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Understanding price shock

delhi Updated: Jan 13, 2011 01:20 IST
Gaurav Choudhury
Gaurav Choudhury
Hindustan Times
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The rise in food prices — 18.3% on December 25 — is more teary a problem than the onions suggest. The UPA government, which safely steered the economy through the downturn, is perhaps grappling with its biggest economic crisis: persistently high food prices.

Supply shortage

In a normal year, vegetable and fruit prices fall sharply in December. This year, on the contrary, the prices of some vegetables have surged sharply.http://www.hindustantimes.com/Images/HTEditImages/Images/13_01_11_pg11a.jpg

There are two primary reasons for the abrupt jump. First, the ground frost and excessive rainfall have damaged crops in some parts of the country, resulting in a supply crunch in staples such as onions. This is a weather-induced situation the government could not have done much about.

The second and more important reason is an inefficient supply chain and distribution system that has worsened the price increase. In other words, speculative activity and hoarding have contributed to the price shock.

This is evident from the trends in the price data. "While wholesale and retail prices of onions as for any other commodity always differ, the gap widened significantly in December. This indicates that, in addition to adverse weather conditions, hoarding and speculation created further upward price pressures," said Samiran Chakraborty of Standard Chartered Bank.

High-protein consumption
Economists are doing a lot of hair-splitting in trying to ensure growth while keeping prices in check and their latest worry is that food prices are revealing a new pattern reflecting the challenges of a growing economy.

As people shift to higher standards of living, the focus is changing from the basic needs of nutrition to such as rice and coarse grains to more aspirational products like protein-rich eggs, meat and fish.

Recent price data show the prices of protein-rich food items such as pulses, milk, eggs and fish have risen faster that overall food prices.

In the last one year, the prices of eggs, meat and fish have risen 31.03%, milk 24.6% and fruit 19.16%.

Contrast this with the prices of rice, which have grown 7.17%, and wheat prices, which have risen 7.73%, during the same period.

"Rise in income has increased the share of proteins in people’s diet. Rising affluence has also led to an increase in demand for proteins and nutrition," said RBI deputy governor Subir Gokarn recently.

Policy management
The price spike has caught the government unawares. Finance minister Pranab Mukherjee has asked state governments to "urgently look into the supply management of items that are driving the current round of food inflation".

"State governments need to ensure that all bottlenecks in the supply chain are removed so that food prices can be brought down quickly."

Experts warned global food and commodity prices could rise higher in the wake of floods in Australia, drought in Argentina, and the extreme cold weather in Russia resulting in a poor wheat harvest.

Crude prices are inching towards the worrisome $100 a barrel mark as industrial activity picked up in the global economy.

Policy makers and industrialists will be keenly observing the cues sent out by the Reserve Bank of India (RBI) in its quarterly policy review later this month amid anticipation that the central bank would announced another hike in interest rates hikes to cool prices. "The risk that inflation and higher rates will adversely impact growth cannot be ruled out," said Chakraborty.

"No amount of demand side management will help rein in inflation; in our case it is supply-side inflation, and capacity expansion, both in agriculture and manufacturing, has not kept pace," said a government economist, preferring anonymity.