In an article published in the Economic Times today, Swaminathan S A Aiyar reveals that global food prices play a major role in driving Indian food prices contradicting to a general belief that Indian food prices are regulated by minimum support prices. The article enlighten the role of global food market and Indian government's inability to open the Indian food market led to a sharp rise in the food prices in India (all three segments viz., cereals, proteins and vegetables).
Before talking about the role of these two players viz., Chicago food market and the Indian government, Mr. Aiyar informed ET's readers that global wheat and maize prices have crashed spectacularly from $8.50 per bushel for much of 2013 to $5.70 per bushel and $7 per bushel in early 2013 to $4.13 per bushel, respectively. He expects it to bring down food inflation in India.
The interesting part of the article focuses on relationship of global and Indian food market and how the government is willingly or unwillingly flowing with the global food prices. While mentioning the downtrend in the food prices is sustainable, Mr Aiyar said in his article "India doesn't allow free import or export of farm items, so Indian prices often differ from global ones. Some analysts think Indian food inflation is driven mainly by politically-mandated rises in cereal prices, not by global trends. This is simply wrong. Global trends matter significantly."
How?
· In the last two decades, India has become a major exporter of foods: rice, maize, wheat, poultry products and beef
· MSP is just a catch up of Indian food prices to global food prices
· Sharp rise in demand for wheat, maize for animal feed and bio fuels
He said "Despite continuing controls on agricultural trade, global trends now have a big impact on Indian price expectations. Indian farmers and traders look up Chicago prices every day, as these sway domestic price expectations partially, though not totally.
It's politically impossible in a predominantly rural democracy to consistently pay Indian farmers less than global prices. This can happen occasionally, when global prices suddenly spike. But political pressures to raise minimum support prices (MSP) for Indian crops are high when global prices shoot up. Big increases in MSP since 2008 have been driven by the need to catch up with global prices after 2007-08."
He said that government took a phase wise approach in increasing MSPs for catching up global rally in the food segment, which means Indian consumer paid for rigid food inflation. While he expects some relief through only a small increase in MSPs will come in this year (yes and that too despite falling global food prices, thanks to political compulsion), risks in India for rigid food inflationary situation remains high.
The government seriously needs to evaluate benefits of opening of the Indian food markets globally and put it in public domain. This will only help Indians to build economy by putting more money in productive assets than helping farmers to catch up global food prices in a lag of 4-5 years.
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