(General Studies III – Economy Section – Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment. Inclusive Growth and issues arising from it.)
- The Economic Survey preceding this year’s Union Budget has proposed that the Reserve Bank of India (RBI) exclude food prices from the inflation target.
- This would mean shifting the focus from ‘headline’ inflation, which includes all items, to ‘core’ inflation, excluding food and fuel.
- However, removing food prices from the inflation target overlooks the most critical aspect of inflation for the majority of the Indian population.
- This could lead to policy measures that fail to address the real challenges facing the economy.
Reasons for the Rise in Food Prices in India –
- Persistent High Food Inflation: Since 2019, food prices in India have been on an upward trajectory, with inflation rates nearly reaching 10% year-on-year in June. This trend predates the COVID-19 pandemic and the Ukraine war, highlighting the presence of domestic factors driving food inflation.
- Supply-Side Constraints: Factors such as erratic weather patterns, inefficient supply chains, and rising input costs have contributed to the persistent rise in food prices. Limited agricultural productivity and disruptions in distribution also play significant roles.
- Structural Issues in Agriculture: The Indian agricultural sector faces several structural issues, including fragmented landholdings, inadequate irrigation infrastructure, and limited access to modern technology, which restricts productivity and contributes to higher prices.
Impact of High Food Prices on People, Especially the Poor –
- Vulnerability of Households: In India, nearly 50% of household expenditure is spent on food, a figure significantly higher than in developed countries like the U.S., where it is less than 10%. This high share indicates a direct and substantial impact on household budgets when food prices rise.
- Disproportionate Effect on the Poor: The poor are disproportionately affected by rising food prices as they spend a larger portion of their income on food. A continuous increase in food prices exacerbates poverty and food insecurity, leading to malnutrition and other related issues.
- Erosion of Living Standards: As food prices increase, the real income of households declines, leading to a reduction in overall living standards. This situation is particularly concerning in a country where a significant portion of the population is already struggling with poverty.
Link Between Core and Food Inflation –
- Interdependence of Food and Core Inflation: Food price inflation significantly influences core inflation (which excludes food and fuel). When food prices rise, wages tend to increase as workers demand higher pay to cover their basic needs, leading to higher production costs and thus contributing to core inflation.
- Ineffectiveness of Interest Rate Hikes: Attempts to control inflation through interest rate hikes by the Reserve Bank of India (RBI) have shown limited success. Higher interest rates can lead to reduced demand and higher costs for firms, which may in turn raise prices to protect profits, further driving inflation.
- The Inseparability of Food and Core Inflation: The strong link between food prices and core inflation suggests that focusing solely on core inflation without addressing food price inflation is ineffective. Food prices are a key determinant of inflation across the economy.
Solutions to Increase Agricultural Productivity –
- Enhancing Agricultural Infrastructure: Improving irrigation systems, providing better access to quality seeds and fertilizers, and modernizing agricultural practices are essential steps to boost productivity. Investments in cold storage and transportation infrastructure can also reduce post-harvest losses and stabilize prices.
- Adopting Technology and Innovation: Encouraging the adoption of technology in farming, such as precision agriculture, digital tools for market access, and advanced farming techniques, can significantly increase yields and reduce costs.
- Policy Support and Reforms: Implementing comprehensive agricultural reforms, including land consolidation, better credit facilities, and crop diversification, can address structural issues and improve overall efficiency in the sector.
- Focus on Sustainable Practices: Promoting sustainable agricultural practices, such as organic farming and conservation agriculture, can help maintain soil health, reduce dependency on chemical inputs, and ensure long-term productivity growth.
Addressing rising food prices in India requires a multifaceted approach, including ongoing efforts to tackle supply-side constraints, boost agricultural productivity, and acknowledge the link between food and core inflation. Initiatives like Pradhan Mantri Krishi Sinchayee Yojana (PMKSY) for irrigation, e-NAM for digital market access, and agricultural reforms aimed at efficiency are key steps. Advancing these reforms and embracing technological innovations can help stabilize food prices, control inflation, and improve living standards, particularly for the poor.
