Agrarian Performance & Food Price Inflation in India

Agrarian Performance & Food Price Inflation in India: Pre- and Post-Economic Liberalisation Article by: Sthanu R Nair & Leena Mary Eapen

Course : Indian Economy 2 B.A. Hons Economics, Semester VI Delhi University

Course Instructor: Siddharth Rathore Assistant Professor Economics Department, Gargi College

Siddharth Rathore SPECIAL ARTICLE

Agrarian Performance and Food Price Inflation in India Pre- and Post-Economic Liberalisation

Sthanu R Nair, Leena Mary Eapen

Examining long-term trends in food inflation in India in 1 Introduction relation to the performance of the Indian agricultural he post-economic reforms (post-ER) period1 in India has been characterised by a slowdown in the growth rate of sector under various agrarian policy regimes, this paper Toverall agricultural output and crop yields due to vari- shows that despite the slowdown in the agricultural ous reasons (Bhalla and Singh 2009; Desai et al 2011). In the sector and higher increases in the cost of food context of persistently high food price infl ation in India over production during the post-economic reforms period the last few years, it was argued that the supply constraint causing high food prices was rooted in the slow growth of (1992–2013), food prices were relatively low compared Indian agriculture in the post-ERs period (Carrasco and to the initial (1967–80) and the maturing (1980–92) Mukhopadhyay 2012; Desai et al 2011; GoI 2012). However, a stages of the Green Revolution. This, it is argued, is clear understanding of the food price situation during the possibly due to more stable agricultural growth post-ERs period as a whole and its connection with the slowdown in agricultural growth during the same period is yet post 1991–92, higher buffer food stocks, greater to emerge. coverage of the public distribution system, and better Against this background, this paper aims to examine the responses to food price fluctuations due to import/trade trends in food price infl ation in India in relation to the growth liberalisation and a more comfortable foreign exchange of Indian agriculture pre- and post-ERs, so as to enhance our understanding of food price behaviour during the post-ERs reserves position. period, which has been a period of slow agricultural growth. For this purpose, following Bhalla (2007), Bhalla and Singh (2009), and Panagariya (2004), the growth path of India’s agriculture sector is divided into four phases: the pre-Green Revolution period (1950–51 to 1964–65),2 the initial stage of the Green Revolution (1967–68 to 1979–80), the maturing stage (1980– 81 to 1991–92), and the post-ERs period (1992–93 to 2012–13).3 The paper is organised as follows. Section 2 presents a brief performance analysis of Indian agriculture under various agrarian policy phases in terms of growth in agricultural gross domestic product (GDP) and food output. In Section 3, the trends in wholesale price index (WPI) food infl ation witnessed during various agrarian policy periods are discussed. Section 4 offers possible reasons for the price trends that emerged under agrarian policy regimes. The last section summarises the fi ndings of the paper and draws policy conclusions.

2 Performance of Indian Agriculture

The authors are thankful for valuable comments and suggestions from an anonymous referee of this journal and participants of seminars and 2.1 Pre-Green Revolution (1950–51 to 1964–65): At the time of conferences held at Central University of Kerala, IIM Calcutta, IIM independence, India witnessed an acute shortage of food due Kozhikode, and the National Institute of Public Finance and Policy, to the disruption caused to the agricultural sector following the New Delhi. The usual disclaimer applies. partition of British India in 1947 (Bhalla 2007; Swaminathan Sthanu R Nair ([email protected]) and Leena Mary Eapen (leenaeapen@ 2012). Partition led to loss of rich fertile lands to Pakistan and iimk.ac.in) are with the Indian Institute of Management, Kozhikode. large-scale migration of populations across the borders. The

Economic & Political Weekly EPW august 1, 2015 vol l no 31 49 The Pink Professor SPECIAL ARTICLE government met the country’s immediate food requirement rate of agricultural GDP declined slightly to 2.92% pa during the through large-scale import of food aid, primarily using the PL same period (Table 1).9 480 programme of the United States (US). In addition, serious attempts were made to attain self-suffi ciency in food produc- 3 Trends in Food Prices tion by way of large public investment in agricultural infra- We examined the monthly movements (Figures 1 and 2, p 51) of structure, implementation of land reforms and rural develop- two components of WPI food infl ation (Base: 2004–05), namely, mental schemes (Bhalla 2007; Chandra, Mukherjee and primary food articles and manufactured food products, during Mukherjee 2008). the four agrarian periods described earlier to identify episodes of high and persistent food infl ation during each period, and 2.2 Initial Stage (1967–68 to 1979–80): The agrarian to calculate the average infl ation rate in each such episode stagnation during the fi rst half of the 1960s eventually led (Tables 3 and 4, p 52).10 Since most studies have suggested a to the introduction of a new high yielding varieties (HYV)– threshold level of infl ation of about 6% for India (Table 2 in seed–fertiliser strategy, popularly known as the Green Pattanaik and Nadhanael 2011) we considered the persistence Revolution, starting from 1966.4 The infl uence of this new of infl ation of 6% and above as a high infl ationary episode. The strategy on the performance parameters of Indian agriculture average infl ation rate recorded in an episode, say from June 1972 was not encouraging during the initial stage (1967–68 to to May 1975, is calculated based on the change in the average 1979–80). This is evident from the noticeable drop in the value of the WPI over this period with respect to the average value growth rate of agricultural GDP, output and yield of all the of the WPI over the corresponding period (June 1971 to May 1974) major crops except wheat during this stage (Tables 1 and 2).5 the year before. The fi ndings of our analysis are as follows: Several factors are believed to have contributed to this out- Since April 1954 India experienced 14 episodes of high food come (Bhalla 2007; EPW 1967a, 1967b). They include mainly articles infl ation (Table 3).11 On all these occasions, the impact limited crop (only wheat) and geographical coverage (only of the price build-up was broad-based, implying that almost all Punjab, Haryana and Western Uttar Pradesh) of the Green the commodity subgroups under the food articles category Revolution strategy to start with; the after effects of the 1965 were subject to high infl ation.12 The longest episode of high and 1971 India–Pakistan wars; and the oil crises of 1973–74 food articles infl ation were the 62 months from July 1979 to and 1978–79. August 1984, followed closely by 61 months from March 2008 to March 2013, and 57 months from June 1963 to February 1968. 2.3 Maturing Stage (1980–81 to 1991–92): Consequent to the The infl ationary episode that had the highest average food spread of the HYV–seed–fertiliser strategy to more crops and articles infl ation of 20.22% was during the 36-month period almost all geographical areas, India’s agrarian economy wit- from June 1972 to May 1975. nessed a revival during the Table 1: Compound Annual Growth Rates During the pre-Green Revolution period, high food articles of Gross Domestic Product (GDP) and 1980s. Compared to the Agricultural GDP (Base: 2004–05) (%) price infl ation occurred on four occasions (Table 3). The aver- initial stage of the Green Period Total Agricultural age infl ation recorded during these infl ationary episodes Revolution, the growth GDP GDP ranged from 8.5% to over 15%. In the 13 years covering the rate of agricultural GDP, 1950–51 to 1964–65 3.95 2.66 initial stage of the Green Revolution, India experienced three 1967–68 to 1979–80 3.45 2.19 output and yield of a ma- 1980–81 to 1991–92 5.21 3.09 Table 2: Compound Annual Growth Rate of Production and Yield of jority of crops recorded 1992–93 to 2012–13 7.01 2.92 Various Food Commodities (%) Items 1950–51 to 1967–68 to 1980–81 to 1992–93 to an improvement between Data for 2010–11 are second revised estimates 1964–65 1979–80 1991–92 2012–13 1980–81 and 1991–92 (RE), for 2011–12 are first RE and for 2012–13 are provisional. Output Yield Output Yield Output Yield Output Yield (Tables 1 and 2). The GDP Source: Handbook of Statistics on Indian Economy Total foodgrains 3.54 2.12 2.16 1.73 2.74 3.01 1.58 1.57 growth fi gure of 3.09% (HSIE) 2012–13, Reserve Bank of India (RBI). Cereal 3.76 2.43 2.47 2.08 2.87 3.20 1.59 1.68 pa achieved by the agricultural sector during this period is the Rice 4.35 2.86 1.95 1.18 3.71 3.12 1.38 1.34 highest till date. Another landmark achievement was the Wheat 4.27 1.53 5.48 2.30 3.63 3.24 1.93 1.12 emergence of yield as the predominant contributor to food- Coarse cereals 2.75 1.68 0.72 1.81 –0.01 1.73 1.45 2.58 6 output growth. Pulses 2.19 0.40 -0.54 -1.08 1.33 1.27 1.34 0.91 Nine oilseeds 3.54 0.89 1.83 0.67 6.06 2.73 2.03 1.75 2.4 Post-Economic Reform (1992–93 to 2012–13): The eco- Sugar cane 6.36 3.07 2.79 1.16 3.67 1.44 1.48 0.01 nomic liberalisation strategy introduced in India in June 1991 Tea - - 3.33* - 2.76 1.87 1.99 0.03 had no explicit mandate to liberalise the Indian agriculture Coffee - - 5.01* - 2.67 1.17 2.33 -0.23 sector and integrate it with the global economy (Bhalla 2007; Milk 1.64 - 2.23 - 5.14 - 4.15 - Chand, Raju and Pandey 2007; Landes and Gulati 2004).7 This Egg 4.63 - 6.49 - 7.71 - 5.95 - together with a host of other factors contributed to the deterio- Fish - - - - 5.14 - 3.35 - - Not available; * From 1970–71 to 1979–80;  From 1950–51 to 1960–61 based on point- ration in the overall performance of Indian agriculture during to-point data; - From 1960–61 to 1979–80 based on point-to-point data. the post-ERs period.8 The growth rate of output and yield of a Source (Basic Data): (i) Department of Agriculture and Cooperation (DAC), Ministry of Agriculture (MoA), Government of India (GoI) (For foodgrains, oilseeds); (ii) HSIE 2012–13 majority of food commodities decelerated signifi cantly between (for sugar cane, tea, coffee); (iii) Annual Report 2012–13, Department of Animal Husbandry, 1992–93 and 2012–13 (Table 2). On the other hand, the growth Dairying and Fisheries, MoA, GoI (for milk, egg, fish).

50 august 1, 2015 vol l no 31 EPW Economic & Political Weekly The Pink Professor SPECIAL ARTICLE

Figure 1: Monthly Movements in Food Articles Inflation Rate (April 1954 to March 2013) 40 Pre-Green Revolution Period Initial stage of Green Revolution Maturing stage of Green Revolution Post-economic reforms period 35

-5

-10

-15

-20

-25 April-54 May-55 Jun-56 Jul-57 Aug-58 Sep-59 Oct-60 Nov-61 Dec-62 Jan-64 Feb-65 Mar-66 Apr-67 May-68 Jun-69 Jul-70 Aug-71 Sep-72 Oct-73 Nov-74 Dec-75 Jan-77 Feb-78 Mar-79 Apr-80 May-81 Jun-82 July-83 Aug-84 Sep-85 Oct-86 Nov-87 Dec-88 Jan-90 Feb-91 Mar-92 Apr-93 May-94 Jun-95 July-96 Aug-97 Sep-98 Oct-99 Nov-2000 Dec-01 Jan-03 Feb-04 Mar-05 Apr-06 May-07 Jun-08 July-09 Aug-10 Sep-11 Oct-12 See Table 3. Source (Basic Data): (i) HSIE (March 2006), RBI and Central Statistics Office (CSO) (http://eaindustry.nic.in/).

Figure 2: Monthly Movements in Food Products Inflation Rate (April 1972 to March 2013) 80 Initial stage of Green Revolution Maturing Stage of Green Revolution Post-economic reforms period 75 70 65 60 55 50 45 40 35 30 25 20 15 10 5 0 -5 -10 -15 -20 -25 Apr-72 Jan-73 Oct-73 Jul-74 Apr-75 Jan-76 Oct-76 Jul-77 Apr-78 Jan-79 Oct-79 Jul-80 Apr-81 Jan-82 Oct-82 Jul-83 Apr-84 Jan-85 Oct-85 Jul-86 Apr-87 Jan-88 Oct-88 Jul-89 Apr-90 Jan-91 Oct-91 Jul-92 Apr-93 Jan-94 Oct-94 Jul-95 Apr-96 Jan-97 Oct-97 Jul-98 Apr-99 Jan-2000 Oct-2000 Jul-01 Apr-02 Jan-03 Oct-03 Jul-04 Apr-05 Jan-06 Oct-06 Jul-07 Apr-08 Jan-09 Oct-09 Jul-10 Apr-11 Jan-12 Oct-12 See Table 4. Source: As in Figure 1. episodes of high food articles infl ation. The peak average infl a- periods from December 1976 to June 1977 and from April 2011 tion rate recorded during these episodes was 20.22% with the to June 2012, on all other occasions, the impact of food products lowest being 10.96%. During the maturing stage of the Green price build-up was spread across a majority of food items.13 Revolution that spanned 12 years, food articles price build-up The initial and maturing stages of the Green Revolution had occurred on three occasions with average infl ation rates ranging three episodes of high food products infl ation each (Table 4). from 9.88% to 15.11%. Notably, the duration of the infl ationary The average infl ation recorded during the three episodes of episodes witnessed during this stage was longer compared to high infl ation in the initial stage of the Green Revolution other stages. Since the introduction of economic reforms, India ranged from 15% to 37.72%. The same fi gures for the maturing experienced four episodes of high food articles price infl ation. stage were 8.68% to 10.86%. During the post-ERs period, India The average infl ation rate recorded during these episodes experienced fi ve episodes of high food products price infl ation ranged from 9.22% to 12.99%. with the average infl ation rate ranging from 7.29% to 12.20%. Since April 1972, the period from which data is available, high Our literature survey reveals that each episode of food infl ation of the food products group struck India on 11 occasions, articles and food products infl ation identifi ed were triggered the longest being the 72-month period from April 1989 to by a host of factors (Table 5, p 53). In addition, our analysis of March 1995 (Table 4). The period from April 1979 to June 1981 yearly movements in growth of food output and WPI infl ation had the highest average infl ation rate of 37.72%. E xcept for the rates of food reveals that on most occasions the spike in food

Economic & Political Weekly EPW august 1, 2015 vol l no 31 51 The Pink Professor SPECIAL ARTICLE prices with respect to a particular food commodity was pre- 4.1 More Stable Food Production: A striking feature of In- ceded by a supply shortfall. dia’s agrarian performance during the post-ERs period was the A comparison of average food articles and food products in- growth of agricultural output and GDP, though lower, was fl ation rates experienced during the various phases of agricul- more stable. This is evident from the low standard deviation of tural growth reveal that despite the decline in agricultural GDP the year-on-year growth rate of output of a majority of food and food output growth rates, the post-ERs period saw lower commodities, and of agricultural GDP in the post-ERs period food infl ation compared to the maturing stage of the Green Rev- compared with earlier periods (Table 7, p 54). The implication olution (in case of food articles), and the initial and maturing of this fi nding is that even if the rate of agricultural growth is stages of the Green Revolution (in case of food products). On an slow, low fl uctuations in growth cause few disruptions in food average, the food articles infl ation rate recorded during the ma- supply, thereby contributing to low food price infl ation. On the turing stage of was 10.20% against 7.86% recorded during the other hand, high agricultural growth may not guarantee low post-ERs period (Table 3). In the case of food products, the post- food prices if it is accompanied by frequent fl uctuations in ERs period saw an average infl ation of only 5.94% as against growth. This is evident from the experience of the maturing 12.57% and 7.24 % recorded during the initial and maturing stage of the Green Revolution. The high growth performance stages, respectively (Table 4).14 The prices of the majority of in- of Indian agriculture during this period was made possible due dividual food articles and food products turned out to be lower, on to the extraordinary growth achieved in just three years, average, in the post-ERs period compared with the maturing namely, 1980–81, 1983–84 and 1988–89. The year-on-year stage of the Green Revolution (Table 6, p 54). Moreover, the peak growth of agricultural GDP during these three years was average infl ation rate recorded in any given episode of high 14.44%, 10.75% and 16.85%, respectively. The same fi gure for food infl ation was the lowest during the post-ERs period for food foodgrains output was 18.13%, 17.64% and 21.07%, respec- articles (12.99%) and second lowest for food products (12.20%). tively. In all the other years during the maturing phase, the growth rates of agricultural GDP and foodgrain output were 4 Understanding the Food Price Trends either negative or quite low. We offer the following explanations for the relatively low food price infl ation during the post-ERs period notwithstanding the 4.2 Shift in Food Consumption: An analysis of food expendi- slowdown in agricultural growth. ture patterns at current prices prior to the economic reforms period (1967–68 to 1993–94), based on the household con- Table 3: Average WPI Inflation Rate (Base: 2004–05) Recorded during Various Episodes of Food Articles Price Inflation sumer expenditure survey conducted by the National Sample Period Duration Inflation Survey Offi ce (NSSO) on a quinquennial basis, reveals that a (in Months) Rate (%) “secular shift” in food consumption pattern in favour of high- Pre-Green Revolution period (1954–55 to 1964–65) March 1956 to August 1957 18 15.02 value food items has occurred in India during the maturing 15 July 1958 to May 1959 11 9.91 stage of the Green Revolution (1983 to 1994). This is evident May 1962 to November 1962 7 8.50 June 1963 to March 1965 22 13.70 Table 4: Average Inflation Rate (Base: 2004–05) during Various Episodes of Food Products Price Inflation (%) Overall period (April 1954 to March 1965) - 4.48 Period Duration Inflation Initial stage of Green Revolution (1967–68 to 1979–80) (in Months) Rate (%) June 1972 to May 1975 36 20.22 Initial stage of Green Revolution (1972–73 to 1979–80) February 1977 to January 1978 12 13.15 April 1972 to June 1975 39 15.00 July 1979 to March 1981 21 10.96 December 1976 to June 1977 7 18.31 Overall period (April 1968 to March 1981) # - 5.98 April 1979 to June 1981 27 37.72 Maturing stage of Green Revolution (1980–81 to 1991–92) Overall period (April 1972 to June 1981) - 12.57 April 1981 to August 1984 41 11.67 Maturing stage of Green Revolution (1980–81 to 1991–92) April 1986 to February 1989 35 9.88 April 1983 to August 1984 17 10.57 April 1990 to February 1993 @ 35 15.11 February 1986 to October 1988 33 8.68 Overall period (April 1981 to February 1993) - 10.20 April 1989 to March 1993 @ 48 10.86 Post-economic reforms period (1992–93 to 2012–13) Overall period (July 1981 to March 1993) - 7.24 June 1994 to April 1997 35 11.47 Post-economic reforms period (1992–93 to 2012–13) May 1998 to April 1999 12 12.99 April 1993 to March 1995 24 12.20 October 2005 to September 2007 24 9.22 December 1996 to March 1999 28 9.46 March 2008 to March 2013 61 11.16 March 2003 to January 2005 23 7.29 Overall period (March 1993 to March 2013) - 7.86 January 2008 to July 2010 31 10.20  The period up to March 1981 is included under initial stage of GR because the reason April 2011 to March 2013 24 7.64 for high food inflation recorded during April 1980 to March 1981 was the decline in food production in 1979–80, which falls under initial stage of GR. Overall period (April 1993 to March 2013) - 5.94 # The year 1967–68 is not included under initial stage of GR because the high food inflation The period up to June 1981 is included under initial stage of GR because the cause of witnessed during this year was due to crop failure for two successive years in 1965–66 and high food inflation recorded during April 1980 to June 1981 lies in negative growth of food 1966–67. The year 1967–68 was an excellent year for Indian agriculture. production in 1979–80, which comes under initial stage of GR. @ The period up to February 1993 is included under maturing stage of GR because the root @ The period up to March 1993 is included under maturing stage of GR because the root cause of high food inflation experienced during April 1992 to February 1993 was the poor cause of high food inflation experienced during April 1992 to March 1993 was the poor growth of agriculture sector in 1991–92, which falls under maturing stage of GR. growth of agriculture sector in 1991–92, which falls under maturing stage of GR. Source (Basic Data): As in Figure 1. Source (Basic Data): As in Figure 1.

52 august 1, 2015 vol l no 31 EPW Economic & Political Weekly The Pink Professor SPECIAL ARTICLE from the following three trends that emerge from Tables 8 and 9 Figure 3: ContributionFigure 3: to Contribution Overall Food Inflation to Overall Food Inflation (%) (%) (p 57).16 First, the drop experienced in the expenditure share 120 of cereals both in rural and urban India during 1983–88 was not only signifi cantly more than in other periods, but were his- Other food products 100 toric highs. Second, except sugar, all the high-value food com- Sugar, modities registered highest expenditure shares both in rural khandsari & gur and urban areas during 1983–94. Third, the highest percent- 80 age point increase recorded in the expenditure shares of Edible oils Condiments pulses, milk, sugar, edible oil, vegetables and fruits in rural and spices 60 India was during 1983–94. These trends suggest that the Fruits and rising demand for high-value agriculture products was one of vegetables Per cent Per the key factors contributing to the historically high average 40 food price infl ation rate recorded during the maturing stage of Protein the Green Revolution. This is clearly refl ected in Figure 3, foods which shows that besides the important role of edible oils, the 20 contribution of high-value food commodities, namely protein foods, fruits and vegetables to overall food infl ation has increased Cereals 0 markedly in the maturing stage of the Green Revolution Initial State of GR Maturing State of GR Post-ERs Period compared with the initial stage.17 (a) Protein foods include pulses, milk, dairy products, egg, meat and fish; (b) Other food products include grain mill products and oil cake. The shift in food consumption demand during the maturing Source (Basic Data): As in Table 3. stage of the Green Revolution might be due to two reasons. Notes: First, as documented in literature on India’s economic growth, independence,Source (Basic Data): the diversifi cation of Indian diets. Second, the after experiencing low and stagnant growth during the fi rst signifi cant increase in the real agricultural wages during three decades after independence, the Indian economy grew 1980s might have pushed up rural demand for high-value food. at a noticeably high rate during the 1980s (De Long 2003; The growth of real agricultural wages was highest during the Nagaraj 2000; Panagariya 2004; Rodrik and Subramanian maturing stage of the Green Revolution. For instance, real 2008). This seems to have triggered, for the fi rst time since wages for male agricultural labour grew 3.75% between 1983

Table 5: Factors Contributing to Various Episodes of High Food Inflation in India Inflationary Episodes Reasons for High Inflation June 1972 to May 1975 (food articles) and April 1972 to June 1975 Crop loss in 1971 due to flood situation, in 1972 due to drought and in 1974; uncertainty (food products) caused by the 1971 Indo–Pak war; additional demand for food due to influx of Bangladesh refugees resulting from 1971 Indo–Pak war; successive increases in the procurement price; higher central issue prices; absence of a robust system of government procurement, buffer stocking and public distribution; delay in importing food; panic situation created by the dwindling foreign exchange reserves; stoppage of concessional food imports using soft loans; and speculative behaviour by traders February 1977 to January 1978 (food articles), December 1976 to June Excess liquidity in the agricultural and trading sectors leading to bullishness in the 1977 and April 1979 to June 1981 (food products) grain market; short-fall in rice production due to scanty rain during 1976 kharif season; severe drought situation in 1979–80 leading to sharp drop in foodgrains production and cornering of large quantities of market arrivals by private traders. July 1979 to August 1984 (food articles) and April 1983 to August 1984 Short-fall/unimpressive growth in foodgrains production during 1979–80, 1981–82 and (food products) 1982–83; drought during the kharif season of 1982–83; self-imposed limits on open market purchases by government; inadequate spread of public distribution system; limited food imports due to difficult foreign exchange situation; depletion of buffer stock; and high support prices April 1986 to February 1989 (food articles) and February 1986 to Short-fall/unimpressive growth in foodgrains production during 1984–85, 1985–86, October 1988 (food products) 1986–87 and 1987–88; higher support prices; drought situation in 1987–88; and low foodgrains procurement in 1988–89 despite record production April 1990 to February 1993, June 1994 to April 1997, May 1998 to April Short-fall/unimpressive growth in foodgrains production during 1989–90, 1990–91, 1999 (food articles), April 1989 to March 1995 and December 1996 to 1991–92, 1993–94, 1995–96, and 1997–98; large government procurement at high March 1999 (food products) support prices; large increases in the issue price of foodgrains; more export of wheat and rice; and increase in speculative hoarding by private traders due to withdrawal of monitoring of stock limits under Essential Commodities Act and RBI's decision to exempt almost all commodities from selective credit controls effective from 21 October 1996 October 2005 to September 2007 (food articles) Short-fall/unimpressive growth in foodgrains production during 2004–05 and 2005–06; higher aggregate demand; and government's failure to procure adequate quantities of wheat March 2008 to March 2013 (Food articles), January 2008 to July 2010 Supply-side bottlenecks; large increase in minimum support prices; inadequate sale of and April 2011 to March 2013 (food products) rice under open market sales window of government; inflationary expectations due to unfavourable climatic condition; increasing demand for food due to an increase in income, increase in cost of production; and high cost of imports and higher food exports. Source: Economic & Political Weekly (Analysis and Editorials published in various issues); Nair and Eapen (2011 and 2012); Nair (2013); Patnaik (2007) and the authors’ analysis of year-on-year growth of production of various food commodities.

Economic & Political Weekly EPW august 1, 2015 vol l no 31 53 The Pink Professor SPECIAL ARTICLE and 1993–94, against 1.33% and 0.59% recorded, respectively Overall, though, the MSP increased substantially during the during the periods 1993–94 to 1999–2000 and 1999–2000 to post-ERs period, a closer look at the annual increases in MSP 2010–11 (Himanshu 2005 and Usami 2012).18 Prior to the ma- reveals that between the fi ve-year period from 2001–02 to turing stage of the Green Revolution (1964 to 1980) as well, the 2005–06 in case of wheat and from 2002–03 to 2006–07 in growth of real agricultural wages was slow as evident from the case of rice the increase in MSP was moderate (circled portion analysis presented in Chavan and Bedamatta (2006).19 in Figures 4 and 5). The annual increases in MSP during these periods ranged from 1.56% to 1.64% for wheat and 1.75% to 4.3 Role of Minimum Support Prices: One of the key reasons 3.77% for rice.22 Both prior to and after these periods in the ER attributed to the spikes in food prices witnessed during the post- s period, annual Table 7: Standard Deviation of Year-on-Year post-ERs period are the hefty increases in minimum support increases in MSP were Growth Rates of Food Production and Agricultural GDP (%) prices (MSP) of foodgrains (rice and wheat) (Balakrishnan 2000; signifi cantly larger. For 1951–52 1967–68 1980–81 1992–93 Chand 2005; Dev and Rao 2010). The procurement of foodgrains instance, from 1993–94 to to to to by the government at higher MSP can cause high food infl ation to 2001–02 (2000–01 1964–65 1979–80 1991–92 2012–13 due to three reasons (GoI 2000; Nair and Eapen 2011). First, it in case of wheat) the Foodgrains 8.40 12.52 9.51 8.45 sets a higher benchmark for market prices of foodgrains annual increases in MSP Total cereals 7.75 11.90 9.36 8.24 Rice 10.20 14.80 13.43 9.38 thereby feeding into food price infl ation expectations. Second, ranged from 3.92% to Wheat 12.74 14.91 8.10 6.45 it necessitates a hike in the prices of foodgrains supplied by the 14.81%, and 2.86% to Pulses 14.66 19.27 13.94 13.74 PDS government through the public distribution system ( ) and 25.39% for rice and Nine oilseeds 10.32 18.91 18.00 20.68 OMSS 20 Open Market Sale Scheme ( ). Third, it edges out private wheat, respectively. In- Sugar cane 16.51 13.04 8.37 11.33 trade thereby reducing the quantum of foodgrains available for terestingly, during this Tea – 3.49 4.34 4.21 consumption by ordinary consumers. The infl uence of a hike in phase of moderate in- Coffee – 24.06 46.16 10.35 MSP on foodgrain prices is evident from Figures 4 and 5 (p 55) creases in MSP, infl ation Milk – – 2.19 0.96 which show that generally, the rate of annual increases in MSP rates of both rice and Egg – – 3.31 4.33 of rice and wheat and their respective annual infl ation rates move wheat were ruling low Fish (total) – – 5.65 2.69 in the same direction, indicating that a higher increase in the with a period average of Agricultural GDP 5.05 9.05 6.49 4.65 MSP translates into an increase in the market price of foodgrains 2.1% and 1.9%, respec- Source (Basic Data): As in Tables 1 and 2. and vice versa. Long-term trends reveal that MSP for rice and tively (circled portion in Figures 4 and 5). Incidentally, it is this wheat in nominal terms recorded much higher increases dur- fairly long phase of signifi cantly low rice and wheat infl ation ing the post-ERs period than in the 1980s (Figure 6, p 55).21 rates which has pulled down the average cereal infl ation rate Interestingly, however, cereals experienced lower average after the economic reforms. infl ation rates during the post-ERs period compared to the Apart from the modest increases in MSP, which might have maturing stage of the Green Revolution (Table 6). We provide reduced the expectation of an all pervasive increase in food the following explanation for this counter-intuitive fi nding. prices, the other reason for low rice and wheat price infl ation Table 6: Average WPI Inflation Rate (Base: 2004–05) of Diesel and between 2001–02 and 2006–07 appears to be the reduction Subgroups of Food Articles and Food Products under Various Agrarian followed by no revision in Central Issue Price (CIP) of rice and Policy Regimes (%) wheat since July 2000 for below poverty line (BPL) families, Items Pre-Green Initial Stage Maturing Stage Post-Economic Revolution of Green of Green Reforms Period and since July 2001–02 for above poverty line (APL) families Period Revolution Revolution (Tables 10 and 11, p 57). The combined effect of the marginal Period Period increases in MSP, and reduction and no upward revision in the Food articles CIP Foodgrains* – 5.10 9.89 7.32 are the following: (a) starting from 2000–01, the govern- Cereals 3.69 5.40 9.94 7.36 ment’s food subsidy bill increased substantially both in Pulses 8.34 7.54 9.00 8.44 absolute terms and as a percentage of GDP (at market prices) Fruits and vegetables 6.62 6.87 9.81 7.68 (Figure 7, p 56), (b) the offtake of rice and wheat both by BPL Milk 4.09 5.07 10.28 8.04 and APL benefi ciaries under targeted public distribution system Eggs, meat and fish 7.42 8.64 9.59 9.64 (TPDS) increased between 2001 and 2007 (Table 12, p 58).23 Condiments and spices* – 4.34 18.89 6.14 Thus, it is evident that the moderate hikes in procurement prices Fuel (diesel) – 10.57 8.39 9.82 during 2001–02 to 2006–07 coupled with reduction in and freeze Food products PDS Dairy products – 8.96 10.21 6.58 on prices resulted in a fall in wholesale price of cereals and PDS Grain mill products – 6.17 9.43 5.21 increase in offtake of cereals from and open market. Sugar, khandsari and gur – 11.39 2.32 7.16 Although increased offtake led to steep falls in foodgrains Edible oils – 11.14 9.64 4.43 buffer stocks bet ween 2002–03 and 2006–07 (Figure 8, p 56), Oil cake – 10.49 8.32 8.84 consumers paid lower prices for cereals thanks to modest Tea and coffee proccessing** – – 6.66 5.69 increases in MSP and downward/no revision in CIP.24 Fuel (diesel) – 15.81 7.87 9.79 In sharp contrast to the situation during 2001 to 2007, between * Prior to April 1963 foodgrains and condiments and spices classification are not available. the period 1993–94 and 1999–2000 (2000–01 in case of wheat) ** Tea and coffee processing classification is available only from April 1982. Source (Basic Data): As in Figure 1. annual increases in MSP were substantial (Figures 4 and 5).

54 august 1, 2015 vol l no 31 EPW Economic & Political Weekly The Pink Professor SPECIAL ARTICLE Figure 4: Movements in Year-on-Year Growth of MSP and Inflation Rate of Rice (%) during this period (Figure 8, p 56) 45 thanks to high levels of procurement, it has not translated into

35 MSP lower cereal prices for most years due to (a) procurement at higher MSP, and (b) increase in CIP at fre- 25 Inflation Rate quent intervals. In fact, the upward revision of CIP has accelerated the 15 rate of accretion to public stocks of foodgrains, particularly in case of 5 wheat during 1997–2001, by way of reducing the offtake of grains under 25 -5 the PDS (Figure 8 and Table 12). As regards the other important phase (2007 to 2012)26 of high MSP -15 prevailing during the post-ERs period to overcome the situation of falling 2011–12 2011–12 2012–13 2012–13 2010–11 2010–11 1977–78 1977–78 1978–79 1978–79 1991–92 1991–92 1976–77 1976–77 1981–82 1981–82 1992–93 1992–93 1997–98 1997–98 1987–88 1987–88 1982–83 1982–83 2009–10 1993–94 2001–02 1979–80 1980–81 1985–86 1995–96 1990–91 1983–84 1996–97 1989–90 2002–03 1986–87 1998–99 1988–89 2007–08 1994–95 1984–85 2003–04 2005–06 2000–01 2000–01 2006–07 2008–09 2004–05

1999–2000 1999–2000 foodgrain stock from 2002–03 to Source: HSIE (RBI) (for MSP) and CSO (for Inflation) 2006–07 and to incentivise farmers Figure 5: Movements in Year-on-Year Growth of MSP and Inflation Rate of Wheat (%) to increase grain production and 40 productivity (GoI 2012) a sharp 35 hike in MSP of rice and wheat 30 MSP was effected from 2007–08 and 2006–07, respectively.27 As a result, 25 cereal prices rose despite rising 20 grain buffer stock.28 However, since CIP remained unrevised dur- 15 Inflation Rate ing this period thereby widening 10 the gap between CIP and the mar- 5 ket price of grains, the offtake of TPDS 0 foodgrains under , even by APL beneﬁ ciaries, was high. -5 Finally, considering the matur- -10 ing stage of GR, though in absolute terms the nominal MSP of rice and 2011–12 2011–12 2012–13 2012–13 2010–11 2010–11 1977–78 1977–78 1978–79 1978–79 1976–77 1976–77 1991–92 1981–82 1981–82 1992–93 1992–93 1997–98 1997–98 1987–88 1987–88 1982–83 1982–83 2009–10 1993–94 2001–02 1979–80 1980–81 1995–96 1985–86 1990–91 1983–84 1996–97 1989–90 2002–03 1986–87 1998–99 1988–89 2007–08 1994–95 1984–85 2003–04 2005–06 2000–01 2000–01 2006–07 2008–09 2004–05 wheat was lower during this period 1999–2000 1999–2000 ER Source: As in Figure 4. than the post- s period, a major MSP Figure 6: Minimum Support Price of Wheat and Rice (Rupees per quintal) shift in the level of nominal 1400 occurred since 1988–89 (circled portion in Figure 6). The average 1200 MSP offered to rice increased from 1000 Rs 131 during 1980–81 to 1987–88 to Rs 210 during 1988–89 to 1992–93, Wheat 800 a huge increase of 60%. The MSP of 600 wheat also increased to a similar magnitude from Rs 154 to Rs 247 400 Rice during the same period. More 200 importantly, the CIP of both rice and wheat was subject to upward 0 revision throughout the maturing state of Green Revolution (Tables 10 2011–12 2011–12 2012–13 2012–13 2010–11 2010–11 1977–78 1977–78 1975–76 1975–76 1978–79 1978–79 1976–77 1976–77 1991–92 1991–92 1981–82 1981–82 1992–93 1992–93 1997–98 1997–98 1987–88 1987–88 1982–83 1982–83 2009–10 1993–94 2001–02 1979–80 1980–81 1985–86 1995–96 1990–91 1983–84 1996–97 1989–90 2002–03 1986–87 1998–99 1988–89 2007–08 1994–95 1984–85 2003–04 2005–06 2000–01 2000–01 2006–07 2008–09 2004–05

1999–2000 1999–2000 and 11). Thus, it turns out that the Source: HSIE (RBI). high level of MSP in the later part Notably, there were frequent upward adjustments in the CIP of the maturing stage of the Green Revolution and upward consequent to the increases in the MSP (Tables 10 and 11). adjustments in the PDS issue price at regular intervals have put Though the food stock with the government was healthy pressure on cereal prices.

Economic & Political Weekly EPW august 1, 2015 vol l no 31 55 The Pink Professor SPECIAL ARTICLE Figure 7: Food Subsidy in India might have contributed to lower 90,000 1.20 food inﬂ ation during the post-ERs 80,000 period by enhancing the govern- 1.00 70,000 ment’s ability to stabilise prices As % of GDP through sale of foodgrains to the 60,000 0.80 open market.30 Another closely re- 50,000 lated factor could be the improve- 0.60 40,000 ment in coverage and effective- Percentage Rupees crore PDS 30,000 0.40 ness of the overtime. Though In rupees crore the PDS played an important role 20,000 0.20 since independence in making 10,000 available foodgrains to consumers 0 0.00 at reasonable price, it remained predominantly urban and ineffec- 2011–12 2012–13 2012–13 2010–11 1974–75 1977–78 1975–76 1978–79 1991–92 1976–77 1981–82 1992–93 1997–98 1987–88 1982–83 2009–10 1993–94 2001–02 1979–80 1980–81 1985–86 1995–96 1990–91 1983–84 1996–97 1989–90 1986–87 2002–03 1988–89 1998–99 2007–08 1994–95 1984–85 2003–04 2005–06 2000–01 2006–07 2008–09 2004–05 tive in reaching the poor until the 1999–2000 Source: Radhakrishna and Subbarao (1997) and Sharma (2012) (For Subsidy); HSIE, RBI (For GDP). mid-1980s (Howes and Jha 1992; Figure 8: Yearly Movements in Cereal (Wheat & Rice) Stocks (in Million Tonnes) and WPI Inflation Rate of Nawani 1994). However, starting Cereals (Base: 2004–05) (1972–73 to 2012–13) 50 70 from the early 1990s, serious policy interventions such as re- 40 60 vamped PDS and TPDS were made Cereal inflation rate (%) 30 Cereal stocks 50 to ensure the effective reach of in million tonne PDS to the traditionally deﬁ cit ar- 20 40 eas and vulnerable people (GoI

10 30 2005; Nawani 1994). Recent stud- PDS Million tonne Million ies have found that has im- Percentage 0 20 proved overtime in terms of cover-

-10 10 age and function (Khera 2011; Rahman 2014). -20 0 4.5 Import Liberalisation: It seems that liberalisation of agricultural 2011–12 2011–12 2012–13 2012–13 2010–11 2010–11 1974–75 1974–75 1973–74 1973–74 1977–78 1977–78 1975–76 1975–76 1972–73 1972–73 1978–79 1978–79 1991–92 1991–92 1976–77 1976–77 1981–82 1981–82 1992–93 1992–93 1997–98 1997–98 1987–88 1987–88 1982–83 1982–83 2009–10 1993–94 2001–02 1979–80 1980–81 1985–86 1995–96 1990–91 1983–84 1996–97 1989–90 1986–87 2002–03 1988–89 1998–99 2007–08 1994–95 1984–85 2003–04 2005–06 2000–01 2000–01 2006–07 2008–09 2004–05 imports and less stringent foreign 1999–2000 1999–2000 Source: CSO (for Inflation) and HSIE (RBI) (for cereal stocks). exchange constraints—both an Figure 9: Yearly Movements in Index Number (Base: 1999–2000) of Food Imports (Quantum) and outcome of opening up of the In- Figure 9: Yearly Movements in Index Number (Base: 1999-00) of Food Imports (Quantum) and WPI Food Inflation Rate (Base: 2004–05)WPI Food (1960–61 Inflation to 2009–10) Rate ((Base: 2004-05))( (1960-61 to 2009-10)) dian economy since 1991—have 250 60 enabled India to import more 50 quantities of various food items to 200 Food Products Inflation 40 Index No of Food Import meet food requirements at times Food Articles Inflation 150 30 of domestic shortage and escalat- 20 ing domestic food prices, thereby 100 10 helping to reduce food infl ation during the post-ERs period. This is 0 50 evident from Figure 9, Figures 10 -10 to 12 (p 58), which reveal the fol- 0 -20 lowing trends. (a) Since 1960–61, the quantum of 1974–75 1972–73 1978–79 1970–71 1976–77 1992–93 1982–83 1962–63 2009–10 1980–81 1990–91 1996–97 1998–99 2002–03 1986–87 1960–61 1988–89 1994–95 1984–85 1968–69 1966–67 1964–65 2000–01 2006–07 2008–09 2004–05 aggregate food imports responded Source: HSIE RBI (For Import Index) and CSO (For Inflation). mostly to food price shocks until 4.4 Role of Buffer Stocks and PDS: As pointed out by Gokarn 1975–76, followed by a phase of substantially lower food (2011), a credible level of food stocks can dampen price volatil- imports covering a 10-year period from 1976–77 to 1986–87 ity, possibly by keeping a check on speculative tendencies in (Figure 9). Food imports started responding to food price the market. Figure 8 reveals that historically, by and large, ce- spikes again from 1987–88 to 1995–96 though in a subdued real infl ation rates and cereal stock levels have behaved simi- and erratic fashion. And from 1996–97 onwards food imports larly.29 Barring the period from 2002 to 2007, foodgrains (rice have responded overwhelmingly to domestic food price esca- and wheat) buffer stock with the government was signifi cantly lation. Thus, India’s aggregate food imports remained at a higher in the post-ERs period compared with other agrarian high level and were adequately responsive to food price escala- policy regimes (Figure 8). As such, the higher food stocks tions before the mid-1970s and after the mid-1990s. In the

56 august 1, 2015 vol l no 31 EPW Economic & Political Weekly The Pink Professor SPECIAL ARTICLE interim period (1976–77 to 1995–96), India’s food imports were agricultural products, Table 10: Central Issue Price (CIP) of Rice relatively low.31 namely, pulses, vegeta- (Rs/quintal) Date of Revision Common Fine Superfine (b) A commodity-wise analysis of trends in food imports32 bles, fruits, spices, milk 1982 (October) 188 200 215 vis-à-vis food infl ation since 1960–61 reveals that prior to the products, edible oils, 1984 (January) 208 220 235 opening up of the Indian economy only the import of cereals, oil cake and sugar have 1985 (October) 217 229 244 milk and milk products have responded adequately to the increased signifi cantly 1986 (February) 231 243 253 infl ationary pressures witnessed in these commodities.33 The in response to the price 1986 (October) 239 251 266 import of other food commodities, though responded posi- shocks that occurred in 1987 (October) 239 264 279 tively to price escalation, was very limited during the same these products. In par- 1989 (January) 244 304 325 period (Figures 10 to 12, for example).34 On the other hand, ticular, the increase in 1990 (June) 289 349 370 after the opening up of the Indian economy, import of several imports of many of these 1991 (December) 377 437 458 products was pheno- 1993 (January) 437 497 518 Table 8: Trends in Percentage Composition of MPCE (at Current Prices) on 1994 (February) 537 617 648 menal since the early Groups of Food Items in Rural India (Share in Total Consumer Expenditure Above Poverty Below Poverty on Food) 2000s and this may be Line (APL) Line (BPL) 1967– 1972– 1977– 1983 1987– 1993– 1999– 2004– 2011– Common Grade A Common/Grade A 68 73 78 88 94 2000 05 12 the outcome of removal 1997 (December) 550 700 350 Cereal 58.69 55.72 50.96 49.25 40.99 38.30 37.31 32.72 24.62 of quantitative restric- (-2.97) (-4.76) (-1.71) (-8.25) (-2.69) (-0.99) (-4.59) (-8.10) tions on farm imports 1999 (January) 700 905 350 Gram 1.08 0.78 0.65 0.39 0.38 0.28 0.22 0.24 0.35 2000 (April) 1,135 1,180 590 starting from 2001. (-0.31) (-0.12) (-0.26) (-0.02) (-0.10) (-0.06) (0.02) (0.11) 2000 (July) 1,087 1,130 565 The implication of this Cereal 1.08 0.75 0.52 0.28 0.21 0.17 0.12 0.13 0.14 2001 (July) 795 830 565 substitutes (-0.34) (-0.23) (-0.23) (-0.08) (-0.04) (-0.04) (0.00) (0.01) food import pattern 2002 (April) 695 730 565 Pulses and pulse 5.69 5.88 5.93 5.37 6.22 6.02 6.41 5.59 6.39 from the point of view products (0.19) (0.06) (-0.56) (0.85) (-0.20) (0.39) (-0.82) (0.80) 2002 (July) 795 830 565 Milk and milk 9.56 10.01 11.93 11.46 13.52 15.02 14.74 15.38 18.67 of understanding food The classification of beneficiary category and grain variety products (0.45) (1.92) (-0.47) (2.06) (1.50) (-0.28) (0.64) (3.29) price behaviour is that has changed since the introduction of TPDS in 1997. Source: Economic Survey (Various Issues) and DAC, Sugar 5.07 5.16 4.11 4.29 4.47 4.84 4.01 4.31 3.8 the positive import res- MoA, GoI. (0.09) (-1.06) (0.18) (0.19) (0.36) (-0.83) (0.30) (-0.51) ponse to food price esca- Edible oil 3.76 4.82 5.55 6.14 7.82 7.03 6.29 8.36 7.75 Table 11: Central Issue Price of Wheat (1.06) (0.73) (0.59) (1.67) (-0.79) (-0.74) (2.07) (-0.61) lation witnessed prior to (Rs/quintal) Date of Revision Central Issue Price Egg, fish and 3.10 3.39 4.15 4.61 5.07 5.29 5.59 6.05 7.33 1975–76 was restricted 1982 (August) 160 NA meat (0.29) (0.76) (0.46) (0.46) (0.22) (0.30) (0.46) (1.28) only to cereals, milk and Vegetables 4.22 4.94 5.87 7.19 8.16 9.56 10.38 11.08 9.95 1983 (April) 172 NA (0.72) (0.92) (1.32) (0.97) (1.40) (0.82) (0.70) (-1.13) milk products. In con- 1986 (February) 190 NA Fruits and nuts 1.16 1.40 1.74 2.12 2.55 2.76 2.89 3.39 3.08 trast, the highly favour- 1987 (May) 195 NA (0.24) (0.34) (0.38) (0.43) (0.21) (0.14) (0.49) (-0.31) able import response to 1988 (March) 204 NA Figures in the brackets are percentage points change over the years. 1990 (May) 234 NA Percentage shares of individual food items do not add to 100 since salt and spices and food price escalation beverages etc are excluded. MPCE = Monthly per capita expenditure. recorded since the mid- 1991 (December) 280 NA Source (Basic Data): NSSO (For 1967–68 to 1983); Household Consumer Expenditure in 1993 (January) 330 NA India, 2007–08; NSS 64th Round (Report No 530) (For 1987–88 to 2004–05); and Key 1990s was broad-based, 1994 (February) 402 NA Indicators of Household Consumer Expenditure in India, 2011–12; NSS 68th Round. involving several agri- APL BPL Table 9: Trends in Percentage Composition of MPCE (at Current Prices) on cultural commodities. 1997 (June) 450 250 Groups of Food Items in Urban India (Share in Total Consumer Expenditure Farm imports were on Food) 1999 (January) 650 250 1967– 1972– 1977– 1983 1987– 1993– 1999– 2004– 2011– liberalised through three 1999 (April) 682 250 68 73 78 88 94 2000 05 12 key measures, namely, 2000 (April) 900 450 Cereal 38.06 36.17 34.09 32.85 26.46 25.69 25.70 23.65 19.02 removal of quantitative 2000 (July) 830 415 (-1.90) (-2.08) (-1.25) (-6.39) (-0.77) (0.01) (-2.04) (-4.63) restrictions (from 2001), 2001 (July) 610 415 Gram 0.47 0.49 0.42 0.32 0.29 0.32 0.23 0.25 0.32 2002 (April) 510 415 (0.02) (-0.07) (-0.10) (-0.03) (0.03) (-0.09) (0.01) (0.07) lowering of tariff barri- 2002 (July) 610 415 Cereal 0.23 0.20 0.17 0.13 0.12 0.12 0.09 0.12 0.14 ers and increasing the NA: Not Applicable. substitutes (-0.04) (-0.02) (-0.04) (-0.01) (0.00) (-0.03) (0.03) (0.02) role of private traders Source: As in Table 10. Pulses and 5.63 5.29 5.95 5.46 6.04 5.55 5.90 5.03 5.59 35 pulse products (-0.34) (0.66) (-0.49) (0.58) (-0.49) (0.35) (-0.87) (0.56) in agricultural imports by way of decanalisation of imports. Milk and milk 14.12 14.47 15.88 15.62 17.06 17.94 18.05 18.62 20.2 While these measures have enabled import of large quantities products (0.35) (1.41) (-0.26) (1.44) (0.88) (0.11) (0.57) (1.58) of food, decanalisation of imports might have produced an Sugar 5.40 5.58 4.40 4.16 4.19 4.35 3.41 3.55 3.0 (0.18) (-1.18) (-0.25) (0.04) (0.16) (-0.95) (0.14) (-0.55) additional benefi t in terms of adequate response of private Edible oil 6.14 7.52 7.73 8.19 9.47 8.03 6.53 8.13 6.89 sector imports to price rise against the pre-1990s situation (1.38) (0.22) (0.45) (1.28) (-1.44) (-1.50) (1.60) (-1.24) of only government controlled imports via state trading Egg, fish 4.86 5.07 5.77 6.10 6.33 6.19 6.52 6.36 7.25 and meat (0.21) (0.71) (0.33) (0.23) (-0.14) (0.33) (-0.16) (0.89) bodies/enterprises. Vegetables 6.24 6.78 7.33 8.43 9.39 9.99 10.69 10.47 8.82 (0.55) (0.55) (1.09) (0.96) (0.60) (0.70) (-0.22) (-1.65) 4.6 Cost of Production: One major factor determining food Fruits and nuts 2.75 3.11 3.26 3.57 4.49 4.87 5.03 5.29 4.55 price infl ation is the cost of production (CoP) in agriculture. In (0.36) (0.15) (0.31) (0.92) (0.39) (0.16) (0.25) (-0.74) absolute terms, the trends in nominal C2 CoP36 in agriculture – MPCE = Monthly per capita expenditure. Source: As in Table 8. represented by two major food crops, namely, rice and wheat

Economic & Political Weekly EPW august 1, 2015 vol l no 31 57 The Pink Professor SPECIAL ARTICLE

Figure 10: Yearly Movements in Cereal Imports (in Tonnes) and WPI Inflation Rate of Cereals Table 12: Offtake under the Public (Base: 2004–05) (1961–62 to 2009–10) Distribution System/TPDS 1,20,00,000 50 (in Million Tonnes) Year Rice Wheat 1,00,00,000 Inflation rate 40 1990–91 7.87 NA 7.08 NA 80,00,000 30 1991–92 10.17 NA 8.83 NA

20 1992–93 9.55 NA 7.47 NA 60,00,000 Import 1993–94 8.87 NA 5.91 NA Tonne 40,00,000 10

Percentage 1994–95 8.03 NA 4.83 NA 20,00,000 0 1995–96 9.75 NA 5.81 NA

0 -10 1996–97 11.14 NA 8.52 NA 1997–98 9.9 NA 7.08 NA -20 -20,00,000 BPL+AAY APL BPL+AAY APL 1998–99 3.35 7.27 2.62 5.20 1971–72 1973–74 1977–78 1975–76 1991–92 1981–82 1961–62 1997–98 1969–70 1987–88 1967–68 2009–10 1993–94 2001–02 1979–80 1995–96 1985–86 1983–84 1989–90 2007–08 1965–66 1963–64 1999–2000 3.98 7.21 3.02 2.60 2003–04 2005–06 1999–2000 Source: Food and Agriculture Organization STAT (FAOSTAT) (for imports) and CSO (for inflation). 2000–01 5.92 1.94 3.76 0.17 2001–02 6.74 1.30 4.99 0.53 Figure 11: Yearly Movements in Pulses Imports (in Tonnes) and WPI Inflation Rate of Pulses 2002–03 9.28 1.17 7.98 1.64 (Base: 2004–05) (1961–62 to 2009–10) 2003–04 11.41 1.86 8.56 2.11 40,00,000 60 2004–05 13.24 3.23 9.69 3.20 Import 50 35,00,000 Inflation rate 2005–06 14.40 4.66 8.69 3.36 40 30,00,000 2006–07 15.30 5.82 7.60 2.65 30 2007–08 16.66 5.79 7.91 2.93 25,00,000 20 2008–09 16.36 5.71 8.82 3.71 20,00,000 10 2009–10 16.88 6.54 9.47 9.53 0 15,00,000 2010–11 17.97 6.87 9.13 9.75 -10 10,00,000 2011–12 17.91 6.41 9.10 9.68 -20 2012–13 18.20 7.03 9.78 9.87 5,00,000 -30 NA: Not Applicable; As in Table 10. 0 -40 Source: Economic Survey (various issues) and IndiaStat.Com (from 1998–99). 2010).37 As regards fuel prices, the 1971–72 1973–74 1977–78 1975–76 1991–92 1981–82 1997–98 1961–62 1969–70 1987–88 1967–68 2009–10 1993–94 2001–02 1979–80 1995–96 1985–86 1983–84 1989–90 2007–08 1965–66 1963–64 2003–04 2005–06

1999–2000 average diesel price infl ation wit- Source: As in Figure 10. nessed during the post-ERs period Figure 12: Yearly Movements in Edible Oils Imports (in Tonnes) and WPI was higher than the maturing stage of the Green Revolution Inflation Rate of Edile Oils (Base: 2004–05) (1961–62 to 2009–10) (Table 6). However, interestingly, as indicated earlier, the real 90,00,000 60 80,00,000 50 agricultural wages increased at a much slower rate during the Inflation rate rate ImportImport 70,00,000 40 post-ERs period compared to maturing stage of the Green Revolu- 60,00,000 30 50,00,000 20 tion. These trends suggest that the higher increase in CoP in 40,00,000 10 30,00,000 0 Indian agriculture after the economic reforms period was not 20,00,000 -10 attributed to higher increases in cost of farm labour.38 Thus, the 10,00,000 -20 0 -30 relatively low food price infl ation in the post-ERs period despite the higher overall cost of food production was due to an over- 1971–72 1973–74 1977–78 1975–76 1991–92 1981–82 1961–62 1997–98 1969–70 1987–88 1967–68 2009–10 1993–94 2001–02 1979–80 1995–96 1985–86 1983–84 1989–90 2007–08 1965–66 1963–64 2003–04 2005–06 whelming response of other factors discussed above. 1999–2000 Source: As in Figure 10. 5 Summary and Policy Conclusions Figure 13: C2 Cost of Production of Rice and Wheat (Rs/quintal) 600 In this paper, we have analysed the trends in food price infl ation

500 in India in relation to the performance of the agricultural sector RiceRice during the pre- and post-ERs periods. It is revealed that, on aver- 400 age, food price inﬂ ation was lower during the post-ERs as a 300 whole compared to the initial and maturing stages of the Green WheatWheat 200 Revolution. This is despite the decline in the agricultural sector 100 during the post-ERs period and the persistently high food inﬂ a-

0 tion witnessed in recent years which, among others, was caused due to supply-side constraints, growing demand for protein-rich 1991–92 1981–82 1992–93 1997–98 1987–88 1982–83 2001–02 1995–96 1985–86 1990–91 1996–97 1983–84 2002–03 1989–90 1998–99 1986–87 1988–89 1994–95 1984–85 2003–04 2005–06 2000–01 2006–07 2004–05 food items and rising cost of food production (for details see Source: Dev and Rao (2010). 1999–2000 Basu 2011; Chand 2010; Nair and Eapen 2012; Nair 2013). Sur- reveals that post-ERs period saw faster increases in CoP than the prisingly, the maturing stage of the Green Revolution, which is maturing stage of the Green Revolution (Figure 13). A similar considered a turning point in India’s agricultural development trend was recorded in the growth rate of real CoP (Dev and Rao (Bhalla and Singh 2009), has not turned out to be price friendly,

58 august 1, 2015 vol l no 31 EPW Economic & Political Weekly The Pink Professor SPECIAL ARTICLE with both food articles and food products infl ation rates ruling control price shocks.39 In contrast, the periods before eco- high on average during this phase. In our view, the following nomic liberalisation were constrained by a restricted trade re- factors explain these results. gime, perennial foreign exchange shortages, and an unfavour- First, agricultural growth was more stable during the post- able international com munity, all of which made it diffi cult to ERs period than the initial and maturing stages of the Green exercise the import option liberally. Revolution. Second, there was a major shift in food consump- The policy implications of our fi ndings are as follows: (a) it tion towards high-value food commodities during the maturing seems that, in the long run, a combination of a liberal foreign stage of the Green Revolution. Third, the moderate increases trade regime and stable, but not necessarily high, agricultural in MSP from 2001 to 2007 signifi cantly reduced cereal prices growth and food output can be helpful to keep food infl ation and infl ationary expectations during this period thereby help- under control;40 (b) along with the level of agricultural growth, ing achieve lower average food infl ation in the post-ERs pe- attention must be paid to the stability of growth (Chand 2010); riod. Fourth, the downward revision in and freeze on CIP since (c) moderate hikes in MSP and lower PDS price can have a sof- the early 2000s resulted in higher offtake of foodgrains from tening effect on food prices, but at the cost of an enlarged food PDS at highly subsidised prices. Fifth, the foodgrains buffer subsidy bill; (d) a better level of buffer stock and increase in ac- stock situation improved signifi cantly in the post-ERs period cessibility of the PDS can help stabilise food prices; (e) from an thereby strengthening the government’s capacity to release infl ation angle, the concerns about the deceleration of agricul- grains in the open market to check price rise. Fifth, the cover- tural growth during the post-ERs period are unfounded; and age and performance of PDS has improved over the years. Sixth, (f) the notion that economic (trade) liberalisation and the con- thanks to the opening up of foreign trade, and a comfortable sequent strengthening of the foreign exchange reserve position foreign exchange reserves position since 1992, India succeeded have led the government to be less focused on agricultural self- in importing adequate food to meet domestic shortages and to suffi ciency since 1992 (Landes and Gulati 2004) has substance.

Notes 14 We measured policy regime-wise average food distortions and restoring the role of private 1 Post-economic reforms period refers to the infl ation rate after taking into account the trade in the grain market, thereby reducing period after 1991. spill-over effect of output shock occurring in the pressure on government to procure more 2 Following literature, we exclude 1965–66 and one policy regime on the price situation in food grains (GoI 2005: 2006). 1966–67 as they experienced two unprece- another regime. For details, see notes to 23 The offtake under OMSS was also high during dented droughts and a war (India–Pakistan). Tables 3 and 4. The conclusions remain the most of the years in this period. same if average infl ation rate is measured 3 As the economic reform programme was intro- 24 The other major factor contributing to easing without this adjustment. duced from July 1991, its effect on the economy of buffer stock was the higher export of rice could not have been felt prior to 1992–93 15 After the economic reforms a similar shift in and wheat permitted by the government at a (Panagariya 2004). food consumption pattern was experienced heavy discount price and lower wheat procure- between 2004 and 2012 (Tables 8 and 9). Also, ment in 2005–06 and 2006–07. For details, see 4 For details of this strategy, see Bhalla (2007); see Nair (2013). Swaminathan (2012). Nair and Eapen (2011; 2012). 16 Being drought year we exclude MPCE data for 5 It is be noted that output performance of a few 25 The offtake declined due to reduced difference 2009–10. As the number of years is not uni- between the PDS price and open market prices, food commodities, namely, milk, egg, fi sh and form across the NSSO survey rounds, the per- meat included in our analysis are not linked to which induced a large section of APL benefi ci- centage point change reported in Tables 8 and aries to move out of the PDS, and due to the Green Revolution strategy as it was guided 9 are not strictly comparable. by sector-specifi c policy interventions such as introduction of TPDS since 1997 (Chand 2005; 17 Interestingly, the proportion of total food infl a- the Operation Flood programme launched in GoI 2002). tion contributed by protein foods increased 1970 to boost milk production and “Blue Revo- 26 2006 to 2012 in case of wheat. further after the economic reforms, while the lution” efforts to modernise Indian capture 27 For a detailed account of circumstances lead- contribution from fruits and vegetables remained fi sheries from the mid-1950s onward. ing to the sharp increase in MSP from these the same. The trends emanating from Figure 3 periods, see Nair and Eapen (2011; 2012). 6 During 1980–81 to 1990–91, the yield growth largely confi rm Gokarn’s (2011) fi nding that accounted for 80.25% of growth of output, over the years, protein foods and fruits and 28 During 2010–11 and 2011–12 the prices of rice against the fi gures of 58.45% and 38.41% re- vegetables emerged as the predominant con- and wheat remained low despite high MSP. corded during 1949–50 to 1964–65 and 1967– tributor to food infl ation in India. This was due to record output on the back of 68 to 1980–81 respectively (Bhalla 2007). 18 See Table 1 in Himanshu (2005) and Table 1A in good monsoon (GoI 2011; 2012). 7 However, the changes introduced in India’s Usami (2012) (for raw data). 29 See Gokarn (2011) for similar trends in 1990s macroeconomic, industrial and trade policies 19 In particular, see Table 6 in Chavan and Be- and 2000s. as part of economic liberalisation have infl u- damatta (2006). 30 In fact, long-term trends reveal that the offtake enced the agrarian environment in varied of cereals from the central pool increased ways. For details see Landes and Gulati (2004). 20 The price at which foodgrains are supplied under PDS is called central issue price (CIP). Un- signifi cantly after the economic reforms com- 8 For details about factors responsible for der Open Market Sale Scheme (OMSS), the pared to earlier periods. agrarian slowdown, see Bhalla (2007); Chand, government through the Food Corporation of 31 The decline in the food imports during this pe- Raju and Pandey (2007); Landes and Gulati India (FCI) sells foodgrains at predetermined riod was contributed by the signifi cant reduc- (2004). prices in the open market to check the rise in tion witnessed in the cereals imports (Figure 9 The underperformance of growth rate of agri- their market prices and to dispose part of sur- 10). Cereal imports declined due to attainment cultural GDP after the economic reforms is more plus food stock with the government. of higher degree of foodgrain self-suffi ciency evident from the robust overall GDP growth rate 21 Similar trend was witnessed in the growth of by India thanks to Green Revolution (Sathe experienced during the same period. MSP in real terms (see Dev and Rao 2010). Sev- and Deshpande 2006). 10 The WPI available in various bases is converted eral factors have contributed to the higher MSP 32 Except milk and milk products, the import fi g- into a common (2004–05) base using linking after the economic reforms. For details see Dev ures analysed in this paper consists only of raw factor. and Rao 2010; Landes and Gulati (2004); Saini component. Milk imports contain both raw and 11 The data on food articles infl ation rate is avail- and Kozicka (2014); Tripathi (2014). pro cessed forms. able only from 1954–55. 22 This is the outcome of the policy of restraint in 33 The better import response to infl ation of 12 The complete data sets are available from the announcing hike in the MSP followed by the foodgrains, cereals, and milk is refl ected in their authors upon request. government during the fi rst half of the last lower average infl ation before the Green Revo- 13 See footnote 12. decade with the goals of removing market lution and during its initial stages (Table 6).

Economic & Political Weekly EPW august 1, 2015 vol l no 31 59 The Pink Professor SPECIAL ARTICLE

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