PROJECT REPORT ON

FOOD INFLATION

SUBMITTED BY :

ANKIT
ASHIMA NAREWAL
ISHAN MAHAJAN
KARAN MALIK
MEGHA BATES
NITIN NIGAM
SHALU UPPAL
CONTENT
 WHAT IS INFLATION ??

Inflation can be defined as a rise in the general price level and therefore a fall in the value of money.
Inflation occurs when the amount of buying power is higher than the output of goods and services.
Inflation also occurs when the amount of money exceeds the amount of goods and services available.
As to whether the fall in the value of money will affect the functions of money depends on the degree
of the fall. Basically, it refers to an increase in the supply of currency or credit relative to the
availability of goods and services, resulting in higher prices.

Therefore, inflation can be measured in terms of percentages. The percentage increase in the price
index, as a rate per cent per unit of time, which is usually in years. The two basic price indexes are used
when measuring inflation, the producer price index (PPI) and the consumer price index (CPI) which is
also known as the cost of living index number.

Inflation in India is also a grave issue of concern, given the vast disparity between the rich and the poor
on the one hand or the Rural and the Urban on the other. Skyrocketing inflation robs the poor, and hurts
others, though much less grievously. The fruits of the much-talked about economic growth have not
reached large sections, especially in the rural areas. Under extant conditions, the benefit of high prices
paid by consumers does not flow back to primary producers, but is siphoned away by middlemen and
speculators who enjoy a free run in an economy of shortages. If attention to agriculture has been
limited to rendering lip service, inefficiencies in the physical market remain unattended. With
production trailing demand in recent years, shortages of essential commodities have widened. Imports
have become expensive because of high global market prices. It may be instructive to remember that
inflation is not an overnight phenomenon. It is benign to the extent that it allows you time to cover
yourself. In India, the onus to control and take control of the situation of inflation is upon the Reserve
Bank of India (RBI).
TYPES OF INFLATION
Depending on the characteristics and the intensity of inflation, there are several types, namely.
− Creeping inflation
− Trotting inflation
− Galloping inflation

− Hyper inflation
When there is a general rise in prices at very low rates, which is usually between 2-4 percent annually,
this is known as creeping inflation. Whereas, trotting inflation occurs when the percentage has risen
from 5 to almost percent. At this level it is a warning signal for most governments to take measures to
avoid exceeding double-digit figures. Another type of inflation is the galloping inflation, where the
rate of inflation is increasing at a noticeable speed and at a remarkable rate, usually from 10-20 percent.
However, when the inflation rate rises to over 20% it is generally considered as hyper inflation and at
this stage it is almost uncontrollable because it increases more rapidly in such a little time frame.
The main difference between the galloping and hyper inflation, is that hyperinflation occurs when
prices rise at any moment and there is no level to which the prices might rise.

TRENDS

Food inflation trends point to new consumption patterns

The Reserve Bank of India (RBI) on Tuesday said the trend of food inflation was pointing at not only
structural demand-supply mismatches in commodities comprises the essential consumption basket but
also at changing consumption patterns.
The essential consumption basket comprised wheat, rice and pulses, while food inflation has been
primarily held up by milk, vegetables, fruit and pulses — the high-protein and perishable food items.
“Notwithstanding some moderation, food price inflation has remained persistently elevated for over a
year now, reflecting in part the structural demand-supply mismatches in several commodities,” RBI
said in the second quarter review of monetary policy.
It said given the changing “consumption patterns” and the inadequate supply response, particularly for
perishables and protein sources, food price inflation was becoming “increasingly structural in nature”.
Analysts have repeatedly pointed that the structural imperfections of the existing agricultural and
distribution system are going to increase, as consumption patterns change due to the transition of India
from a developing to a middle-income society. Such a transition, which requires a country to have high
growth rates and increases income levels and purchasing power, results in higher demand for high-
calorie and high-protein food items.
FOOD INFLATION

Average
Commodity
inflation
All food articles 19.37
Cereals 9.40
Rice 8.61
Pulses 21.14
Fruits and vegetables 12.55
Milk 26.56

The observation by RBI can be seen in a positive light because it clearly shows India is moving
towards a high growth trajectory. it is, however, a matter of concern as far as inflation is concerned,
because solution to structural mismatches is not short term. so, we will have to live with high inflation
for now,” said Rupa Rege Nitsure , chief economist at bank of Baroda.
The observation fuels concern, as structural problems do not have short-term solutions and cannot be
directly controlled by monetary policy measures.
“The food-led inflation is typically difficult to address directly through monetary tightening, which will
at best restrict the second-round effects of high food inflation spilling to other sectors through the
wage-price spiral,” said D K Joshi, chief economist with ratings agency Crisil.
Others such as Yes bank chief economist Subhadha Rao remained optimistic on inflation, as well as
food inflation moderating. “It is true there has not been adequate supply and that has resulted in high
inflation, but we had a good monsoon, which has significantly bettered the prospects for both rabi and
kharif crops and will ease supply pressures, bringing down inflation,” said Rao.
 CAUSES AND EFFECTS OF FOOD INFLATION

1) Middlemen
There is a huge difference between the cost of production and the price the final consumer pays. The
farmer gets a very very small amount of this profit or the difference of cost and final price.
For example – If we are buying a vegetable for Rs. 40 per kg., the dealer at the wholesale market gets
Rs. 10 per Kg., and the poor farmer gets a meager Rs. 3. Again this Rs. 40 too will differ depending on
the locality it is being sold.

2) Black marketing
Then there is always the problem of black marketing & illegal stocking of goods to get a higher price.
So we actually need checks on the middlemen and the retailers. Secondly, the system of direct farm to
shops has to be developed, so that the farmers are the real beneficiaries. This will also motivate the
farmers to increase production

3) Wastage
Wastage is another important avoidable problem, leading to shortage. Production we have raised. But
so much is wasted because we still are a laggard when it comes to the storage facilities. Even the
government’s huge food buffer stock lies unused till it gets finally rotten. The government has raised
the support prices of some food items. This along with the rural employment schemes and high urban
salaries has also infused excess money in the market causing the inflation.

4) Prices which are subsidized or fixed by the government

There are cases where the inflation will not show in the Government statistics, but will certainly affect
our household budget.
For example If we take the case of electric meter.
We go with an application for a new electric meter to your locality’s state electricity board, they will
say currently they do not have it, so we have to buy it from some authorized dealer from the market. It
will cost us Rs. 1800, the bill of which we have to submit to the electricity department for getting the
meter tested and installed. When we go to the dealer, he will give us a bill of Rs. 1800 and ask us to
submit this bill to the electricity department. But he will actually take anything between Rs. 3000 to Rs.
5000 from us.
 IMPACT OF FOOD INFLATION ON INDIAN CONSUMERS
The high food price inflation is having a significant impact on the Indian consumer in general and the
Indian middle class in particular. The chart below gives the way the Indians spend.

The above chart shows that, nearly 43% of the personal disposable income goes into food products.
This is the segment which is experiencing highest inflation. A high food inflation ensures that
consumers have to cut their cost on non-necessary items. This in turn will impact the consumption part
of the GDP growth.
Another important point is that a majority of Indians still don't invest in equity markets. They prefer
going for fixed deposits which are currently yielding only around 8-10% annually. On the other hand,
inflation for an average household is easily around 12-15% even education, health and housing cost are
going up.
Thus, a large section of the population are losing out on their purchasing power without realizing about
it. the people who realise it has only one option - to speculate in the stock markets and try to get returns
which beat the annual inflation rate.

Considering these factors, it is very important for the Government to try and control the inflation or at
least try and ensure that these circumstances do not arise again in the future.
 STEPS TAKEN BY RBI TO CHECK INFLATION

The Reserve Bank of India (Amendment) Act, 2006 gives discretion to the Reserve Bank to decide the
percentage of scheduled banks' demand and time liabilities to be maintained as Cash Reserve Ratio
(CRR) without any ceiling or floor. Consequent to the amendment, no interest will be paid on CRR
balances so as to enhance the efficacy of the CRR, as payment of interest attenuates its effectiveness as
an instrument of monetary policy.

The Reserve Bank of India (RBI) follows a multiple indicator approach to arrive at its goals of growth,
price stability and financial stability, rather than targeting inflation alone. This, of course, leads to
criticism from mainstream economists. In its effort to balance many objectives, which often conflict
with each other, RBI looks confused, ineffective and in many cases a cause of the problems it seeks to
address.

The steps generally taken by the RBI to tackle inflation include a rise in repo rates (the rates at which
banks borrow from the RBI), a rise in Cash Reserve Ratio and a reduction in rate of interest on cash
deposited by banks with RBI. The RBI's measures generally sucks out a substantial sum from the
banks.

In India’s case it is supply side inflation, so no amount of demand side management will help rein
inflation RBI cannot increase supply of goods and services and it cannot reduce demand which is due
to population and increased earnings of public so it can do nothing to check inflation

Though RBI cannot do much to ease inflation, because no monetary measures can solve the problem
but RBI cannot be seeing doing nothing so the only thing it does it raises interest rate to rein in
inflationary expectations and dampen overall demand

The Reserve Bank has already raised the short-term key borrowing and lending rates six times in 2010
in a bid to raise cost of funds and check inflationary expectations. Although the RBI action pushed up
the lending and deposit ratesof banks, the impact has not been profound in case of food inflation .On
jan 25 2011 Reserve Bank of India (RBI) Governor Duvvuri Subbarao hiked the repurchase or repo
rate to 6.5 percent from 6.25 percent and reverse repo rate to 5.5 percent from 5.25 percent. Other rates
like cash reserve ratio and statutory liquidity ratio remained unaltered.
The repo rate, often referred to as the short term lending rate, is the interest charged by the central
bank on borrowings by commercial banks. A hike in the rates makes cost of borrowing costlier for the
commercial banks.
The reverse repo rate, referred to as the short term borrowing rate, is the rate at which the central bank
borrows money from commercial banks. A hike in this rate makes it more lucrative for banks to park
funds wit The cash reserve ratio and statutory liquidity ratio determines the amounts banks have to
retain in liquid assets, gold and government bonds against deposits, and form a part of traditional
instruments that help in checking liquidity in the system.

The central bank also revised upward its inflation forecast sharply to 7 percent by the end of this fiscal,
from 5.5 percent earlier, while the projection on growth has been retained at 8.5 percent with an
upward bias.

"There have been some transitory supply shocks as reflected in the sharp increase in vegetable prices.
In addition, petroleum and aviation turbine fuel prices were raised in January which will add 9 basis
points to wholesale price inflation," Subbarao said.

"With the risks to growth in 2010-11 being mainly on the upside, the baseline projection of real gross
domestic product (GDP) growth is retained at 8.5 percent as set out in the second quarter review of
monetary policy of July 2010, but with an upside bias."

The governor said that the policy actions Tuesday will rein in the rising inflationary expectations,
which may aggravate due to transitory nature of food prices, but yet be moderate enough not to disrupt
growth.

The central bank also warned the federal government on its fiscal stand. "Any slippage in the fiscal
consolidation process at this stage may render the process of inflation management even harder," the
bank said. h the RBI
There are two major drawbacks in the CRR – REPO policy adopted by the RBI to combat
inflation.

Firstly, monetary tools have proved more effective in economies with greater financial inclusion. They
are less effective in economies such as India's, where the majority of the population still has no access
to banks, and those with access barely have the resources to open bank accounts.
The increasing cost of funds and rising interest rates are of little consequence in the economic life of a
financially excluded population. The impact will be critical on smaller segments and will take a while
to yield results for the economy. Much more remains to be achieved on the financial inclusion front.
To cite Mr V. Leeladhar, Deputy Governor of the RBI, from a recent speech: "Compared to the
developed world, the coverage of our financial services is quite low. The average urban middle-class
income-earner often has more than one bank account. This is bound to reduce further the percentage of
people with bank accounts. Most account holders are urban-centric, leaving large segments of the rural
population with no access to banks or the means to save or borrow.
Secondly, in spite of its being an indirect weapon of credit control, CRR does impact the level of
money supply in the economy and plays some role in the fight against inflation. But the impact of the
CRR hike will not distinguish as between productive credit and credit meant for consumption. This will
hurt growth and the creation of assets in the economy.
Farmers today keep several acres of land uncultivated as the financial returns are not commensurate
with the expenses incurred for cultivation. Irrespective of the increasing cost of funds, large segments
of the borrowing public, especially the small, medium and large farmers, have no option but to
approach the commercial and cooperative banks, or the multitude of unregulated moneylenders at the
beginning of every crop cycle.
As a result, lendable resources of the system will be reduced to that extent and bank credit will be
dearer. This hike will result in increase of the lending rates, whether for production or consumption.
The RBI can address only the demand side through such an approach. The need of the hour is to curb
only consumption credit and not production. On the other hand there is urgent need to increase supplies
of food products and manufactured goods, for which credit flow to the farm sector and industry must
increase.
The combined effect of the CRR hike and the REPO rate hike will tell upon expansion of productive
credit as well and this is not desirable at this stage.
The monetary measures are meant to increase the cost of funds for banks, make loans dearer and
temper the demand for credit. While there is a greater possibility of banks passing on the increased
costs to the consumer, it is debat

Right now RBI seems to be concentrating only on the Demand end of inflation, as a result the entire
perspective of supply is completely ignored. Inflation may also be curtailed if the supply is bolstered to
meet the demands of the people. With the increase in supply, prices would inevitably come down and
thus inflation may be controlled.
Granted, the supply side would not be strengthened so easily, as it would require infrastructure
development, planning, large scale investments etc. However, this is where the RBI could play an
extremely important role.
For the purpose of bolstering agricultural growth, development of infrastructure and all other avenues
which the RBI may deem fit, it may lay down regulations to direct money either directly or indirectly
with special importance to these sectors. To direct foreign capital in these fields and thus bolster
infrastructure would not be a difficult task, as the RBI already does this function. Only this time it shall
do it with the purpose of meeting the ever – rising demand.
.

Secondly and most importantly this would also enable the government to lay down measures to utilize
this money to develop the infrastructure which would bolster supply and thus would be a huge boost in
the fight against inflation in the long run.
The practice adopted by the Central bank right now seems to be an ostrich approach. It is sufficiently
clear that the reason that we have inflation is because the economic status and mindsets of the people of
India are advancing. The Indian consumer is no longer afraid to spend tomorrow’s money today. The
average Indian consumer has reached a comfortable economic position where he now starts to demand
products and services which were earlier not available to him. This is an indicator of an improved
standard of living. Why should this be considered a disadvantage? The problem here is that the
country’s infrastructure is not capable of meeting these requirements.
But, surprisingly, instead of giving any attention to the supply factors, by simply lowering money and
credit in the market, the RBI is artificially pushing demand down. It is stifling the needs and
requirements of the consumers and is attempting to create an illusion that there is no demand.
 WHAT IS GOVERNMENT DOING TO CHECK FOOD INFLATION

The government announced on Thursday that it will review import and export of all essential
commodities in its bid to tame spiralling food prices that have fuelled rapid inflation. Stringent action
against hoarders and black marketers manipulating market prices will continue.

Cartelisation by large traders will be strictly dealt with and the states requested to ensure that such
action is effectively taken under the Essential Commodities Act, 1955, and the Competition Act, 2002.

The Indian government has already taken a series of measures from banning onion exports to putting a
pause on sugar exports, but food inflation has remained stubbornly high despite policymakers' forecasts
of a slowdown.

The government also announced that an inter-ministerial group under Chief Economic Adviser Kaushik
Basu will be set up to review the overall inflation situation with particular reference to primary food
articles.

Food inflation, which stood at 16.9 percent in early January, is a major headache for a government
already battling multi-billion dollar corruption cases that have emboldened the opposition.

Storage and Infrastructure

It was also announced that suitable support, including augmenting storage capacity and modernising
and upgrading godowns and other infrastructure, will be extended to facilitate stocking of bumper
kharif crop. This is expected to boost agricultural production not merely in cereals but also in pulses,
oilseeds, vegetables and fruits, milk and milk products, and poultry etc. As incomes rise, demand shifts
towards horticultural crops, dairy products. These are perishable and need sustained development of
market facilities, cold storage etc, quite different from what is needed for foodgrain.
Public Sector Undertakings shall intensify purchases of essential commodities, particularly edible oils
and pulses, for distribution through their retail network and also through the Public Distribution System
operated by the state governments. The existing schemes for subsidized distribution of edible oils and
pulses will be continued. Exports of edible oils and pulses, as well as non-basmati rice, will remain
banned.

The Centre also announced a scheme to support state governments in setting up of farmers' mandis and
mobile bazaars and to improve the functioning of civil supplies corporations and cooperatives will be
finalised urgently. States wil also be asked to consider waiving mandi tax, octroi and other local levies,
which impede smooth movement of essential commodities, and also reducing commission agent
charges.

The Committee of Secretaries under the Cabinet Secretary will review the prices situation with
individual states, and advise the Departments concerned of the Central Government to maintain close
coordination with State agencies to get direct feedback with a view to taking suitable remedial
measures on a fast-track.

The central bank raised its key rates six times since March in a bid to tame prices and is expected to
tighten further in January.

Government has taken measures to facilitate imports and restrict exports where needed, but urged state
governments to review local levies and state level marketing regulations which add to food prices.

Measures like Income Tax raids on traders, Slashing import duty on Onion and other food commodities

The UPA government is trying out various measures to bring down the inflation and control the rising prices.
However, since the current inflation rise is driven by increase in prices of vegetables and fruits, it is more
difficult to control these prices given the fact that these items cannot be stored for longer duration like other
commodities. Even the role of RBI is limited here, given that the current inflation rise is being driven by
supply side constraints. The government is reviewing the exports of all the essential commodities and is also
easing import regulations to encourage the imports of these essential commodities. It has also initiated
stringent action against black marketers and middle men who are trading in essential commodities and
spurring up the prices. However, all these measures can only provide short term relief. Government should
initiate long term measures to avoid a large food scarcity scenario in the country. Policy level measures must
be initiated to improve the supply chain & distribution for essential food items such as vegetables, meat,
fruits, milk products etc by reducing pilferage and wastage.
The high rates of inflation are hindering the future growth prospects of the Indian economy and are also
worsening the living conditions of the Indian middle class. We have to wait and see if the Government can
control it and tame the rising food prices. One also needs to keep a tab on impending action by RBI on
inflation, whose option has become limited after the industrial growth plunged to an 18 month low of 2.7%.

Recommendations
The government should play an important role in controlling inflation without harming
the economic growth by ensuring greater transparency in the RBI' operations. The
Governments at the Centre and the States should take urgent action to make available
adequate credit at competitive interest rates and offer other incentives. Inflation can be
contained only if supply-side and demand issues are effectively addressed, apart from
initiating appropriate fiscal and monetary measures.

Improved Public Distribution System

Decreasing Large numbers of intermediaries in Agriculture Supply
Chain & The Margins
Continuous Increase in the minimum support price to farmers.
Increased Employment Opportunities