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I Seminar on

Zero Inflation and Consistent Rise in Food Price

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Schema of Presentation

Introduction to Inflation Zero Inflation

FactorsPros and ConsExamples of Zero Inflation

Consistent Rise in Food PriceReasons for food price riseImpactsMeasures to check the price rise

4“something which decides economy of the country”

INFLATION

LAYMAN TECHNICAL

Rise in price It is a rise in the general price level caused by an imbalance between the quantity of money and trade needs.

“Inflation means a persistent rise in the prices of goods and services”

INTRODUCTION

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TYPES OF INFLATIONI. Depending upon the rate of growth of prices i.e. on the percentage of

inflation

•Creeping Inflation: • The inflation of a nation increases gradually but continually over long period• when rate of general price increase is in the range of 1 – 5 %

•Walking/Trotting Inflation: • When the price rise is moderate. It is a warning signal for the government to

control it before it turns into running inflation• when rate of increase is in the range of 5 – 10 %

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•Running Inflation: • A rapid acceleration in the rate of rising prices are in the range 10-20%

per annum is referred as Running Inflation

•Galloping/Hyper/Runaway Inflation: • Most dangerous type of Inflation and out of control• Inflation > 20% • Prices rise by double or triple digit, Inflation rates like 400% or 999% per annum• Shouldn’t allowed to persist• Eg: Many Latin American countries like Argentina and Brazil had Inflation rates

of 50 to 700 percent per year in the 1970s and 1980s and developed and industrialized countries like Italy and Japan witnessed this type of inflation.

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II. Based on the causes of Inflation, It can be of two types:

•Demand-Pull Inflation: • Inflation caused by increase in demand •When ‘Too much money is chasing too few goods’

•Cost-Push Inflation: •Caused by reduction in supply, also called Supply Shock

Inflation when such changes occur prices increase rapidly.

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MEASURING INFLATION

• To measure “General fall or rise and rate of change of prices” ‘Different countries use different ways like GDP deflator, Cost of living Index, Producer price Index, Wholesale price index, Consumer price index and others.

• In India, To check the increasing trend of general price levels, Two levels are used: •Wholesale Level and Retail Level.

• Wholesale level of prices form the Wholesale Price Index (WPI) • And Retail level forms Consumer price Index (CPI)

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1. WHOLESALE PRICE INDEX • The Wholesale Price Index(WPI) is ‘The price of a representative

basket of wholesale goods’. • This basket is composed of three groups: • Primary Articles (20.12% of total weight),

(Food Articles (14.3%)+ Non food articles (4.26%) + Minerals(1.2%))• Fuel and Power (14.91%)

Coal , Mineral oils , Electricity.• Manufactured Products (64.97%)

-Chemicals and Chemical products (12.00%), -Basic Metals, Alloys and Metal Products (10.80%),

- Food Products (9.97%) -Machinery and Machine Tools (8.93%), - Textiles (7.30%) and - Transport, Equipment and Parts (5.21%),

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WPI includes 676 items which comprises of • Agricultural commodities (such as Rice, Tea, Raw Cotton), • Industrial commodities (such as Iron Ore, Bauxite), • Intermediate products for industry (such As Cotton Yarn, Iron and Steel), • Products for consumers (such as Atta (Wheat Flour), Sugar, Electricity, Ceiling

Fans, Among others) and energy items (Petrol, Kerosene).

But one of the biggest drawbacks of WPI is that it does not include services which CPI includes like Transport, Health, Education etc.

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INDIA WHOLESALE PRICE INDEX, 2015

Source: www.tradingeconomics.com, Ministry of Statistics & Programme Implementation (MOSPI), India

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2. CONSUMER PRICE INDEX

• A Consumer Price Index (CPI) measures changes in the price level of a market basket of consumer goods and services purchased by households.

• The CPI is a statistical estimate constructed using the prices of a sample of representative items whose prices are collected periodically.

• CPI Inflation India November, 2015: 5.00 %

• There are 200 weighted items in CPI

Source: Inflation.eu

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Source: The Hindu, 13, Nov. 2015

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There are three CPICPI for the entire urban population viz. CPI (Urban)CPI for the entire rural population viz. CPI (Rural)

Each type track the retail prices of good and services for specific group of people.

Its main purpose is to measure the impact of price rise in rural and urban poverty.

CPI gives larger weight on food items than WPI and therefore is more sensitive to changes in prices in food items

“From 2012 India begin to use CPI for calculating the inflation rate”

“Most of the developed nations like UK, USA, JAPAN, use CPI for the inflation

calculation”

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Prime Drivers of Inflation

Food prices : High Protein and nutritious items

like Pulses and Milk continue to see high rates of

Inflation (eg. 22% & 7 % respectively, rise in June

2015)

Fuel prices: Which has a direct and indirect feed into retail Inflation –

The cost of petrol before customs duty, excise, state taxes, VAT and cess,

an increase in excise duties per litre.

20Source: www.tradingeconomics.com, Ministry of Statistics & Programme Implementation (MOSPI), India

Inflation Rate

Nov. 2015 Oct. 2015 2014

5.00 4.41 3.78INDIA INFLATION RATE, 2015

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INFLATION LEAD TO

Reduces purchasing power- Hit on the poor

Unemployment increases

Cost of goods increases

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“Poor people with fixed /low income are the ultimate sufferers of

Inflation”

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“Zero Inflation is where the economy reach a state of 0% Inflation rate”

ZERO INFLATION

W P I @ Z E R OWe are tired of the Inflation in last couple of years,

“This phenomenon is quite talked about in the economic intelligentsia and is termed as ‘Zero Inflation’’

November 2014, 0.0%

Source: www.tradingeconomics.com

INDIA WHOLESALE PRICE INDEX CHANGE, 2015

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• International crude oil prices have fallen to half of its earlier prices • Fall in crude oil prices was one of the most important reasons behind the

‘Zero Inflation’.

• In CPI, Food is given around 50% of the weightage which mainly contains cereals

• The MSP in recent times has not been increased in cereals which has a direct effect on the prices.

Factors Influenced Zero Inflation

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•Demand compression is further caused due to stagnant Social spending like on MNREGA and other schemes.

• Tight monetary policy by RBI Raghuram Rajan RBI governor

“Emphasized that interest rate cut by itself would not lift the economy. Industry has been demanding easing of interest rates to boost growth, which has slumped to 4.7 percent in 2013-14. The economy is estimated to grow in the range of 5.4-5.9 percent this fiscal (2014-15).”

timesofindia.indiatimes.com, December 2014

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Zero Inflation is good……! Why? Growth with no Inflation

Is feasible by having supply-side policies. “An increase in supply equivalent to that of the increased demand would theoretically result in inflation of zero”

There is an accumulation of long-term investments as the investors are willing to invest money for a long time without any risk.

Welcomed more by people with fixed incomes and households and pensioners.

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Zero Economy enables to lessen the price distortion, it also reduces the uncertainty involved in price drift

Corporation is in a better position to plan for the economy and implement new rules, policies for the betterment of the economy.

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Zero Inflation increases unemployment rate Not only skill loss but tax revenueLimited wages

Slows down economic growth Encourage people to delay buying expensive goods

Zero Inflation is Not good…!! Why?

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Zero inflation has no use in a dynamic economyWhich is an indication of low growth.Demotivates producers to produce because there is no change in price

levels

Very low inflation lead to lower government tax revenuese.g. VAT (%) of goods will not rise by as much as expected.

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Can there be economic growth with zero inflation?

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Consumers Producers Economy

Zero Inflation Not affected at all

No incentive to produce more, same production

Stagnant for almost same level of production

Mild Inflation

Affected but not much, Demand may be same

Have incentive to produce more, Higher production

Economy expands as production increase

High Inflation

Affected much, Demand may be lower in many products

Producers of inelastic products affected, Production lower for lower demand

Economy squeezes as production falls

EFFECTS OF INFLATION

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Mild Inflation

Is basically low rate

of inflation around

2% to 3%

Mild inflation shows

that an economy is

stable and indicates

economic growth.

It Is better compared to Zero Inflation

because in thefirst place it

motivates producers in producing more, since price increase

is an incentive to them.

Secondly excess demand will be

partially regulated here because price increase reduces,

hence, prospects of higher inflation

minimized

Zero Inflation Economy:Examples

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1. Best Example is USA. It had faced a high inflation during the 1970s but after a long effort they could establish an economy that was clear off inflation. They reached a stage of Zero Inflation in Jan, 2015.

2. In the UK, CPI inflation has fallen to 0% in July 2014

36http://www.economicshelp.org/ 25 March 2015

Public of UK Said

The fall in Inflation will be mostly welcomed by the ‘Average’ joy in the public. They will benefit from cheaper prices and the feeling of more disposable income. This ‘feel good’ factor may encourage stronger

confidence – Investment, Spending and Growth. In the current climate, low inflation could be a blessing in disguise.

“Reducing Inflation above target is relatively easy – solving Deflation is more of an unknown quantity”

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India is the world’s second largest producer of food next to china

India has 2nd largest arable land in the world

Largest producer of Pulses, Milk, Tea, Mangoes, Bananas,

Largest livestock population

The Indian food and grocery market is the 6th largest in the world

India is one of the leading exporters of the agriculture products

Indian Food Industry

www.makeinindia.com

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RISE IN FOOD PRICE

Rise in prices of food items – “FOOD INFLATION”

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• Rising food price is all set to hit the Asians countries hard in the next few years.

• Millions of people in developing nation are about to face additional burden as domestic food prices in Asia rose by 10% while international prices in annual terms soared to 30% in the initial years of this decade

ileadkolkata.wordpress.com

Rising prices are like a fire feeding on itself – As they erode the incomes of wage earners,

they give rise to labor unrest.

Food Inflation Rate• It is calculated by the Central Statistical Organization

(CSO)

• The current rate is 4.4% ( October 2015)

Year Inflation Rate

2005-06 4.832006-07 7.782007-08 5.462008-09 8.012009-10 14.722010-11 15.782011-12 7.272012-13 14.32013-14 9.82014-15 4.782015-16 4.4

“Volatility due to dependence on imports, the uncertain impact of Monsoon Rains on large farm sector, difficulties in Transporting food items to market because of Poor Roads and Infrastructure and high Fiscal Deficit”

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Price rise trends over last six decades indicate that India has bump into successive bouts of high food Inflation, but the fundamental drivers have changed over time; The influence of monsoon and drought has

declined and some new sources of price pressures like surging prices of Fuel, Commodity, Fruits and Vegetables have emerged.

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REASONS FOR RISE IN FOOD PRICE

• Govt. policies –• Pressure stemming from

inclusive growth policies- Food security, MNREGA

• Minimum Support Price – • MSPs of food grains:

• Seasonal Cycles• Bad monsoon in India

• International prices • -Shocks from global food

prices• Food Wastage

• Rise in living standards leading to improved diets• - A Shift in dietary habits towards

protein foods: • More demand for food/ change in

consumption pattern• Decreased production and Less

productivity• Export of food• Holding by marketers• Financialisation of commodities and

market regulations

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While food prices have been declining

everywhere else, why are they rising at such a fast clip in

India?Former Prime Minister Man

Mohan Singh had famously said high food inflation was

the result ofpeople eating

better; a reasonable

response from an economist

accustomed to cold facts

Source: suparna-sen.blogspot.in and Bhattacharya et al (NIPFP & ADB), 2014

Diversification of Indian diets associated with raised per capita income has increased the demand for high-value food products

‡ Rise in Living Standards Leading to Improved Diets

- A Shift in dietary habits towards protein foods:

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• Major contributor to Food Inflation is Protein rich foods like Milk, Pulses, Eggs, Fish etc.

• The trend of food consumption has shifted from Carbohydrate rich foods to Protein rich foods.

• In the case of Pulses the problem is compounded by the fact that India is the single biggest consumer and only a handful of other countries produce in quantities that India demands.

• Shortage in demand and supply: pulses production fallen by more than 2 million tonnes in 2014-15 and are falling short of about 4 million tons this year.

†. More demand for food(Change in consumption pattern)

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Drought-induced : Shortages in food supply are deemed to be the prime reasons for food rise in India

Scarcity of Rainfall: The late coming of monsoon is held responsible for the price rise.

Cheating temperament of local vegetable vendors

Poor monsoon of the previous year that kept the prices of food grains uneven

†Seasonal Cycles

Only a small portion of food price rise can be blamed on weather

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» Land • Besides availability, the process of acquisition is held up in legislative uncertainty, costs and legal complications.

» Labor • Rising wages, availability and reliability of skilled labour,

» Capital • Credit growth is stagnant in the face of rising stressed assets and low bank capitalization.

» Power• Despite record coal availability and generation, the condition

of state electricity boards and distribution companies still constrain the availability of power

» Supply chain

• Slow pace of road building, lack of cold chains and warehouses, paucity of railway rakes, and absence of a clear master plan to integrate highways, ports and railways leave the industry constrained.

• Value chain

†Decreased production and Less productivityFactors of production

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• Food subsidies—in the form of the Minimum Support Price,

• MSP—for crops can also pressure inflation in the short term.

†. Minimum Support Price –

MSP is the floor price that the government guarantees to farmers for 25 crops, if the output

is weak.

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• Nearly 40% of all fresh produced in India perishes before it can get to customers

• Inappropriate supply chain management and lack of basic facility to store the food

†. Food Wastage –

www.bbc.com, 2014

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Growth rate of the essential goods and commodities (like

food, oil, land etc.) has not been able to match population

growth.

Food crisis in the world is due to increase in population rate

†.Increase in Population

But this is not the case in India as -> There is consistent growth is achieved in food production year-on-yearFrom 208 million tonnes in FY 06 to an estimated 265 million tonnes in FY14, a 3 percent annual growth, compared to a 1.2 percent population growth rate.

forbesindia.com

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Benefits of Food Price Rise

FARMERS - The benefits of high prices go primarily to farmers with a large

marketed surplus and these farmers are not the poorest of the poor.

TRADERS – Take advantage of market and price gap

INVESTORS - High prices represent an opportunity to spur long-term

investment in agriculture, which will contribute to sustainable food security in

the longer run

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EXPORT AND IMPORT Countries that export a

large proportion of their production benefit the most when prices are high.

Higher food prices will be strongest in countries where food subsidies are an important part of the budget

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The rapid rise in food

prices has been a burden

on the poor in developing

countries like India, Who

spend roughly half of their

household incomes on food.

Indian’s spending pattern

Effects of food inflation

Soucre: Would the Real Inflation Rate Please Stand Up, Jan 19, 2012

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oHike in food prices posses a threat to the over all growth of the

economy and can push millions of people below the poverty line.

oFood Inflation encourages hoarding of essential commodities

oLowers the purchasing power of common man

oForces common man to borrow money from banks and other

financial institutions

oMal-functioning of PDS shops

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Differential impact on net food exporters (e.g. China) and net food importers

(e.g. Indonesia)

Among the developing countries, the impacts are more severe in poorer

countries. Interestingly, the impacts are lesser in countries that have a higher

contribution of agriculture to GDP.

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Food price rise resulted Infant Mortality, Child Mortality and Undernourishment

It is found that a one per cent increase in Food Inflation leads to an increase of 0.3 percent in both Infant and Child mortalities and 0.5 percent in Undernourishment.

Influences of food inflation of earlier years was visible in increased infant and child mortality, and that of recent years in increasing undernourishment.

Impact of food price rise on Nutrition

Rising food prices are comrade with negative childhood nutrition

56Source: indianexpress.com

Rising food prices were associate with significant declines in the consumption

of rice, a major source of caloric intake, And eggs and meat which are

important high-protein sources in Indian diets. In turn, these declines were

associated with a greater risk of children’s wasting, a short-term respondent

to prices, but not stunting, which is a long-term deprivation measure,”

In near future the impact of high food price will show in terms of more malnourished

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In both rural and urban areas, the poorest quintiles are the worst affected.

“The poorest of poor people usually buy more food than they sell. Thus, High food prices tend to worsen poverty, Food Insecurity and Malnutrition”

The poor landless are likely to be worse-off

Female-headed households fail to benefit due to limited access to land, credit and markets

On the other hand, farmers who are net food sellers are likely to grieve more

Impact of food price rise on Poverty

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The situation of price rise coexists with a set of short-term complexes.To combat food inflation, It is these myriad factors the government needs to focus on.

Measures to Control Food Inflation

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Increase in

Production &

productivity

provisi

on of

Subsidies

Proper

commerci

al policies

Encouragement to

savings

Ban on Exports and Imports Food Inflation

Crucial Measure

Price stability is a prime concern of the governments the world over.

• Price and quantity restrictions make matters worse• Subsidised food distribution provides partial relief but does not mitigate

food insecurity • The food system is global but the principal actors are national governments• International agencies can play a supportive role but improvements require

sound national policies• In the long-term, higher agricultural growth needed for food security and to

raise incomes of smallholders.

Policy Priorities

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Rakesh Bharti Mittal Vice-Chairman of Bharti Enterprises

Emphasized 10 Point Measures, Both short term and long term to tackle the inflating prices @ CII (Confederation of India Industry, 2011)

Views to Tackle Food Price Change

“Measures should be made a part of long term policy for ensuring food security rather than ad-hoc emergency measures. And also, A strong political consensus and push is needed to ensure that the State Governments accept this recommendation”

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Lower import duty, especially on fruit & vegetables and allow imports: Looking at the rising prices of fruit and vegetables, the Government should react fast on

lowering the existing tariffs (hovering around 30% to 50%) and allow import of these commodities.

State Governments should take stern enforcement measures to curb hoarding and speculations.

The Government should invite and Incentivize private sector (Both domestic and foreign), Cooperatives and NGOs to come up with business models

that directly link the growers with processors and retailers.

Short Term Measures

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Medium to Long Term MeasuresExemption of perishables from the provision of the APMC Act

All the fruits, vegetables and other perishables including fisheries having very short shelf-life should be fully exempted from the provisions of the APMC Act.

Processors and organized retailers should be incentivized To procure directly from the farmer groups (growers, companies or cooperatives) for building infrastructure in

rural areas for aggregating the fresh produce, cleaning it, grading, packaging, and storing in cold storages before bringing it for retail distribution. This will create not only employment in rural areas but also build much needed infrastructure.

The Centre should also encourage the States To help build the infrastructure, especially cold storages, to save on wastages which will boost supply side and

help in price moderation. www.dayafterindia.com

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A unified national market :The Government should move towards a unified national market and allow free movement of fresh produce across the country without any taxes whatsoever.

Creating a marketing platformMost importantly it is time to usher in market reforms by compressing the value chain of Agri-commodities. The model of creating a marketing platform at the village level needs to be promoted where the buyers will come to the producer groups directly rather than farmers going outside to sell their produce.

Investments in organized retail(Both domestic and foreign) to shore up the entire supply chain and ensure good prices to farmers as well as consumer.

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Farm ProductivityStrong and urgent focus is needed to enhance farm productivity by way of adequate

Inputs usage and by extension For enhancement of the supply side to meet the growing demand on a sustainable basis

A special agreement should be signed between India and the neighbouring countries - for import and

export of perishables. This will be a confidence building measure and will ease demand supply challenges

of similar commodities between India and the neighbouring countries.

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Investment by Multi Brand Outlets

Increased Competition

Organized Supply Chain

Job Creation

Increased Disposable

Income

Increased Consumption

Inflation Decrease

Reduced Waste

Middle Man Cut

Out

Increased Income Of Farmers

Offset of Existing

Distributors

IMPACT OF FDI ON INFLATION RATE

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In India Wholesale Price Index hit zero in November 2014, (the lowest in about five and half years) was because of decline in prices of food, fuel and manufactured items.

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