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Sky Rocketing Food Prices – Why?

Sky Rocketing Food Prices


High Food Prices – A phenomenon that impacts our everyday lives significantly, by eating away into our monthly budgets. We frequently get a taste of this, when we have our regular squabbles with the neighbourhood vegetable vendor over the prices, or when we visit the grocery store.

Now for some number crunching – Rice, which used to cost around Rs. 18 per kg one and half years ago, now costs more than Rs. 30 per Kg (a 60% increase). Toor Dal, which used to cost around Rs 35 per Kg, now almost costs Rs. 100 per Kg (a 3-fold increase). Sugar, which used to cost Rs. 25 per kg just a few months ago, now costs Rs. 36 per kg (a 50% increase in just a few months).

Most of us just trudge along, accepting this as a hard fact of our daily lives. It is all the worse for the vast lower-middle class, for whom inflated food prices are yet another of the many hoops to jump through in order to survive.

Deficient monsoons this year has been a major cause of high food prices. However, food prices have shown a marked rise (increase in prices of rice is a classic example) in the last one and a half years, much before India was plagued by Monsoon Deficit.

Here, we examine some more root causes of food price inflation and explore some possible solutions for the same:-

Root Causes of High Food Prices

Ineffective Inflation Tracking Mechanisms

Inflation indicates the rise in the price of a basket of commodities on a point-to-point basis (usually year to year basis). It basically indicates the quantum of increase in the cost of living over a period of one year.

To calculate inflation, the wholesale prices of the identified commodities are collected and a weighted average of those commodities is computed to arrive at the Wholesale Price Index (WPI). Around 400+ commodities that include the prices of food items, manufactured goods, raw industrial materials (such as iron, copper, steel, etc), fuel and power, constitute the WPI. Whenever this weighted average figure exceeds 5% on a Year to year basis, The Reserve Bank of India (RBI) which usually tracks the WPI takes action and increases interest rates for money lending (this sucks out excess liquidity from the system and helps bring the commodity prices down).

Problems with this inflation tracking methodology – The weight for manufactured goods is more than 60% whereas food and agriculture products have a weight of less than 25% in the WPI. Hence a rise in the food prices will not attract much action from the RBI, unless it is accompanied by a significant increase in prices of other manufacturing goods and commodities. Other commodities have their own up and down cycles, but food prices remain persistently high.

Also, the wholesale prices do not factor in the additional retailer margins, transportation costs and other taxes, which are reflected in the Consumer Price Index (CPI). Unfortunately, the benchmark followed by the government is the WPI and not the CPI.

”’The Inflation Paradox:”’ The Inflation figure (as indicated by the WPI) is currently very low (1.5%), however, as we all know, the food prices have risen by as much as 50% over the last two years!

So, while the government proudly proclaims over the rooftops that inflation figures are ‘low’, these ‘low’ figures are somewhat a cruel paradox for the common man who sees no respite from rising food prices

Skewed Government Policies and Priorities

It is a known fact that the government has favoured progress in Industrial and Service Sectors while neglecting agriculture and meting out step-motherly treatment to the farmers who feed the nation. Most of the economic development policies have a distinct ‘urban’ bias, serving the interests of a selected small percentage of the (urban) population.

Most corrupt politicians are hand in glove with the super-rich industrial bigwigs and have no qualms about snatching fertile agricultural land from farmers and awarding them to the corporate tycoons at a throwaway price. Thus, the farmers never get a fair price for their lands and are merely paid a pittance.

The SEZ Act (read ‘Plot’): Adding to the farmers’ cup of woes is the government’s SEZ (Special Economic Zone) act that allows the government to acquire land for setting up export processing zones, industries and service companies and giving them tax breaks. 75% of the land identified for SEZ operations is agricultural land.

The SEZ act has a provision for a unique “Single Window Clearance” system that does not require the proposed projects to undergo clearances from the environmental boards, local panchayats, etc, and does not even require stating the purpose of the project to the relevant stakeholders (farmers). This leaves no scope of legal objection from anyone and removes the need to be more transparent!

Earlier laws and acts dealing with land acquisition needed proper justification to be given by the government (such as using the land for building public utilities like sewerages, tanks, roads, etc), but this is not the case with the SEZ act that also allows ‘private enterprises’ to be set up in the acquired land. Now it is anybody’s guess as to the hidden agenda behind introducing the SEZ act, under the garb of ‘economic development’.

The farmers are then offered employment as labourers or watchmen and exploited in the same land that they once used to own! The SEZ act does result in good employment to a few educated engineers and executives, but repeated recessions are making us painfully realize that the ‘agriculture sector’ clearly scores over the industrial and service sectors with respect to providing sustained employment.

Another problem faced by farmers is that most state federations and middle-men in the food chain pay them very low prices for their produce, whereas the input costs needed for irrigation infrastructure, fertilizers, pesticides, etc are not so low. Sometimes, farmers are not paid their dues at all by the government. A classic example of this is the plight of the sugarcane farmers in India recently.

The bitter story behind high sugar prices: In Uttar Pradesh alone, the government owed Rs. 1500 Crores to farmers for the sugarcane delivered by them to the state-run sugar mills, at the start of the 2007-08 crushing season. Frustrated farmers then cut down their production of cane and instead sold the cane to jaggery mills. Thus, the sugar mills faced a ‘shortage of sugar’ leading to skyrocketing sugar prices (a 50% increase in just a few months).

All of this has led frustrated farmers to sink into deep debt and subsequently commit suicide or move to the cities in search of alternative employment. Some of them try switching to cash crops (such as Cotton, Tobacco, Coffee) with the hopes of clearing off their debts. All of this has led to lower production of Food Crops and increased food prices.

Did you know? India imports millions of tones of food grains (mostly wheat) frequently whenever food prices become uncontrollable. On one hand they snatch away fertile land from farmers for industrial development, and on the other hand they import food grains to tackle the shortage. A big irony, indeed!

High Transportation Costs

Increased migration of people to urban areas creates a need of transporting the food grains from farms to far away cities. Any increase in the prices of petrol or the cost of creating supporting infrastructure (such as roads) gets factored into the prices of food grains, ensuring that the urban folks like us shell out that much more for food.

Another culprit behind the high transportation costs is our ‘industry-oriented’ economy which is extremely capital intensive, resource intensive as well as labour intensive. This is because any given industry depends on a lot of allied industries such as mining of raw materials (iron, coal), secondary raw material production (steel, cement), power generation (thermal, hydropower, etc), power equipment manufacturer (turbines, windmills), industrial equipment manufacturer (machinery), infrastructure creation (roads, bridges), construction (buildings, factories), etc. The list goes on and on, and all these industries are heavily dependant on one another. It is not possible to manufacture these things locally, and all this creates a need to have factories flung across many parts of the country based on the availability of land, labour and raw materials. This in turn, pushes up transportation costs like labour, raw materials and finished goods need to be transported across different parts of the country. Subsequently, the food transportation costs also go up, thus, pushing up food prices.

The government does provide benefits to farmers occasionally, but that is only when elections are around the corner, for garnering votes from them. An example of this was when the government announced waivers for farmers’ loans during the budget of 2008, with an eye on the elections in 2009. Also, the subsidies provided by government to farmers mostly benefit either cash crop farming (which in turn will provide raw material for big corporates at cheaper prices), or the small percentage of large scale farmers, who have more access to irrigation facilities and are in possession of large tracts of high quality land, thus leaving the majority of the small-time farmers in the lurch.

Hoarding, Black Marketing and Speculation

Any ‘anticipated’ shortage of food grains sets a panic wave into motion amongst the people. Many unscrupulous godown owners, merchants and even corporates try to hoard (buy) huge quantities of food grains before the prices rise. Powerful corporate houses have access to huge funds from NBFCs (Non-Banking Finance Corporations) that aids them in their hoarding activities. This hoarding leads to increase in prices.

Many ration shops (which are supposed to provide food grains to the poor at subsidized prices, sponsored by the government), hoard most of the food grains and sell them in the black market at high prices, and the poor don’t get the food grains entitled to them.

Speculators sometimes ‘anticipate’ huge increases in prices of commodities such as wheat or corn, and buy huge quantities of futures contracts in these commodities in Commodity Exchanges, in order to profit from the price increase. This unnecessarily pushes up the food grain prices, and the sad part is that this is not even because of excessive consumption (which at least serves to feed some people). This is pure because of speculation (read “gambling”) that is manipulating the prices and depriving so many other poor people of their due.

Did you know? Wheat prices in the US increased by 46 per cent between January 10 and February 26 2008, purely because of speculation in the commodities markets! Such wild swings cannot be explained purely based on the fundamental “demand and supply” factors.

Possible Solutions for high food prices

Agricultural policy

  1. Encouraging agriculture and focus more on food crops instead of cash crops
  2. Ensuring that existing farmers get a fair price for their produce
  3. Providing excellent irrigation infrastructure
  4. Stop acquiring fertile agricultural land for industrial purposes, and acquire barren land instead

Setting up Farming Communities

Farm communities centred around sustained organic agriculture and dairy farming can be built for producing enough food grains, vegetables and dairy products. A self-sufficiency based model is key to the success of these communities. Such a model will reduce dependency on the “Petroleum-Based” economy and will serve to insulate people from the fluctuating prices of Crude Oil as well as Industrial Commodities such as Iron, Copper, etc. This will also reduce dependency on capital intensive High-End Infrastructure, Machinery, raw material procurements and transportation, thus bring down investments drastically while ensuring a steady income from selling the farm produce. Most importantly, the residents would be protected from inflating food prices, and would never have to go hungry!

There are many successful farm communities run by spiritual institutions, missionaries, and welfare groups in India, US, Europe and Australia that are successfully practising the simple mantra of self-sufficiency!

Good Irrigation Infrastructure

This will help in combating monsoon deficit. Pipelines and bunds can be built for carrying water from rivers, streams and estuaries to the farms. Watershed development activities can be carried out for conserving water.

There are case studies of a few villages in Maharashtra (India) which have already built a good irrigation setup, leveraging on the rivers and streams in the forest with the help of an almost 10,000 feet pipeline, and watersheds, thus achieving self-sufficiency!

Usage of Natural, Low Cost Manures

Usage of natural manures such as cattle dung, crop residues, biological wastes, neem, decayed vegetable matter, etc is much cheaper and also has many advantages such as soil enrichment, aeration, improving water holding capacity and simulate micro-organism activities that make plant food. This reduces the dependency on expensive fertilizers and helps to bring down food prices.

The Vedic Observer

Interestingly, the Srimad Bhagavatam (a Vedic Text) incidentally predicts a huge food shortage in the future Verse 12.2.9:-

anāvrstyā vinańksyanti

“Harassed by famine and excessive taxes, people will resort to eating leaves, roots, flesh, wild honey, fruits, flowers and seeds. Struck by drought, they will become completely ruined.” So these are times when we shall see imposed artificial lifestyles driven by destructive methodologies of our policies.

Economies in the Vedic times were run on a model predominantly based on Localized Production. This means that each town or set of towns produced their needs locally from nearby forests, natural resources and cattle by-products. Food was grown in local farms. This closely resembles the “farm community” model described above.

This optimal model has very low dependence on scarce and depleting resources such as petroleum products, coal, copper, iron, etc, and hence, we don’t end up paying extra to cover up for high transportation costs, mining, power, infrastructure, machinery, etc which eventually get factored into the prices.

Thus, the common man was spared from paying through the nose for basic necessities such as food and water, as most of the food was anyway produced locally.

Quite contrary to popular modern beliefs, the people of the Vedic Era (especially the Brahmanas and the kings) were highly intelligent and had a scientific and practical understanding of the higher laws governing the functioning of nature (such as the law of karma) described in the Vedas. By virtue of this, they understood the dangerous consequences of exploiting nature for satisfying ones own greed, and accordingly aligned their lifestyles, society and economies to function in harmony with nature.

All this, in turn, ensured that their needs would be abundantly supplied by nature. No wonder, inflated pricing was a rare phenomenon in the Vedic Era. DO we have better days ahead?

Authored by Vivek Devarajan


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