Structure and Impact of Rising Food Prices in India

Empirical Review and Qualitative Assessment 

Abusaleh ShariffNational Council of Applied Economic Research, New Delhi

Presented in an international workshop on “Indian Agriculture: Improving Competition Markets and the Efficiency of Supply Chains” jointly organized by Australian Centre for International Agriculture Research, and NCAER, New Delhi, 16 February, 2011

Presentation is based on a draft paper – ‘Food Security in the Context of Food Price Rise in India: An empirical review, by Abusaleh Shariff and Ganga Shreedhar, January 2011

• Global Food Price Increase 2008-9 | Domestic Food Inflation 2009-10

• Structure of Food stress and implication for markets & Food Security?

• Product specific price movements in recent months /years

•Income and price dynamics of food consumption (demand)

•Food Consumption behavior & differentials

•Understanding Coping mechanisms

•Safety Net Policies and Efficiency2Shariff's PPT

Motivation for this Study

Quantitative and Qualitative Methods

(1) Monthly Price movements May 2006- June 2009 25 food and fuel items | 78 towns/cities

(2) Nationally representative sample survey of households,

human development survey, NCAER-2004-5|N=40,000 rural-urban

Price, income & substitution effects - rice, wheat and milk

(3) Qualitative rapid surveys and focus group interviews

Coping mechanisms - UP, MP, Karnataka and Delhi-NCT.

 

(4) Review safety net/social protection policies –

PMT Score method - improve targeting efficiency  

Food Price Surge: 2007-08

• Focus on the poor and vulnerable• Rural and Urban differentials

• Diversity in Coping behavior• Efficacy of programs mitigating food crisis

• Improving food security of the poor

International Cereal Price Links

• International Rice and Wheat Price surge

- from mid-2007 to mid-2009

• Prices in India did not rise

• Rather Indian price rise dramatically only from mid- 2009 and continued into 2010, when actually international food prices crashed!

Market Size and Price Movements Specific Food Items

• 78 Towns / Cities Size Class < 1 lakh

1-5 lakh

5-10 lakh

10-25 lakh

25-50 lakh

50 + lakhs

Note: Town/city class size cutoffs are chosen so as to ensure that a reasonable percentage of total population is covered in each of the category.

 

• 25 Food Items Monthly Price Movements

 

Wheat, Rice (common variety) , Wheat Flour Atta (processed)

Milk, Pulses, Vegetables – Onion etc , Cooking Oil

Fish, Meats, Chicken, Eggs

Kerosene

Commentary

Monthly Cereal consumption Shares and Quantities

Cereal/ SectorIndia

Rural Urban All

Share of selected cereal consumption (%ge)

Rice 56.1 52.3 55.3

Wheat 36.5 41.8 37.9

Other Cereal 10.9 5.7 9.3

Monthly Household Consumption (Kgs./Reporting HHs)

Rice 37.8 24.5 33.9

Wheat 30.6 22.8 28.1

Other Cereal 17.4 8.8 15

  Mean for all HHs

All Cereals 63.5 45.7 58.3Source: Calculated by the author using HD- Survey (2004-05).

Commentary

Monthly Per Capita Consumption by Income Quintile Kgs/Liters

QuintileSelect Items

RiceRural

Rice UrbanWheat Rural

Wheat Urban

Milk Rural Milk Urban Vegetables

RuralVegetables

urban

Lowest 7.1 4.7 6.4 5.3 2.9 3.2 3.7 3.5

Q2 7.3 4.9 6.2 5.1 3.3 4.0 3.8 3.7

Q3 7.3 5.0 6.1 4.9 4.1 5.1 4.2 4.4

Q4 7.0 5.0 6.3 5.0 5.4 6.2 4.2 4.8

Highest 6.5 5.3 6.4 5.0 6.9 8.1 4.5 5.4

Total 7.1 5.0 6.3 5.0 4.4 5.2 4.0 4.2

Commentary

Household Quantity Consumed a day before interview, selected States

Rice consumption is relatively more sensitive to price rise

Possibly due to substitution to cheaper cereals which is mostly wheat

Home Grown Rice help sustain consumption upto 30%

Home Grown Wheat help sustain consumption upto 13%

Home produced Milk help sustain consumption upto 50%

Multivariate Analysis Suggests

Results

Source: Calculated by authors using IHD-Survey (2004-05).

Sources of Household Grain Consumption

Comments

Sources of Household Rice and Wheat

0% 20% 40% 60% 80% 100%

Q1

Q2

Q3

Q4

Q5

% share

(b) Rice by Income Quintiles

Rice Paid/Market Rice Home Grown Rice PDS

0% 20% 40% 60% 80% 100%

Q1

Q2

Q3

Q4

Q5

% share

(b) Wheat by Income Quintiles

Wheat Paid/Market Wheat Home Grown Wheat PDS

Short Term Coping Mechanisms Reported by Households (%)

StateReduced

food

intake

Breakdown

of

social

network

Increased

debt

Child

withdrawn

from School

Child Sent

for meager

wage

Sold livestockSold utility

assets

Migrated

out

All

Rural83 66 45 23 11 25 13 18

UP

70 48 49 35 20 41 19 45MP

95 80 68 11 3 5 13 8Karnataka

80 68 9 26 12 33 6 1All

Urban93 76 29 25 11 5 14 6

UP

91 50 31 31 20 4 21 13MP

100 83 45 19 12 2 10 7Karnataka

93 83 13 21 6 8 7 0Delhi

91 86 39 28 9 3 19 6Comments

Typology of Low Food Stress

Sustain quantity at the cost of quality

PDS present and generally accessible

Marginal dependence on general market

Income and consumption smoothening possible

No takers for NREGA, even women

Can deal with idiosyncratic shocks except health crisis

Moderate Food Stress

RURAL

Face food shortages, inadequate home production, Irregular and limited PDS but high dependence,Depends on market to bridge consumption needsLow income and consumption smootheningMigration both seasonal and long termConditional (higher wage) demand for NREGADifficulty in dealing with idiosyncratic shocks and health crisis

URBAN

Face food shortages, no home production Irregular and limited PDS but high dependenceDepends on market to bridge consumption needsLow income and consumption smootheningSome are recent-migrantsDifficulty in dealing with idiosyncratic shocks and health crisis

High Food Stress

RURAL

Young earners migrate leaving old and vulnerable in villageLow productivity agriculture and lack of irrigationPoorly developed non-farm employmentLack of awareness about NREGANonexistent wage-empl. opportunity in and around village

URBAN

Unstable families in urban fringe, uprooted from rural partsManual labor, beedi rolling, cycle rickshaw etcPoor employment and low wages, and lower occupational diversity No home produced food, No or low PDS accessTotal dependence on general marketLow capacity for income and consumption smootheningCannot deal with idiosyncratic shocks, High incidence of sickness

SAFETY NETS

Public Distribution System

Exclusion and Inclusion Errors

Recent period has seen increased public spending on safety nets & food subsidy for food security…..

Central Government Safety Net Outlays

Source: (Ministry of Finance, Various years) (Central Statistical Organization, Ministry of Statistics and Program Implementation, 2010)

Central Government Food Subsidy Bill

Comments

MG-NREGS allocation is about 0.7% of GDP

Nearly as much as the food subsidy bill

MG-NREGS, Rural Wage Employment

2008One time schemed in response to the spate of famers’ suicides perceived to be driven largely by the inability to repay debts.

Total expenditure 2008/09 was Rs 150 billion (about $US 3.3 billion)

Agri. Debt Waiver and Relief

PDS Card Ownership by Income Quintile

Exclusion and Inclusion Errors in PDS

  BPL APL No CardRural India 42.1 43.2 14.8Urban India 22.2 56.6 21.2

Poverty Estimates by Standard MeasureRural India

Poor (25.9) 52.2 32.7 15.1Non-Poor (74.1) 39.1 46.2 14.7

Urban IndiaPoor (22.8) 36.3 46.1 17.6Non-Poor (77.2) 19.0 59.0 22.0

Deprived Estimated using PMT Score MethodRural India

Deprived (35.3) 55.4 28.6 16.0Better Off (64.7) 34.7 51.2 14.1

Urban IndiaDeprived (39.1) 33.7 44.3 22.0Better Off (60.9) 17.0 62.2 20.8

The Overlap- Poor Versus Deprived

  Deprived (PMT) Better Off (PMT)

Rural India 35.3 64.7

Poor (std. method) 25.9 41.8 17.2

Non-Poor (std. method) 74.1 58.2 82.8

Urban India 39.1 60.9

Poor (std. method) 22.8 46.2 7.7

Non-Poor (std. method) 77.2 53.8 92.3

Add on Threat Leading to Malnutrition:Incidence of Diarrhea among the Under-5 year Old Children

Income class

India

Rural Urban Total

All 10.2 6.9 9.4

Quintiles

Lowest 10.3 8.1 9.8

2 12.1 6.6 10.9

3 11.0 6.3 9.8

4 8.3 6.4 7.8

Highest 5.9 5.6 5.8

Thank you

Wheat - Prices lower in smaller towns price rises at town size increase

Wheat Flour – price highest in smaller towns lower in large cities

Even a small processing value added and marketing increases the price considerably and add on transportation make prohibitive in rural areas

Centralized processing of Cereals must be discouraged

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High consumption in Rural - 64 kgs Urban - 46 kgs

Share of Rice is higher more so in Rural area

Wheat relatively an Urban Cereal

Cereal Consumption

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Marginal differences between income class

- both Rice and Wheat | Rural and Urban

Extremely large differences between income class

- Milk and Vegetables and other value added

Not surprising !

Per Capita Cereal Consumption by Income Class

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backMultivariate ImpactVariable

Wheat Rice Milk

Dependent Variable Log of PCM Wheat con. (Kg.) Log of PCM Rice con. (Kg.) Log of PCM Milk con. (litre)

Independent Variable Coef. P>t Coef. P>t Coef. P>t

_cons 2.78 0.000 2.81 0.000 1.74 0.000

Price EffectLog of Wheat Prices (Rs/Kg.) Log of Rice Prices (Rs/Kg.) Log of Milk Prices (Rs/litre)

-0.39 0.000 -0.54 0.000 -0.16 0.000Source of Cereal            

PDS Wheat 0.02 0.012na na na na

Home Grown Wheat 0.13 0.000na na na na

Home Grown Other than Wheat -0.14 0.000na na na na

PDS Rice nana

0.06 0.000na na

Home Grown Ricena na

0.30 0.000na na

Home Grown Other than Rice na na

-0.30 0.000na na

Milk Production at Homena na na na

0.48 0.000

Home Grown Cerealsna na na na

0.03 0.038

           

Number of obs.   32139   38805   31028

Prob > F   0.000   0.000   0.000

R-squared   0.70   0.72   0.39

Adj R-squared   0.69   0.72   0.39

Root MSE   0.54   0.60   0.74

Urban Cereals85 - 90% Market dependence

Rural Cereals 50% Market, 35% Self, 10-15& PDS

Marginal Difference by income classMiddle income HHs use more PDS!

Market Dominates

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80 - 90% reduce consumption

70-80% face breakdown of social networks:Inflation impact households uniformly; and make them cautious

High Indebtedness 50% in rural areas

About a quarter HHs withdraw children from schoolAnd another 10% resort to child labor

Sale of livestock, and household assets also reported

Rural households migrate out in search of income (18%)

Multiple Coping Mechanisms

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Food subsidy bill represents the basic direct cost incurred by the center from procurement, stocking and supplying to various food based safety nets such as PDS

Food Subsidy Outlays: 0.6% of the GDP in 2006/07 0.8% of the GDP in 2008/09 and 2009/10

Rs. 400 billion - partly cost of rising MSPs and procurement and no corresponding increases in the issue price of grain for safety nets like PDS

Food Subsidy Outlays

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