FOOD INFLATION

2010 WAS THE WORST YEAR.

SHAMSUL GHANI
(feedback@pgeconomist.com)
Dec 27, 2010 - Jan 2, 20
11

According to a news item, weekly inflation surged to 22 percent during the week ended on December 15. The inflation measured through SPI (sensitive price index) is back-breaking for the low income groups as the prices of 21 daily-use kitchen items have soared to new heights.

INDICES COMPARISON ON ANNUAL AND MONTHLY BASIS

 

MONTH OF NOVEMBER AS COMPARED TO PREVIOUS YEAR

MONTH OF NOVEMBER AS COMPARED TO PREVIOUS MONTH

INDEX FY-11 FY-10 FY-09 FY-11 FY-10 FY-09
CPI 14.44 10.26 24.65 15.48 10.51 24.68
SPI 18.77 9.03 32.05 23.25 10.75 29.79
WPI 21.63 3.44 30.12 24.65 12.46 19.87

A view of indices table shows that after the worldwide unprecedented increase in food prices during FY-09, we got some respite during FY-10 when prices recorded normal increase restricting the inflation to almost single-digit. But that was, to a great extent, due to the unusually high base of FY-09. FY-11, however, proved backbreaking for the low income groups as the advantage of FY-10 was more than neutralized by a fresh and destructive wave of inflation that wreaked havoc on poor people's finances. One may like to put most of the blame on SBP's blind insistence on continuous jacking up of policy rate.

KARACHI WHOLESALE MARKET RATES

FOOD ITEMS 40 KG PRICE (RS) 40 KG PRICE (RS) 40 KG PRICE (RS) YEARLY INCREASE
DEC 15, 2010 A WEEK AGO LAST YEAR IN PRICE %
Wheat 1040/1200 1040/1080 1024/1048 1.56%/14.5%
Maize 960/1040 960/1040 664/712 44.6%/46.1%
Moong (Sindh) 4000/4400 4000/4400 1760/1840 127.3%/139.1%
Mash (Imported) 4800/5200 4800/5200 3400/3800 41.2%/36.8%
Masoor (Imported) 3200/3500 3200/3500 2960/3200 8.1%/9.4%
Masoor Dal (Imported) 3660/3850 3660/3850 3280/3440 11.6%/11.9%
Arhar (Imported) 3700/4000 37000/4000 3200/3600 15.6%/10.0%
Guwar 1850 1900 1140 62.3%
Gram (Garda) 2150/2450 2150/2450 1400/1600 53.6%/53.1%
Gram (Yellow) 1480/1520 1480/1520 1280/1440 15.6%/5.6%
Gram Dal 2560/2600 2560/2590 1360/1520 88.2%/71.1%
Rice Irri-6 1180/1220 1180/1220 1040/1120 13.5%/8.9%
Rice Irri-9 1200/1240 1200/1240 1080/1200 10.0%/3.3%
Rice Basmati 1860/1940 1860/1940 1440/1680 29.2%/15.5%
Rice Basmati Kernel 3400/3500 3400/3500 3320/3400 2.4%/29.4%
Rice Basmati Sela 3200/3700 3200/3700 2800/3600 14.3%/2.8%
Broken Rice Basmati 1240/1280 1240/1280 1120/1280 10.7%/ -
Sugar White 2980/3000 2900/2980 - -
Gur 3000/3200 3000/3200 2000/2400 50.0%/33.3%

The reasons for food inflation in Pakistan are multifarious and multifaceted. These can be categorized under following lead subjects:

Basic Systemic Faults: Our economy is governed by capitalistic economic model based on laissez faire that demands continuous supply of fresh investment in business to survive in a market that has no or few regulations. Interest-based money market, high deficit financing to cater to irrational government borrowing needs and fiat money system provide this additional investment. Under laissez faire, prices are bound to increase with the passage of time. New economic theories keep on evolving to impart aggressiveness to the system. Currently, the world economy is guided by Miltonian theories - advanced by Milton Friedman who, as a free market economist, is far more aggressive than his predecessor Lord Maynard Keynes - that dictate that in case of excessive production, the prices should not be allowed to come down through demand and supply mechanism. Instead, the developed economies should shift their excessive production to new markets in the third world countries.

We saw that commodity prices prior to the global financial meltdown were sky rocketing and global hedge funds and sovereign funds were adding fuel to that fire. The global financial meltdown brought the commodity prices down, but that hardly happened in Pakistan. Why?

Circumstantial Food Price Hikes: Owing to a low degree of technological advancement, our agriculture remains dependent on erratic weathers. Generally low rains and in some cases high rains -that caused the recent foods adversely affect our production to create a supply gap. This gap results in higher food inflation. Circumstantial supply gaps in the world market tempt our exporters to shift bulk of the local produce to the international markets causing domestic price inflation. The recent export of onion to Indian markets explains this phenomenon. But, circumstantial changes in production and supply situations are not very much responsible for sustained food inflation.

Vested Interests: The feudal fabric of our society is one of the basic causes of growing food inflation. The feudal lords manipulate the food situation (and therefore food prices) by shifting weight from one crop to the other, depending on which crop in a particular season is going to pay more. For example, after the increase in government wheat procurement price from Rs625 to Rs950 per 40 kg immediately after assumption of power by the present setup, the wheat production increased at the cost of sugarcane production. The situation caused hikes in both wheat and sugar prices. The beneficiaries to increase in food procurement prices are always the large landholders. Since our democrats are predominantly feudal, their coming into power acts as a stimulant for the inflationary forces as most of their policies tend to be pro-feudal.

Low Per-Hectare Yield and Poor Infrastructure: Our per-hectare yield is one of the lowest in the world. To feed the ever-increasing population, we must keep on increasing cultivable area but limited availability of arable land prevents us from doing so. Poor infrastructure, century-old irrigation system, lack of technological advancement, use of substandard farm inputs, and off and on shortage of water affect our agriculture production giving rise to food price inflation.

Fixed Food Habits: The lack of education and absence of food planning has hardened our food habits. We produce wheat that, more often than not, is sufficient to satisfy the nation's requirement. On the other hand, we produce rice that is almost triple the requirement of the nation. Following a proto-type external economy model, we export the entire excessive rice production. And, whatever is left out, finds way into the local market to be sold at prices in consonance with the international market prices. With proper economic planning, national food habits can be changed by selling most of the produced rice in the local market at affordable prices. This will reduce pressure from wheat and result in higher food security and lower food inflation.

Hoarding, Smuggling and Absence of Price Control Mechanism: These factors are the real cause of higher food inflation in Pakistan. Our feudal elite that rules us in alternation, under the garb of democracy and autocracy, also controls the agriculture of this country. Being the large landholders, they decide what to produce and how much to produce. They manipulate prices through hording, unethical marketing, and distribution tactics. If able to get higher prices, they never hesitate to export or even smuggle out their agriculture produce leaving the national consumers high and dry. They openly resist any price control mechanism. They did every thing to take the sting out of the Competition Commission of Pakistan (CCP). The commission, if allowed to work, can act as an effective price control mechanism.

We also need to develop consumer pressure groups. These groups can exhort people to change their consumption habits in line with the change in food commodity prices. As a result of global financial meltdown, the commodity prices came down world over, but not in Pakistan. After a brief respite in 2009, food inflation has hit back with a vengeance in 2010 to make it possibly the worst year of the current decade.