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Charts & Analysis

Viz: The Government Has Been Increasing Food Prices By 12% Since 2007

We’ve been worried about Inflation, here at Capital Mind. Because Consumer price inflation is running at 10%. Because food inflation has gone above 12%. Because it’s been resulting in wage increases, and price increases in all parts of the government.

While we can blame RBI for monetary expansion – which I believe is a fundamental reason for this inflation and there is sadly no plan to contract monetary supply – we also have to look at a big cause of food inflation: the government.

The Indian government through the Food Corporation and other sources, buys agricultural commodities directly from the market. They then attempt to distribute those through the Public Distribution System (PDS) but a good portion rots, and much of the rest is stolen or siphoned off.

The purchasing happens at a fixed rate, called the Minimum Support Price, which is one price per commodity. We have about 6 years of this data from the Agri Ministry, and if you look at those six years in context, you will find that prices have gone up in a huge way. Here’s the compounded annualized growth rate since 2007-08:

image

Nearly all items have gone up, and the average increase is greater than 12% per year! No wonder that food Inflation remains this high.

One of the reasons the government increases prices like this is to keep farmers happy. However, is it okay to make the rest of India unhappy? Why are we paying such heavy prices?

Minimum Support Prices are a signal that tells farmers they have a buyer at some price. But this signal has become a market floor of sorts causing massive inflationary pressure on food items.

Here’s a visualization of how MSP increases have been since 2007-08 (assuming 2007-08 is the base value).

My View: We should dramatically lower support prices and reduce purchases to keep only as much stock as required to meet the PDS requirements. A few years of this and prices will revert. Oh,and the RBI needs to cut liquidity

None of the above is politically palatable, so it’s unlikely to happen.No matter who wins the next election. Prepare to pay more or eat less.

Note: Thanks to Nikhil Pahwa and his pointer to a BusinessInsider post .

  • avinash says:

    Seems to me a big chunk of the rise in MSP is driven by a real rise in farm input costs as well. Diesel prices have risen sharply since 2007, So have fertiliser prices. Wages too (driven partly by NREGA). So not all the rise in MSP is ‘pure profit’ to the farmer.
    Playing devil’s advocate in this scenario, I could argue that sharply cutting procurement prices would make farming even more unviable than it is now. this would accelerate the process by which farmland is being sold off to non-agri uses (e.g. real estate). And a fall in farmland would lead to downward pressure on supply and upward pressure on prices.
    Another indicator that its not just govt-induced. we’ve also seen prices of non-PDS goods (e.g. onions) being driven sharply higher. Ditto for tomatoes, potatoes etc.
    Sure MSP is part of the story. But we should be careful about drawing the conclusion that therefore its all profit to the farmer.

    • I think we should cut procurement prices because such prices should be market determined. Let the market decide supply/non-supply. Keep the minimum at a very low level, like Rs. 100. Also, we should let farmland be sold off to non agri uses because that’s what farmers should be allowed to do if they find it better. No point telling farmers that’s what they must do with their land.
      MSP increases are not all profit to the farmer, of course. But the increase in MSP is mindless and must be cut down dramatically. And we should stop procurement when we have procured enough – and we currently have more than 2x of “enough”.

  • C J Gopinath says:

    Added to that increase in fruits & veggies due to hoarding, cartels etcc.
    In spite of such good rains

  • rakesh ojha says:

    despite this increase, farming has very low profits. we continue to see farmer suicides. no one wants to be a farmer. they all work in urban centers as lobourer’s and send money to thier families. there are numerous problems in farming including middle men. farmers get a raw deal. MSP increase must be seen in this light. farmer’s deserve huge huge sympothy and higher MSP. majority of people in india still derive lively hood through farm work. i know this because we own farm. problem of inflation lies else where. monetary printing by govt/RBI ?

  • mangoman says:

    This is classic example of falling into relentless campaign of government.
    The inflation is due to money printing. Perod.

  • Px says:

    All such talk good at such discussion boards …U think that the govt doesn’t know their faults ? Politicians here dont either care about the long term interests of the nation
    just short term gains and filling their pockets so that their next 5 generations are covered.
    MSP increase doesnt just help farmers … i had read somewhere that govt procures from middlemen who fulfil grade and quality reqs …dont know if im accurate.
    Pawar. RLD and co proudly say msps have given more money to farmers !
    Farmers that make big money are none other than politicians holding vast tracts of land !
    Look at oil policy:- Govt will not rest until it ruins the oil cos
    ONGC boss cries that govt is milking the firm dry in more refined words!
    Look at the sugar policy :-
    The mills in UP have shut down and those in maharashtra are thinking of doin the same but wont cause many are politically controlled and state govt or coop banks will bear more burden.
    To an extent i agree with avinash ,,, govt needs to slam brakes on third and fourth home purchased on loan or by nris ! Farmlands are turning into ghost towns and India cant afford it… but when the Vs profit from such venture who will dare to bell the cat ?

  • Px says:

    Energy will be more productively used in helping the aam admi fight inflation rather than discuss it .

  • Px says:

    tricle up effect ? i dont know if politicians care! The powarful, i guess certainly don’t and are likely to suffer in the next elections , but then again the uncle has bcci and the dada has irrigation scam ! so they can sit out the next 10 yrs… same goes for the vinci clan..
    im getting cynical as hell but im desensitizing slowly ! kudos to u for ur relentless pursuit though!

  • Px says:

    i hope deepak mam comes out with a lifehacker kinda post, something like
    10 ways to invest to try to beat inflation !

  • fubar says:

    We have already killed manufacturing.
    Weak rupee is keeping us barely competitive in IT.
    If we kill farming too, what will people do?
    The actual problem I believe is the income disparity.
    Inflation, Fiat money, fractional reserve banking – these are all tools to increase disparity.
    The end game is a world depicted in a recent movie – Elysium.