Is food finally getting cheaper?

For the past three years, the big economic story that has affected the lives of most people in India is food price inflation. The rate of increase of food prices has been very high over a sustained period, and all the declared policies of the government have done little to reduce it. Indeed, some policies such as the deregulation of petrol prices may well have further contributed to such inflation.
For almost a year now there have been claims made by policymakers and spokespersons of the government — indeed, everyone from the finance minister downwards — that food inflation will come down to six per cent within a few months. This claim has been made periodically since last October, yet food prices have continued to rise at very rapid and even increasing rates.
This continued surge in food prices has become a major political issue, and has also finally come to dominate the concerns of officialdom. It has led to a change in the official policy thrust, towards inflation control through monetary policy, notwithstanding the negative effect this may have on output and employment. Thus the Reserve Bank of India is so concerned about the continuing high rates of food inflation (which it interprets as reflecting excess demand) that it is increasingly veering towards putting up interest rates in order to restrict price increases. But there are several reasons why this is not likely to be the appropriate strategy.
Over the past year, the rapid increase in the food inflation rate to 20 per cent and more from November 2009 reflected the impact of the poor kharif harvest consequent upon the bad monsoon. This was coupled with the effect of adverse expectations. The food inflation rate remained persistently high thereafter. It is only in the past three months that there has been some deceleration in the year-on-year food inflation rate, although it still remains very high at around 15 per cent in annual terms.
In fact, the most recent kharif season has been associated with a deceleration in inflation (though not yet an absolute decline in prices) as the effects of a munificent monsoon in large parts of peninsular India are felt. This is notwithstanding the relatively poor rainfall that has affected much of the eastern region.
It is quite clear that patterns of rainfall and harvests continue to affect food price movements. For example, in 2007 (which was a very good year in terms of agricultural output in both kharif and rabi seasons) quarterly food inflation rates were moderate but positive until October, and then even turned negative from October, indicating absolute price declines. By contrast, 2009 turned out to be a very poor year for kharif and only a moderate year for rabi and showed continuously high price changes.
What does this reveal about food price behaviour for the current fiscal year? For the first four months of fiscal 2010-11, the quarterly food inflation rates have looked very similar to those that prevailed in 2009, which was a bad year in terms of agricultural output. However, since late August the pattern appears to have changed, and the pattern of price movements much more closely tracks the price behaviour of 2007, which was a good harvest year. Since all indications are that the current year will witness a good kharif harvest, there is sufficient reason to expect that the quarterly inflation rate may turn negative post-harvest, as had occurred in 2007.
If this does actually transpire, then the rate of food price inflation may decline in the near future. If the seasonal price pattern tracks the movements in 2007 because of the good kharif harvest, there is likely to be a decline in the year-on-year food inflation rate to just below six per cent in the coming months — a very belated realisation of the promise being made for the past year!
This means that heavy-handed monetary policy measures designed to curb such inflation, especially those affecting the base interest rate, are likely to be excessive and even unnecessary given the likely movement of food prices.
However, this does not mean that there is any justification for complacency on the food price issue, nor does it suggest that the question of food security for the population is any less pressing. Note that much of the decline in food inflation rates that may appear shortly is because of the base effect of very high food prices in the previous year. Also, money wages of most workers (both wage workers and self-employed) have certainly not kept pace with the food price increases.
A further factor must be borne in mind. India continues to be affected by global prices of important food items, and there are clear indications of another price upsurge in food markets in global trade. For example, wheat prices in the Chicago market (which is the typical benchmark for the global trade price) have increased by more than 70 per cent in the three months upto late September. There is once more evidence of speculative activity in the commodity futures markets, driven by index traders. What makes the problem more pressing for India is that the Indian government has once again allowed futures contracts in wheat from May 2009, having lifted the ban specifically for this commodity. If global speculative pressures affect India, including through the impact on the local futures market, this may provide a source of food price inflation that is unrelated to local supply factors. In such a case, any bets on future food price movements would be off.