Arpita Mukherjee & Tanu M Goyal: Negative WPI hides consumer agony
Nov 27 2015
Rising concern over hike in prices of essential goods like pulses, onions
Compared to September, when the year-on-year inflation as measured by the WPI fell by 4.5 per cent, it fell by about 3.8 per cent in October. This has attracted attention of policymakers, economists and consumers. While the present government is taking credit for negative WPI, there are increasing concerns about rise in prices of some essential commodities such as onions, pulses and tomatoes that has dampened the good news about negative WPI. It is, therefore, important to understand, why the inflation numbers are projecting different stories and how these numbers impact poor and middle class consumers.
Food and grocery accounts for almost 30 per cent of the consumption expenditure of a middle-class Indian consumer. It is even higher for the poorer consumers. A detailed look at the WPI data reveals that, while the overall commodity price index has shown a decline in October, when all commodities taken together registered deflation, food articles registered a moderate year-on-year inflation of 2.4 per cent.
Further, within food articles, certain commodities that form an essential component of Indian diet have registered a very steep rise in prices. The case of onion is well known. Compared to October 2014, the prices of onion increased by 85.7 per cent to the shock of the common man. Among all the commodities (food and non-food) taken together, onion has registered the highest level of inflation. The story of pulses such as arhar and urad is no different. Other essential agricultural commodities such as garlic also registered a huge increase in the prices. Interestingly, some commodities such as potato, banana, rice and poultry chicken, among others, registered a deflation.
Again, among all the WPI commodities (food and non-food) taken together, potatoes have registered the highest level of deflation. The question is why different food items are behaving differently. Is it only because of the production pattern? If one looks at onion, tomatoes, potatoes and garlic — all of these are part of daily diet — they all follow typical production cycles, but the price fluctuations are different.
While demand has its role, the supply side factors play a key function in determining consumer prices. A study conducted by the authors reveals interesting facts about the nuances of food supply chain in India, some of which can explain the different inflationary trends across agricultural commodities. Food articles such as potatoes and banana have a matured supply chain due to the strong backward and forward linkages.
Potatoes have a huge demand from the processed food industries and companies such as McCain and PepsiCo have invested substantially in development of the potato supply chain and allied infrastructure such as cold chains. Around 70 per cent of the cold storages in India cater to potato and the cold chain system has helped to mitigate the demand-supply gaps and seasonality in production.
On the contrary, for onions and tomatoes the domestic supply chain and cold storage facilities are not well developed. As a result, by the time the season ends, there is a rise in the prices of these commodities till the next crop. Further, there are poor storage facilities and packaging houses are located far from farmlands.
The per-rack rentals for storing these products are very high and often the farmers have to sell these at throwaway prices to recover some money. In addition, there is limited demand for processed varieties such as tomato puree and freeze-dried onions that are available year-round and do not require sophisticated storage facilities.
The cost of processed products is high and consumers and yet to experiment with processed onion and garlic, unlike the consumers of developed countries. As a result, these products experience abrupt rise in prices after the end of the season. Given that these are essential components of diet there is some amount of hoarding. This, together with the restriction on imports, further accelerates their prices.
Pulses have a unique story. Most pulses are traded in the commodity market. In India, most dry commodities are stored in basic warehouses largely run by the Food Corporation of India, the Central Warehousing Corporation and state government warehouses. The presence of private sector in storage and warehousing is a recent phenomenon. Unlike rice and wheat that are regularly distributed through the public distribution system (PDS), certain pulses such as arhar and urad do not have a regular PDS. As a result, these articles often face a price rise due to hoarding in the commodity market. Moreover, the supply chain is fragmented and controlled by a number of middlemen. Unlike fresh fruits and vegetables, the cost of storing nonperishable commodities in warehouses is negligible, and hence, hoarding makes business.
Thus, efficiency in the food supply chain plays a key role in determining price stability. To combat the sudden rise in prices of essential agriculture commodities, the government can encourage food processing for certain essential commodities such as onions that have seasonal production. ]
The government should also support food processing through awareness campaigns. Processing will benefit he farmers and reduce hoarding. Taxes on processed food have to be lower so that the prices are affordable to the consumers. The restrictions on trade in agriculture commodities should be relaxed so that consumers have access to imports during shortages and price rise. Most importantly, inter-state restrictions on mobility of agriculture commodities have to be removed and the government should intervene to take strict measures against hording of food articles.
- Arpita Mukherjee is professor and Tanu M Goyal is a consultant at the Indian Council for Research in International Economic Relations (ICRIER)