Why food prices go up before the elections?

Sudden spike in onion prices for no apparent reason? 

It has come as a rude shock. After the unimaginable drubbing in the State elections, Congress party now realizes the folly it made in not controlling food inflation. Sonia Gandhi has admitted that rising inflation has been instrumental in building peoples’ anger against the ruling party.

They had taken it rather casually. Remember Agriculture Minister Sharad Pawar expressing his helplessness at rising prices. He said he didn’t know why the onion prices were rising. Instead of initiating tough measures, Delhi Chief Minister Sheila Dixit had pleaded with folded hands before hoarders and black marketeers not to raise the prices at the time of elections. Prime Minister Manmohan Singh had very conveniently blamed the global economic for the spirally prices in India. 

Onion prices were on boil. So were the prices of other seasonal vegetables. Ginger and Garlic selling for Rs 100 per kg, Peas at Rs 120/kg, Cauliflower at Rs 80/kg and even spinach sold at Rs 60 per kg. In fact, no other vegetable was available in the market for less than Rs 40/kg. Such high price prevailed when the monsoon rains had been more than bountiful, and there was no shortfall in production, defied all economic logic.

Let us not forget, prior to elections onion prices had remained abnormally high for several months – from July to mid-November, and had started receding just when the election process had begun. The question that needs to be therefore asked is that why inflation invariably spikes before elections? 

In early December, onion prices had crashed. According to a report in Economic Times (Dec 13, 2013) prices had halved to Rs 13/kg in three weeks in western markets. The report says that prices had stubbornly refused to come down before the assembly elections even when the supply was marginally low. If you have followed my earlier blogs, I had been saying that production fell by only 4 per cent whereas prices had gone up by 600 per cent in various markets. 

Well, the answer is not difficult to find. Over the years, the wholesale and retail trade in fruits and vegetables has monopolized the entire supply chain. Right from procuring vegetables from the farmers to making it available at your doorsteps through a network of hawkers is now an organized business. As I have been saying, these traders or arhtiyas have now turned into money bags for the political parties. No wonder, these wholesale and retail traders are affiliated to one political party or the other. For instance, the Azadpur mandi traders association in Delhi is aligned to the ruling Congress party. In Punjab, on the other hand the traders associations predominantly back the ruling SAD-BJP combine.

It is primarily for this reason that the major political parties had opposed bringing the parties under the Right to Information (RTI) Act. It is therefore a matter of convenience for both the political parties as well as the traders association. While the government remains conspicuously indifferent by not initiating any strong action against hoarding and manipulative trade practices, the trade goes for a killing. This understanding helps the political parties to meet a considerable part of the heavy electoral expenses.

Otherwise I see no reason why the vegetable prices should zoom prior to every elections. Onion prices were no exception. An investigation by a newspaper showed how the trade made a neat Rs 150-crore in just four days when prices peaked at Rs 4,500/quintal on Aug 13.  A sting operation by another TV channel exposed traders hoarding huge stocks in Madhya Pradesh. Even when the prices were touching the sky, the Agriculture Produce Marketing Committee (APMC) in Nasik had acknowledged that more than 2.5 lakh tonnes of onion were available with farmers in 66 villages of Lasalgaon. 

Subsequently, another expose by NewsX TV channel had shown that farmers had got as low as 0.50 paise per kg in Maharashtra while the price consumer paid was Rs 100/kg. Who benefited from such a massive manipulation? Your guess is as good as mine. 

Read it's Hindi version in Rajasthan Patrika, Dec 14, 2013.
http://epaper.patrika.com/c/2064129

Middle class hypocrisy -- pay happily for luxuries, and shout only when vegetable prices go up.

Whenever vegetable prices go up, the middle class is up in arms. But how come they don't mind spending anything for buying flats, gold/silver, car, and other luxuries -- ft.com picture

At the outset let me first acknowledge that I don't see any valid reason for the stupendous rise in vegetable prices that we are witnessing for the past few days. As i have always maintained that the kind of price rise that we have seen in the past several years, which incidentally is the only time when we feel and talk of inflation, has nothing to do with supply demand constraints. Its simply linked to hoarding and profiteering. I have more than once stated publicly that unless the Government gets tough on the retail trade, it is difficult to bring control over runaway inflation that inches one and all.

Having said that, what I find it intriguing is that it is only when the vegetable/fruit prices start showing an upward trend that the media wakes up. It is only then that I find the middle class complaining. Suddenly the ladies who appear on the TV start telling us how difficult it has now become to manage their household in the monthly budget. This makes me ask: Is fruit/vegetable prices the only thing that decides the household budget? Why do the same people remain conspicuously quiet when the price of gold, for instance, jumps from Rs 12000/10 grams to Rs 30,000 and above. Does it not affect their household budgets? What about those who have to get their children married? Don't they feel the pinch of the quantum jump in the price of gold/silver?

It is roti, kapda and makaan that every one looks forward to. Over the past few years, the price of residential flats in every nook and corner of the country has literally gone through the roof. Planning Commission had once blamed the real estate for the 400 per cent increase in reality prices. If you are an average middle class person, I bet it is not possible for you to even think of owning a house or a flat in any city. Thinking of buying land, then you must be really rich. News reports tell us that a cent of land in Mumbai is now more expensive than Tokyo or New York. is that not the kind of inflation that affects the middle class? Then how come every one is quiet.

Instead of screaming at the top of their voice, I find the newspapers and the electronic media actually celebrating the massive rise in land and housing prices by bringing out weekly supplements. Just because any hike in real estate prices brings additional revenue for the newspapers and TV channels, is it fair to remain quiet and not draw the attention of the Government? But just because we remain a silent spectator to the spiralling prices, media benefits. In fact, this makes me wonder. If the vegetable hawkers (or through their associations) were to start advertising in newspapers probably you will never watch any TV programmes on inflation if and when the prices shoot up.

Not only gold and silver, the prices of almost everything that concerns us has been on an upswing. Whether it is your child's education, or your daughters college fees. Whether it is your train ticket or the air fare. Airlines have recently added on to your costs by unbundled prices like seat preference for instance. Taxi fares have been going up. It is more expensive to travel from my house to the airport or railway train station than to take a Volvo air-conditioned bus from Chandigarh to New Delhi. Petrol and diesel prices have been routinely increasing, even privatisation of electricity delivery has made power bills soar for an average family. And so on...

Isn't this all part of inflation that pinches us? Isn't this also responsible for upsetting our household budgets? Then why is that we never complain about anything except vegetable prices? Why is that media never talks about this? Well, because in some way, we all believe that the rise in prices of everything else except for vegetables/food constitutes economic growth. Just because we have surplus cash it is alright to spend. The more the expensive gadgets/services, the better we feel. But when the ostensibly poor people start charging us more, we start screaming. Our budget only goes for a toss when the tomato prices go up to Rs 80/kg or Onion prices increase to Rs 60/kg. But when a 2-bedroom flat in the outskirt of Delhi costs anything upwards of Rs 1.5 crore, we rejoice. We don't even get tired telling anybody and everybody around us the price we have paid for that flat. How come we are ready to pay crores for a flat (which surely is a superfluous price) and only crib when vegetable prices shoot up?

Isn't this middle class hypocrisy?

No longer the apple of your eye. How the trade exploits the gullible farmers and consumers. And how the Govt turns a blind eye blaming supply constraints for rising prices.

The entire trade of the enchanting Kashmiri apples is in the hands of commission agents. They decide how much the growers need to be paid and how much you need to shell out. 

For several years now, food inflation continues to pose a serious headache for the government. Nine year after assuming power, Prime Minister Manmohan Singh appears clueless. He told the Confederation of Indian Industry (CII) a few days back that inflation (along with corruption) remains a big challenge. While it is not that he doesn't know what to do, the fact remains he doesn't want to take steps that can bring down inflation simply because these steps would go against the basic tenants of market economy.

For several years now, in almost all the panel discussions that you get to see on the TV channels and also the articles/analysis appearing in major newspapers, the blame has been on supply-demand constraints. Because that is what the text books say. I have always maintained that there is no constraint at the supply side, and the entire fault is with the wholesale-retail trade. If you were to visit a wholesale market (mandi) in the morning hours when the auctions take place, you will find the prices going up by 300-400 per cent just within an hour. And by the time, the produce reaches your home, you end up paying anything between 500 to 600 per cent more than what the farmers have been paid.

Take the case of apples from Jammu & Kashmir. In an eye-opening report Marketing System and Price Spread of Apple in Kashmir submitted by the National Bank for Agriculture and Rural Development (NABARD) the exploitation of apple growers as well as the consumers by a well-knit network of commission agents has been laid bare. While you end up shelling out anything between Rs 105 to Rs 120/kg for the Kashmir apples, the grower get on an average Rs 26 per kg. The production cost is around Rs 35 per kg.

The exploitative system has been perfected over the years. According to a news report in DNA newspaper entitled Agents decide how much you will pay for Kashmiri apples (DNA April 1, 2013 http://bit.ly/17eeRdD) "Supply is manipulated in artificial manner generally at agents level through hoarding of apple in cold stores for short duration and controlled atmosphere stores (CAS) for long duration up to 6-9 months.” Incidentally, traders gets subsidy and also subsidised loans for setting up cold stores and the controlled atmosphere stores (CAS) which is being used by commission agents to their advantage. 

The newspaper further says: "This trend started with Delhi and has spread to all other parts of the country. Though the agents adopted this CAS system in the late 2000s, the scam became big after 2010 when big agents expanded their CAS capacity in Delhi and Kundli (Industrial Growth Center, Sonepat). “Now CAS units are becoming a craze among CAs,” said an area marketing manager of the J&K horticulture marketing and planning department.

It quotes the NABARD study: “The existence of seven cold storages within Azadpur market yard of Delhi and about 100 CAS at Kundli in Haryana (25 km from Azadpur market) is leading to a sort of hoarding’ of Kashmiri apple before it enters Delhi market for auction.” It also blames the banks for extending commercial loans to commission agents instead of growers, who then exploit growers by extending loans at high rates of interest. In 2011-12, apple growers received Rs 1,200-crores of advances of which only Rs 200-crore came from banks. The rest came from the commission agents and others (Agent's apple growers don't get fruit of labour, DNA, Mar 31, 2013, http://bit.ly/16qmEls). 

Reading the reports it becomes quite apparent how the scam has been operating. If we take apple as an example, it become obvious that the price rise being witnessed is not because of supply constraints. Neither can apple growers be blamed for the price increase in the markets. It also negates the view that farmers benefit when inflation goes up. What is at fault, and which unfortunately is brazenly defended by analysts, economists and policy makers, is the exploitative trade. It is the trade that is solely responsible. But why is that no regulation as well as deterring action has been initiated against the nexus that operates between the wholesale and retail traders? 

I agree that it is primarily the poor implementation of APMC Act (1997). Over the years, traders have formed strong cartels which are very powerful and difficult to break simply because the successive governments have preferred to turn a blind eye. These traders also operate as big money bags for political parties and so no one wants to cut the hands that feeds. But to say that the best way forward is to debunk the APMC Act and allow private markets to be set up which will provide a higher price to growers and a better price to consumers is another flawed hypothesis. The prevailing rotten system needs to be set right, but throwing it away is not the right answer.

It is being suggested that foreign direct investment in retail will set the house in order. It will end the exploitation of the farmers by the middlemen. Many fall for this argument. But in the most recent cases of exploitation of dairy farmers by super markets in UK it has been shown that supermarket giants like Tesco and Sainsbury have pushed prices down to unsustainable levels thereby pushing dairy farmers out of business (Retailer aligned milk contracts -- good or bad. http://fairdealfooduk.com/?p=4494). 

Striking at the wholesale-retail trade in India will send a wrong signal for the market economy. The propaganda machinery has so far been telling us that markets correct itself. This is not true. Showing a stick to the trade therefore will go against the fundamental premise of market reforms. Prime Minister is therefore reluctant to discipline the erring trade. He is trying to protect the reforms he unleashed. His commitment is therefore to the market reforms. The nation can continue to suffer and be exploited in the process. #  

Behind the economic sob story: RBI Governor calls the bluff.

It is heartening to see Reserve Bank of India governor D Subbarao calling government and industry's bluff on rupee depreciation as well as inflation. By doing so, he has categorically exposed the faulty assumptions behind which the Prime Minister, Manmohan Singh, the chief economic adviser, Dr Kaushik Basu, and several chieftains of the Indian industry have been hiding their own failures. Prime Minister and the chief economic adviser have repeatedly blamed policy paralysis (under Coalition compulsions) to be the reason for the slowing of the economy, while the PM goes to shift the blame even to the Eurozone crisis.

"Europe alone cannot be blamed for the rupee's woes and inflation isn't merely due to supply-side constraints but has a structural element to it. I don't think this blame game can go on," Dr Subbarao on Tuesday addressing the Indian Merchants Chamber in Mumbai (RBI guv calls govt's bluff on Re, inflation http://bit.ly/NPZjG8). This is a significant statement coming from the RBI chief who should know what he is talking about. What upsets me more is that even the business journalists, who I thought were knowledgeable enough, refrained from coming out with the truth. None of the Business TV channels (and of course the business papers) had the courage to call a spade a spade. Except for an editorial or two, the business media only echoed what the industry wanted.

Prime Minister Manmohan Singh used the G-20 platform to reiterate what he has been saying earlier. "Our growth rate in 2011-12 declined to 6.5 % from the level of 8.4% in the previous year. This may look like a reasonable figure, given growth rates being experienced in the rest of the world, but or public is impatient for a return to high growth and faster jobs creation," he said at the Los Cabos in Mexico. Interestingly, RBI governor D Subbarao demolishes this argument. The Times of India says Subbarao struck out at those who argued that India at 6.8% was faster than the West. "We must remember that we are a low-income country with a per capita income of less than $1500. India is a supply constrained economy and should grow faster to bridge the income gap."

Well, the PM will need another smokescreen to hide.

Moving away from the growth rate obsession, I would also like to draw your attention to a misleading headline that I find are splashed across the media. 'Global investment seem less bullish on India after a series of policy flip flops by the government sapped confidence', reads the introduction to a news report (see Times of India, June 20, 2012: FDI inflows dip 8% this year). It is misleading because it very cleverly blames policy paralysis for the decline in FDI during the period Jan-April 2012. The RBI data shows that FDI had actually increased, compared to last year, in Jan and Feb, and thereby declined in Mar-April. Overall, against the inflow of $8.5 billion in 2011, it is $7.8 billion this year. But what remains hidden is that the decline in Mar-April is because of the Eurozone crisis when the entire world is witnessing an investment  decline. It is not because of any policy flip flop within the country. 

Nevertheless, what is not being mentioned is that between Jan-March 2012, India Inc had invested $ 8 billion overseas. This massive outgo is not because of policy mismatch within the country but the favourable conditions created by RBI allowing these companies to invest abroad. They have gone to greener pastures overseas. Therefore what is the use of crying over falling FDI when our own companies are investing heavily abroad? Mischievous reporting, isn't it?

I am glad RBI governor has made clear his views on inflation. He talked of the 'structural elements' that result in a higher inflation. This is what I have been stressing for several years now.  At a time when there is no drop in agricultural output, including nutritious commodities like milk and eggs, I see no reason why the prices should be on an upswing. Huge cartelisation in the wholesale markets, followed by rampant exploitation by the retail traders, in the absence of any checks and control, has actually led to the present crisis. No economist wants to point out to this structural anomaly because any effort to bring the wayward trade under control would go against the tenants of the market economy, which they swear by. Also, they are paid to support the proposal of allowing FDI in retail, and so they go on singing the chorus. This is rather unfortunate. But that's how the realities are.

Stupid Economics: Blaming the poor and hungry for food inflation

Obsessed with the growth figures, the planners have tried but failed to hide the ugly underbelly of India’s economic growth.

Montek Singh Ahluwalia has been at the helm of India’s planning process for quite some time now. It is during his tenure as the deputy chairman of the Planning Commission that India has been pushed deeper and deeper into the quagmire of poverty. With the largest population of hungry in the world, the Global Hunger Index 2010 has placed India in the pit.

I wasn’t therefore shocked when I read Ahluwalia blame the hungry for the rise in food inflation. From someone who literally lives in the ivory tower of the Yojana Bhawan, anything can be expected. But what, of course, surprised me was the audacity with which he blamed the poor and hungry in the rural countryside for the rising inflation. Although I hate to say but there can be nothing more stupid than blaming the poor in the villages as if they have started eating more and therefore the pressure on food prices.

A few years back, former US President George Bush had made that ignominious remark shifting the blame for the 2007 global food crisis to the hungry Indians. He had said that the food crisis was because the Indians had started eating more. In an interview, I had then replied that if Indians started eating as much as the Americans do, then probably the world would need to grow food crops on the moon.

While one can ignore what George Bush had said, how can one pardon the head of India’s planning process who should know much better. It also reflects on the disconnect India’s Planning Commission has with the existing ground realities. Obsessed with the growth figures that continue to be tossed around with much fanfare, the planners have tried but failed to hide the ugly underbelly of India’s economic growth.

Only a few weeks back, India was ranked 67th among 84 hungry countries of the world. Two years back, in 2008, the Global Hunger Index had placed India at 66th position among 88 countries. In other words, India had slipped still lower down the pit in the past two years. I can’t fathom how the International Food Policy Research Institute (IFPRI) had placed India in such a low esteem if the poor in the villages had started eating more.

Take another international report that was submitted by the Save the Children Fund just a few days prior to the UN Summit on Millennium Development Goals (MDGs) that was held in the last week of September in New York. With over 5,000 children succumbing to malnutrition every day, India had once again topped the global ranking. This shocking disclosure is enough to put every Indian to shame. I wonder how the head of Indian Planning Commission can even walk with his head held high.

Let me also draw your attention to the 2006-07 report of the National Sample Survey Organisation (NSSO) which brings out the stark truth. It tells us that the correlation between hunger and economic growth is robustly positive -- more the economic growth, more people go to bed hungry. This challenges the widely held view that economic growth pulls poor out of poverty and hunger.

What makes the alarming situation still worse is that ever since economic liberalisation was launched in 1991, the NSSO tells us that cereal consumption has been on a steady decline, with no corresponding increase in the intake of more nutritious eggs, vegetables, fruits and milk. It means hunger has been on a rise and is now more widespread and well-entrenched. So far the feeling was that with the changing food habits, people have shifted from cereals to nutritious foods like fruits, vegetables and milk. This assumption too does not hold true anymore.

Cereal consumption

The decline in cereal consumption has more or less followed a steady pattern in the rural and urban areas, and of course, much faster in the rural areas. I don’t think Ahluwalia ever read this report. Accordingly, per capita cereal consumption per month in the rural areas across the country has fallen from 13.4 kg in 1993-94 to 11.7 kg in 2006-07.

The decline has been sharper between the period 2004 and 2007 when just in three years, cereals consumption fell from 12.1 kg to 11.7 kg. In the urban centres the decline was from 10.6 kg in 1993-94 to 9.6 kg in 2006-07. In a largely vegetarian society, cereals constitute the single important source of nutrition and therefore its importance in the Indian context is well established.

This is still not the real picture. The NSSO survey does not cover the period 2007-08 when the world was faced with an unprecedented rise on global food prices. In any case, the average household expenditure on food shows an increasing trend, but does not translate into more food consumption. It only means food prices have been on an upswing, and the poor are finding it difficult to fill their bellies. The recent price rise had made it still more difficult for the poor to be well fed. Cereal consumption therefore is expected to fall still further in 2009-10, and the impact it must have had on the poor and hungry can be well imagined.

Source: Deccan Herald, Oct 28, 2010
http://www.deccanherald.com/content/108143/ahluwalias-sermons.html