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Indian govt struggles to keep food prices down

Surge in global food prices hits millions of people in India

(NEW DELHI) Anand’s restaurant has served flat bread, lentils and vegetables to loyal customers every day for four decades but for the past year he’s been on the receiving end of almost non-stop complaints.

‘They argue because we’ve raised prices. But we had to increase them because everything – wheat, butter and vegetables – has gone up,’ says Sanjay Anand, second-generation owner of the Delhi restaurant.

Small restaurants like his, as well as hundreds of millions of people across India, have been hit by a huge surge in demand and prices for food worldwide.

The price hikes have triggered government anxiety over whether it can continue to ensure supply of affordable food for the country’s 1.1 billion people.

Analysts say India – which produces most of its own food, exports surplus items such as sugar and heavily subsidises supplies for the poor – has so far managed to avoid severe price shocks.

But it faces the same mix of factors as other nations grappling with rising food prices – higher incomes are boosting demand for protein, surging demand for energy is pressuring oil prices, and diversion of agricultural land to urbanisation and industrialisation, as well as grain production for biofuels, is pushing land values sky high.

‘Of course India is impacted by global events,’ said Saumitra Chaudhuri, economic adviser at Indian credit rating agency ICRA.

‘The question is whether there’ll be a supply response. Better yielding seeds, irrigation, technology and more efficient distribution can and probably will have a major impact. But it will take a little time and we’re likely to see no slack in demand or costs soon.’

The price of wheat on the Chicago Board of Trade more than doubled in the past year to a record high above US $10.60 a bushel for March delivery.

That means India’s government will have to boost the subsidies it pays to wheat farmers – and those extra costs have to be passed on to customers in restaurants like Anand’s.

Government subsidies to feed the poor have more than doubled in the past five years to US$7 billion.

Along with other efforts such as selling transport fuel below market rates to stem inflation, India now spends more than 15 per cent of its budget attempting to control food prices.

‘The government would never scrap food and fuel subsidies. It’s politically impossible and, as we’ve seen, can lead to strikes and protests,’ Mr Chaudhuri said.

Inflation in India, measured by wholesale prices, is running at around 4 per cent. Consumer prices, less widely cited, have gained around 5 per cent.

But for Saba, a housewife from Kashmir, the official figure lags far behind the hikes she has seen in her weekly food budget for staples such as cooking oil and wheat.

‘Prices are going up across the world, but in India they’re rising even faster,’ she said, adding that the prices she pays for wheat and cooking oil have doubled in the past year.

The wide gap between government figures and consumer anecdotes comes amid an unprecedented economic boom in India.

The economy is forecast to grow 8.7 per cent in the year ending March, a slowdown from a torrid 9.6 per cent rate for the previous year.

Rising incomes have created a surge in demand for food supplies from a growing middle class, even as almost two thirds of the country continues to survive on less than US$1 a day.

This has created a dichotomy in supply and pricing, illustrated by the spike in demand created by newlyestablished retail chains using grain and cooking oil to produce ranges of processed foods while the government sells bulk items below cost through its public distribution system for the poor.

‘The Indian government procures wheat and edible oils domestically and offshore and sells below world rates for the poor,’ said Si Kannan, associate vice- president at Kotak Commodity Services in Mumbai. ‘But if they pay the local farmer below global prices, he’s not going to grow the crop unless demand from private companies makes the price attractive.

‘So there’s a structural problem and prices for items like wheat, soy and oils are going to remain high in India like the rest of the world because demand is so strong and supply is limited,’ he said.

Record prices of wheat, soy meal and corn impact economic growth patterns worldwide. In India one outcome is that farmers, like their counterparts elsewhere, switch to high-priced crops and set off a chain reaction for other commodities.

As a result, the government has been forced to sharply raise domestic support prices to ensure production stays high enough to avoid large imports.


Source: AFP (Business Times 18 Feb 08)

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