The following is directly reproduced from the article titled "The breaking point" by Omkar Goswami in Businessworld Magazine dated 31 Jan 2011. http://www.businessworld.in/bw/2011_01_22_The_Breaking_Point.html
I can’t recall writing on the same topic over two consecutive columns. This is a first. Since the last column, I have been going through the supply and demand data on articles of food in India, and I am now convinced that food inflation has reached a new structural level. Despite some cyclical movements, we will now be seeing many more episodes of high food inflation. The prices of food — especially vegetables, fruit, milk, eggs, fish and meat — will plague us like never before. And the solutions will need greater political and administrative bandwidth and imagination than what the present dispensation possesses.
Let me start with the data. The chart (see ‘Crippling Food Inflation’) plots wholesale price index inflation for three broad classes of products: (i) fruit and vegetables, (ii) milk, and (iii) eggs, fish and meat. These account for a sizeable chunk of a family’s food consumption basket, in urban as well as rural India. More significantly, across a large cross-section of the population, these are items on which expenditure rises at rates faster than disposable income. As families get better off, they spend proportionately more on fruit, vegetables, milk and the like. This is important because the demand for these is rising phenomenally, while the supply isn’t.
As of December 2010, fruit and vegetable inflation was running at 22.8 per cent compared to a year earlier; milk was at 18.2 per cent; and inflation on account of eggs, fish and meat stood at 19.2 per cent. To be sure, vegetables spiked in December due to the onion effect. From December 2009, fruit inflation has been reigning at double digits, peaking at 32.4 per cent in July 2010. Milk inflation has been continuously in double digits since March 2009, or 22 months on the trot; and for 12 successive months it ruled above 20 per cent.
To my mind, there is no doubt that India is, and will be, facing higher food inflation than earlier, and will do so over long periods of time. That is the obvious outcome when a rapidly burgeoning middle class across urban and rural India faces the worst supply chain in the country. We have more rent-seeking intermediaries in the food chain than warranted by any notion of sanity. More fruit and vegetables rot between the fields and the consumer than any country that postures as a 9 per cent GDP growth economic superpower. Every field-to-mouth supply chain in India is riddled with laws, regulations and procedures that are antiquated and ridiculous. The food supply chain is not about efficiently transporting food to consumers at affordable prices, but about lining the pockets of various useless intermediaries.
Moreover, since the green revolution of four and a half decades ago, there has been no significant long-term improvement in agricultural productivity — be it in cereal, oilseed, vegetable or fruit cultivation. If anything, untrammelled use of subsidised fertiliser and pesticides, coupled with excess water drawn at zero power tariffs, have reduced our ground water and leached the soil.
Consider a simple fact. We are a nation where services grow at over 10 per cent per year; where industry has started growing at double-digits; but where agriculture averages a growth of 2 per cent. Add to this a ‘protect the farmer’ policy framework where food imports are frowned upon — to be sporadically undertaken only during crises. Why should we not expect long periods of double-digit food inflation?
There is a solution. It involves eliminating restrictions in the food supply chain, and letting corporations get into managing the process; seriously investing in science and agricultural extension; and opening up agricultural imports. Can the present governments — at the state and the Centre — execute these? You know the answer. Thus, the gloom.
Wednesday, February 2, 2011
Dear Indians, learn to live with high Inflation - Part 1
The following is directly reproduced from the article titled "Will inflation get worse" by Omkar Goswami in Businessworld Magazine dated 17 Jan 2011. http://www.businessworld.in/bw/2011_01_08_Will_Inflation_Get_Worse.html
Being in the dismal profession, let me start 2011 with some grumpy news. India might have moved on to a higher inflationary path — one that could stay with us longer than we think.
First, the data. The chart (‘Rising Prices?’) plots inflation of the wholesale price index (WPI) for all products and primary commodities. Let’s start with the latter, which accounts for a fifth of the weight in the WPI and has considerable bearing on daily expenses. For 39 of the 56 months between April 2006 and November 2010, WPI inflation of primary commodities has been ruling at 9 per cent or more. For 31 of these months, it has been at double-digits. For 20 months, it has been at 12 per cent or more. And there have been six months where it has crossed 20 per cent. In November 2010, it was at 13 per cent — lower than earlier, but still too high for political comfort. I suspect that when the data comes out, onion prices will jack this up for December 2010.
Now consider articles of food, which comprise 14 per cent weight in the WPI, or about 70 per cent of the value of primary commodities. From June 2009 to October 2010, it has persistently remained in double digits, rising to over 20 per cent for six consecutive months between December 2009 and June 2010. For the first six months of 2010, it was over 20 per cent; and has remained above 14 per cent for the first 10. These are frightening numbers.
Overall, WPI inflation is also too high. Although a bit lower in November 2009, it was still ruling at 7.5 per cent. More significantly, five of the 11 months of 2010 saw it at double digits — something that we last witnessed between June and October of 2008.
Why did we see higher inflation over a longer period of time? It has to do with ancient, creaking supply facing vibrant demand. Let me explain. The size of the urban middle class, howsoever defined, is growing at double-digits, and will continue doing so until the scale effect comes into play. Not only is this class growing in size, but it is also increasing its per capita disposable income — also at double-digits. Thus, there is a huge, and growing, domestic demand pull for goods and services which India had never seen in the past. It is not just urban India. There is no denying that incomes are rising, more for some, and less for others. Demand is growing like never before.
Supply isn’t — at least anywhere near that pace. Agricultural productivity is pathetic, the supply chain is mired in the late 19th century, and wastage is beyond belief. Nothing has been done in the past decade to raise farm productivity, improve transport and storage, reduce the layers of needless intermediaries and effectively improve food supply. Our food manufacturing sector is equally poor. Please visit rice husking plants, oil mills and sugar factories and you will know what I mean. And the politics of farmer protection translates to idiosyncratic — often knee jerk — policies regarding food imports.
In such a milieu, I can’t see how we won’t face higher inflation than earlier. It will be driven by food, followed by some elements of manufacturing. The standard economic response will be the Reserve Bank of India raising interest rates in an attempt to choke off burgeoning demand. And the political response will be hartals, rasta roko, storming the well of the House and, if the timing is such, incumbents losing state elections.
Don’t believe those who claim that India can live with 8 per cent WPI inflation over long periods and continue to generate 8-9 per cent real GDP growth. It doesn’t, and won’t, happen. There lies the risk — of high inflation closing the taps, and choking off growth.
Being in the dismal profession, let me start 2011 with some grumpy news. India might have moved on to a higher inflationary path — one that could stay with us longer than we think.
First, the data. The chart (‘Rising Prices?’) plots inflation of the wholesale price index (WPI) for all products and primary commodities. Let’s start with the latter, which accounts for a fifth of the weight in the WPI and has considerable bearing on daily expenses. For 39 of the 56 months between April 2006 and November 2010, WPI inflation of primary commodities has been ruling at 9 per cent or more. For 31 of these months, it has been at double-digits. For 20 months, it has been at 12 per cent or more. And there have been six months where it has crossed 20 per cent. In November 2010, it was at 13 per cent — lower than earlier, but still too high for political comfort. I suspect that when the data comes out, onion prices will jack this up for December 2010.
Now consider articles of food, which comprise 14 per cent weight in the WPI, or about 70 per cent of the value of primary commodities. From June 2009 to October 2010, it has persistently remained in double digits, rising to over 20 per cent for six consecutive months between December 2009 and June 2010. For the first six months of 2010, it was over 20 per cent; and has remained above 14 per cent for the first 10. These are frightening numbers.
Overall, WPI inflation is also too high. Although a bit lower in November 2009, it was still ruling at 7.5 per cent. More significantly, five of the 11 months of 2010 saw it at double digits — something that we last witnessed between June and October of 2008.
Why did we see higher inflation over a longer period of time? It has to do with ancient, creaking supply facing vibrant demand. Let me explain. The size of the urban middle class, howsoever defined, is growing at double-digits, and will continue doing so until the scale effect comes into play. Not only is this class growing in size, but it is also increasing its per capita disposable income — also at double-digits. Thus, there is a huge, and growing, domestic demand pull for goods and services which India had never seen in the past. It is not just urban India. There is no denying that incomes are rising, more for some, and less for others. Demand is growing like never before.
Supply isn’t — at least anywhere near that pace. Agricultural productivity is pathetic, the supply chain is mired in the late 19th century, and wastage is beyond belief. Nothing has been done in the past decade to raise farm productivity, improve transport and storage, reduce the layers of needless intermediaries and effectively improve food supply. Our food manufacturing sector is equally poor. Please visit rice husking plants, oil mills and sugar factories and you will know what I mean. And the politics of farmer protection translates to idiosyncratic — often knee jerk — policies regarding food imports.
In such a milieu, I can’t see how we won’t face higher inflation than earlier. It will be driven by food, followed by some elements of manufacturing. The standard economic response will be the Reserve Bank of India raising interest rates in an attempt to choke off burgeoning demand. And the political response will be hartals, rasta roko, storming the well of the House and, if the timing is such, incumbents losing state elections.
Don’t believe those who claim that India can live with 8 per cent WPI inflation over long periods and continue to generate 8-9 per cent real GDP growth. It doesn’t, and won’t, happen. There lies the risk — of high inflation closing the taps, and choking off growth.
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