2015-16, wheat and rice accounted for 78% of the food grains production in the country. 
  • High and persistent food inflation emerged as a major concern in India, from 2006 to 2014.
  • While food inflation averaged 9% over this period, at its peak in late 2009, it had crossed 20%.
  • Sustained high food inflation has significant welfare implications in India, given that food comprises 45% of the consumption basket.
  • With 21.9% of the population or about 270 million people, living below the poverty line, already consuming food below the subsistence level, sustained high food inflation has negative consequences.
  • Effective stabilization of food inflation, therefore, is of utmost priority, which makes it imperative to understand its causes and consequences.

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