Growth and Inclusion: Theoretical and Applied Perspectives

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1 THE WORLD BANK WORKSHOP Growth and Inclusion: Theoretical and Applied Perspectives Session I Food Inflation: Drivers and Policy Implications Subir Gokarn Reserve Bank of India January 12, 212 The Claridges Hotel 12 Aurangzeb Road New Delhi, India

2 Food Inflation: Drivers and Policy Implications Subir Gokarn Deputy Governor Reserve Bank of India Seminar on Growth and Inclusion: Theoretical and Applied Perspectives New Delhi, January 12, 212 1

3 Structure of Presentation Characteristics of food inflation Demand factors Supply factors Policy implications 2

4 CHARACTERISTICS OF FOOD INFLATION 3

5 Apr-54 May-55 Jun-56 Jul-57 Aug-58 Sep-59 Oct-6 Nov-61 Dec-62 Jan-64 Feb-65 Mar-66 Apr-67 May-68 Jun-69 Jul-7 Aug-71 Sep-72 Oct-73 Nov-74 Dec-75 Jan-77 Feb-78 Mar-79 Apr-8 May-81 Jun-82 Jul-83 Aug-84 Sep-85 Oct-86 Nov-87 Dec-88 Jan-9 Feb-91 Mar-92 Apr-93 May-94 Jun-95 Jul-96 Aug-97 Sep-98 Oct-99 Nov- Dec-1 Jan-3 Feb-4 Mar-5 Apr-6 May-7 Jun-8 Jul-9 Aug-1 Sep-11 Per cent 35 Food Inflation in India A Long View Food Inflation

6 1954:3-57:7 1963:12-65:8 1966:5-1968:1 1972:7-75:5 1979:8-82:3 1983:3-84:2 1987:8-89:1 199:1-92: :4-95: :4-97:4 1998:5-99:4 26:1-7:8 28:9-11:1 Per cent 35 Persistence of Food Inflation Avg. food inflation Peak food inflation 5

7 1954:3-57:7 1963:12-65:8 1966:5-1968:1 1972:7-75:5 1979:8-82:3 1983:3-84:2 1987:8-89:1 199:1-92: :4-95: :4-97:4 1998:5-99:4 26:1-7:8 28:9-11:1 Persistence of Food Inflation Number of months

8 Per cent Per cent Contribution of Food Inflation Weighted contributtion of food(prim+mfg) to Total WPI WPI Inflation rate (RHS) -15 7

9 Per cent Per cent 12 Drivers of Food Inflation 196s &197s Cereals Sugar and Allied Products Condiments and Spices Protein-based items Fruits and Vegetables Edible Oils Other Food Articles Cereals Fruits and Vegetables Sugar and Allied Products Edible Oils Condiments and Spices Other Food Articles 8 Protein-based items

10 Per cent Per cent 15 Drivers of Food Inflation 198s &199s Cereals Sugar and Allied Products Condiments and Spices Protein-based items Fruits and Vegetables Edible Oils Other Food Articles Cereals Fruits and Vegetables Sugar and Allied Products Edible Oils Condiments and Spices Other manufactured food 9 Protein-based items

11 Per cent Per cent 125 Drivers of Food Inflation 11 2s Cereals Sugar and Allied Products Condiments and Spices Protein-based items Fruits and Vegetables Edible Oils Other manufactured food Cereals Fruits and Vegetables Sugar and Allied Products Edible Oils 1 Condiments and Spices Other manufactured food Protein-based items

12 Per cent Proteins and Fruits & Vegs 6 Percentage contribution to food inflation Pulses Milk & Milk Products Eggs, Meat and Fish Fruits and Vegetables

13 Per cent 8 Proteins and Fruits & Vegs 2 Percentage contribution to food inflation Pulses Milk & Milk Products Eggs, Meat and Fish Fruits and Vegetables

14 DEMAND FACTORS 13

15 Per cent Per cent Changing Consumption Patterns 1 MPCE Rural 1 MPCE Urban food total non-food total Source: NSSO surveys, Various rounds food total non-food total 14

16 Urban Engel Curves Decile-wise Monthly PCE on Select Food Items: All India (Urban) Cereals and Substitutes Protein Rich food Source: Estimated from NSSO unit level data, Fruits and Vegetables (Rupees) Processed food and Beverages

17 Rural Engel Curves Decile-wise Monthly PCE on Select Food Items: All India (Rural) (Rupees) Cereals and Substitutes Fruits and Vegetables Protein Rich food Processed food and Beverages Source: Estimated from NSSO unit level data, 29-1

18 Income Elasticities Multiples of MPCE: Top Decile/Bottom Decile Rural Areas Urban Areas Cereals and Substitutes Fruits and Vegetables Protein Rich food Processed food & Beverages Source: NSSO 29-1, GOI. 17

19 SUPPLY FACTORS 18

20 Stagnant Productivity in Pulses 7 Yield of pulses (Kg per hectare)

21 Andhra Pradesh Assam Bihar Chhattisgarh Gujarat Haryana Himachal Pradesh Jammu & Kashmir Jharkhand Karnataka Kerala Madhya Pradesh Maharashtra Orissa Punjab Rajasthan Tamil Nadu Uttar Pradesh Uttarakhand West Bengal 11 Productivity Differentials State-wise yield of total pulses in 29-1 (kg per hectare) All India Average Source: Ministry of Agriculture, GOI 2

22 Milk Yield (Hg/Animal) Growth in Yield (%) Slowing Growth in Milk Yields s 197s 198s 199s 2s Yield (Hg/Animal) Growth Rate (%) (RHS). Source: FAO 21

23 South-west Monsoon Rainfall 5 year moving average IMD-LPA is calculated every 1 years as the 5 years average i.e. 22 IMD LPA for is 89 cm and is the average rainfall over the country as a whole for the period

24 POLICY IMPLICATIONS 23

25 Jul-Sep 28 Oct-Dec 28 Jan-Mar 29 Apr-Jun 29 Jul-Sep 29 Oct-Dec 29 Jan-Mar 21 Apr-Jun 21 Jul-Sep 21 Oct-Dec 21 Jan-Mar 211 Apr-Jun 211 Jul-Sep 211 Oct-Dec 211 Per cent Inflation and Inflation Expectations HH Inflation Expectations WPI ALL Total Food Manufactured Non-Food Products 24

26 Rising Wages CPI-Rural Labourers Inflation and Wage Growth* Orrisa Jammu & Andhra Pradesh Maharashtra Assam Tamil Nadu Punjab West Bengal Karnataka Madhya Pradesh All-India Uttar Pradesh Meghalaya Rajasthan Kerala Himachal Gujarat Manipur Bihar Haryana Tripura 2 4 CPI-RL Inflation (21-11) Wage Growth (21-11) Haryana Tamil Nadu Bihar Jammu & Kashmir Karnataka Kerala Maharashtra All-India Madhya Pradesh Uttar Pradesh Orrisa Punjab West Bengal Rajasthan Assam Himachal Pradesh Andhra Pradesh Gujarat Meghalaya Manipur Tripura CPI-RL Inflation (29-1) Wage Growth (29-1) 25 * Y-o-Y Growth in March; Rural Unskilled Labourer (Male) Wage. Source: Indian Labour Journal: Labour Bureau, Ministry of Labour.

27 Jun/95 Mar/96 Dec/96 Sep/97 Jun/98 Mar/99 Dec/99 Sep/ Jun/1 Mar/2 Dec/2 Sep/3 Jun/4 Mar/5 Dec/5 Sep/6 Jun/7 Mar/8 Dec/8 Sep/9 Jun/1 Mar/11 Per cent Million tonnes 25 Cereal Stocks and Prices Cereal inflation Food stocks (RHS) 26

28 Policy Implications Persistence and Expectations Food inflation part of core inflation Wage-price feedback Persistent supply shock implies slower growth for any given rate of inflation Supply Responses Opportunities for productivity increases Product and region-specific constraints Threats from water scarcity Role of stocks 27