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Food Price Inflation in India (2008 to 2010)

This paper analyses the causes of the high inflation experienced in 12 food commodities between January 2008 and July 2010. It is shown that a majority of the commodities were subject to inflationary pressures due to domestic supply-side constraints. They include pulses, fruits, vegetables, meat, fish, spices, tea, coffee and sugar. Cost escalation was the primary reason for rising prices of milk and eggs. The high inflation of rice was caused by a complex interplay of factors. With the exception of milk, the paper finds no concrete evidence to support the popular view that the higher food prices in recent years was the outcome of a "secular shift" in food consumption patterns towards high-value agriculture products. Developments in the global economy have influenced the domestic food prices mainly through passing on world oil price increases. High cost food imports played only a very limited role.


Food Price Inflation in India (2008 to 2010)

A Commodity-wise Analysis of the Causal Factors

Sthanu R Nair, Leena Mary Eapen

This paper analyses the causes of the high inflation experienced in 12 food commodities between January 2008 and July 2010. It is shown that a majority of the commodities were subject to inflationary pressures due to domestic supply-side constraints. They include pulses, fruits, vegetables, meat, fish, spices, tea, coffee and sugar. Cost escalation was the primary reason for rising prices of milk and eggs. The high inflation of rice was caused by a complex interplay of factors. With the exception of milk, the paper finds no concrete evidence to support the popular view that the higher food prices in recent years was the outcome of a “secular shift” in food consumption patterns towards high-value agriculture products. Developments in the global economy have influenced the domestic food prices mainly through passing on world oil price increases. High cost food imports played only a very limited role.

The authors are grateful to the officials of Labour Bureau (Shimla), Ministry of Labour and Employment and Central Statistics Offi ce, Ministry of Statistics and Programme Implementation, for data related assistance and discussions.

Sthanu R Nair ( and Leena Mary Eapen (leenaeapen@ are with the Indian Institute of Management, Kozhikode.

1 Introduction

major economic challenge faced by India in recent years has been the stubbornly high food prices. It began with rising inflation, measured by year-on-year changes in the wholesale price index (WPI) (Base: 2004-05), of manufactured food products from January 2008, followed by primary food articles.1 The inflationary pressure on food products remained high until July 2010. On the other hand, food articles continued to face an upside risk to prices for an extended period of time – up to November 2011 (status as on December 2011). On an average basis,2 the food products infl ation rate recorded during the 31-month period from January 2008 to July 2010 was 10.20%. The food articles group witnessed an average inflation rate of 12.46% between March 2008 and November 2011. Considering the high levels of poverty and household spending on food in India, the persistence of food price inflation over a long period of time is undesirable. Also, it has necessitated aggressive monetary tightening by the central bank even at the risk of a moderation in economic growth.

Several factors are held responsible for high food prices in India since 2008. They include a fall in agriculture production during 2008-09 and 2009-10, deficiency of the 2009 southwest monsoon, increase in the overall demand for food, higher food exports, high support prices for foodgrains, large-scale public procurement of foodgrains, hoarding and speculation, and global factors characterised by high world crude oil and food prices. Though quite a few studies have analysed the factors behind the recent food price spiral (Basu 2011; Chand 2010; Kumar et al 2010; Nair and Eapen 2011), a comprehensive commodity-wise analysis of the causes of this episode of inflation is not available. This paper is an attempt to fi ll this gap by way of examining the reasons for high infl ation experienced in various food items during the period January 2008 to July 2010. A commodity-wise analysis avoids the trap of broad generalisations about the causes of food inflation and thereby bringing more clarity to the issue. The food items considered for analysis are: rice, pulses, fruits, vegetables, milk, eggs, meat, fish, spices, tea, coffee, and sugar. As the causes of high wheat prices has received detailed attention in our earlier work (Nair and Eapen 2011), it is excluded from the present analysis.

The paper is structured as follows. Section 2 presents the trends in food inflation during the study period. It also makes a comparative analysis of the food price situation in India and at the global level. In Section 3, the causes of high infl ation experienced in the select food commodities are analysed from

May 19, 2012 vol xlviI no 20

both the demand and supply sides. The last section summa-straying deeper into the negative zone in the next year with an rises the findings of the paper. average of -17.52%, world food infl ation accelerated again be

tween November 2009 and April 2010. Thus, the movements 2 Trends in Food Inflation in the world food prices between August 2005 and April 2010

can be classified into three phases: Phase I from August 2005

2.1 Domestic Scenario to September 2008 (high food prices), Phase II from October All the food article groups experienced high infl ation between 2008 to October 2009 (negative food infl ation), and Phase III March 2008 and July 2010 (Table 1). Significantly, all of from November 2009 to April 2010 (high food infl ation). These them were subject to a long Table 1: Average WPI Inflation Rate trends are corroborated by the global food inflation rate meas

of Food Articles (March 2008 to July

duration of upward price pres- ured by The Economist’s weekly food price index (base 2000=100)

2010) (%) (Base: 2004-05)

sure. The peak monthly infl a- (Figure 2, p 48). As per this measure, global food infl ation

Items Inflation Rate

tion rates witnessed by the Food articles 13.32 started rising from the third week of July 2005 and remained food article groups ranged Foodgrains 12.34 very high until 30 September 2008. After a year-long lull, from 19.49% (foodgrains) to Cereals 11.55 global food inflation accelerated again from 13 October 2009 48.60% (tea and coffee). On an Rice 12.75 and continued up to March 2010.

Wheat 10.66

average, the egg, meat and fi sh In terms of average inflation, the products/product groups

Pulses 15.70

group has recorded the highest which have contributed to high international food prices

Fruits and vegetables 9.79

inflation rate of 17.66% fol- during the periods August 2005 to September 2008 and

Fruits 11.22

lowed by condiments and November 2009 to April 2010 are cereals (wheat, rice, maize),

Vegetables 8.26

spices (16.86%), milk (15.24%), all varieties of edible/vegetable oils, dairy products (butter),

Milk 15.24

tea and coffee (13.37%), food- coffee, and animal feed (soybean meal) (Table 3). Interest-

Egg, meat and fish 17.66

grains (12.34%), and fruits and ingly, the average inflation rate of these products was negative

Egg 10.68 vegetables (9.79%) (Table 1). A Fish-marine 18.10 during the one-year period beginning in October 2008. The majority of the commodity Fish-inland 26.67 global sugar and tea prices behaved somewhat differently with subgroups under each food ar-Mutton 19.02 their inflation rate remaining high for much of the period betticles group were subject to a Condiments and spices 16.86 ween August 2005 and April 2010.

Tea and coffee

high average inflation rate, im- Table 3: Average Global Food Inflation Rate of Major Food Items (in %)

(other food articles) 13.37

(Base: 2005 = 100)

plying that the impact of food

Tea 14.91 Items August 2005 to October 2008 November 2009 articles price build-up was September 2008 to October 2009 to April 2010

Coffee 11.67 broad-based. In terms of the Source (Basic Data): Central Statistical Food articles

Organisation (CSO) (http://eaindustry. Rice (Thailand/Bangkok) 38.89 -8.61 40.08

average inflation, the sugar

Wheat (US Gulf Ports) 35.74 -34.34 3.09

group (28.67%) emerged as

Table 2: Average WPI Inflation Rate Wheat (Argentina) 47.11 -33.04 9.90

the largest contributor of high of Food Products (January 2008 to July

Maize (US Gulf Ports) 33.26 -24.94 24.23

food products infl ation wit-2010) (%) (Base: 2004-05)

Poultry Index (United States/Georgia) 3.11 4.55 2.10

Items Inflation Rate

nessed during January 2008 to

Food products 10.20 Swine meat Index (United States/Iowa) -3.77 -12.80 13.14 July 2010, followed by oil Food products

Dairy products 10.22

cakes (14.70%), tea and coffee Butter (New Zealand) 25.61 -36.77 40.89

Grain mill products 5.61

processing (12.40%) and dairy Coconut oil (Philippines) 30.29 -42.31 26.10

Sugar, khandsari and gur 28.67

Groundnut oil (CIF Europe) 28.58 -36.99 32.22

products (10.22%) (Table 2). Edible oils 0.84 Linseed oil (any origin) 15.29 -38.78 42.95

The inflation rate of oil cakes Oil cakes 14.70

Palm oil Malaysia (UK) 40.78 -36.30 24.41

and the sugar group, on a Tea and coffee processing 12.40

Soybean oil US (Rot'dam) 38.84 -34.13 31.49

Source (Basic Data): As in Table 1.

monthly basis, peaked at as

Sunflower oil index high as 30.74% and 65.11%, respectively. [EU (NW European ports)] 17.64 -22.51 67.16

Soybean meal US (Rot'dam) 26.83 -6.05 20.71

2.2 Domestic vs Global Scenario Sugar (Brazil) 9.69 18.08 33.32 Sugar Caribbean (New York) 9.09 30.88 59.91

Interestingly, when food inflation in India started creeping up

US sugar import price 0.67 6.34 29.86

from January 2008, food prices at the global level were al-

Tea average auction (London) 6.24 11.15 32.77

ready ruling high. The global food inflation, measured on the

Coffee other milds (New York) 10.05 -3.81 19.21

basis of the monthly food price index (base 2005=100) of the

Coffee Brazil (New York) 11.09 -15.60 18.61

International Monetary Fund (IMF), started building up from

Coffee (Brazil) 16.78 -11.97 16.59August 2005 but remained highly volatile until March 2006. Total food 18.43 -17.52 10.32 From April 2006 onwards the world witnessed a signifi cant Source (Basic Data): International Financial Statistics, IMF.

surge in food prices, which firmed up until September 2008 The key reasons identified for high global food prices bet(Figure 1, p 48). The average and peak food infl ation rate ween August 2005 and September 2008 are unfavourable clirecorded during the 38 month-period from August 2005 to matic conditions, an increase in international crude oil and September 2008 was 18.43% and 45.20%, respectively. After fertiliser prices, speculation in commodity futures market,

Economic & Political Weekly

May 19, 2012 vol xlviI no 20 47

Jan.2005Mar.2005May.2005Jul.2005Sep.2005Nov.2005Jan.2006Mar.2006May.2006Jul.2006Sep.2006Nov.2006Jan.2007Mar.2007May.2007Jul.2007Sep.2007Nov.2007Jan.2008Mar.2008May.2008Jul.2008Sep.2008Nov.2008Jan.2009Mar.2009May.2009Jul.2009Sep.2009Nov.2009Jan.2010Mar.2010May.2010Jul.2010 October 2008 -October 2009 August 2005 -September 2008 World India

Figure 1: Monthly Movements in Food Inflation – India vs World (%) (January 2005 to July 2010) Figure 1 reveals that in the recent past food prices3 in India (Base: 2004-05) have not moved



fully in tandem with the global


trend. For the most part of Phase I of high world food infl ation


(August 2005 to September 2008)


India also witnessed an upward pressure on food prices. However, compared to the world average



(18.43%), the food infl ation wit


nessed in India during this phase was much lower (6.39%). Inter


estingly, in Phase II (October 2008


Source (Basic Data): CSO and International Financial Statistics, IMF. to October 2009) of negative global food inflation, food prices

Figure 2: The Economist Global Food Inflation Rate on Weekly Basis (%) (January 2005 to May 2010)

80 (both food articles and products)




0 -20

and the impact of the global eco-nomic crisis. In response to the crash in global crude oil prices4 -60 -40 October 2008 -September 2009 Source (Basic Data): The Economist (

remained very high in India (Figure 1). The average food inflation rate recorded during this period in India was 10.73% against -17.52% at the global level. Among the factors contributing to negative global food infl ation in Phase II, two were present in India as well. They are low oil prices

Table 4: Year-on-Year Growth Rates of Some Macroeconomic Aggregates (%) (Base Year: 2004-05)

2005-06 2006-07 2007-08 2008-09 2009-10
Gross domestic product (GDP)
at factor cost 9.52 9.58 9.34 6.76 7.96
Of which
Agriculture and allied activities 5.14 4.16 5.80 -0.15 0.44
Agriculture 5.53 4.13 6.34 -0.63 -0.08
Industry 8.54 12.89 9.25 3.96 8.34
Services 11.21 10.11 10.36 9.54 9.68
Per capita GDP (at factor cost) 7.80 8.0 7.80 5.30 6.50
Private final consumption expenditure 8.40 8.50 9.10 7.40 7.30

QE – Quick estimate. Sources: (i) Handbook of Statistics on Indian Economy (HSIE) 2010-11, Reserve Bank of India (RBI). (ii) Review of the Economy 2010-11, Economic Advisory Council to the Prime Minister (for per capita GDP and private consumption expenditure).

d eteriorating terms of trade for agriculture, and neglect of a griculture (Baffes and Haniotis 2010; Chand 2008; Chandrasekhar and Ghosh 2008; EPW 2008). Global food infl ation eased after October 2008 due to improved world food production, a fall in global aggregate demand and crude oil prices owing to the global financial crisis, and unwinding of investments in the commodity futures markets (GOI 2009a; Kumar et al 2010; Rakshit 2009; RBI 2009). The signs of global economic recovery and slow pick-up in demand as the countries worked their way out of the financial crisis have contributed to the increase in global food inflation from November 2009 to April 2010 (RBI 2010).

for a year from October 2008, mineral oils5 infl ation was ruling low in India during December 2008 to November 2009 (Figure 3, p 50). The world economic crisis spread to emerging economies, including India, from September 2008 (Rakshit 2009). This has resulted in a slowdown in economic growth and private consumption demand in India (Table 4). However, despite this similarity in the domestic and global situation, food inflation remained high in India in Phase II. This appears to have happened due to the poor agricultural output in India for two consecutive years from 2008-09. This is evident from the significant fall in the growth of GDP arising from the slowdown in the farm sector and in the production of various farm products during 2008-09 and 2009-10 (Tables 4 and 12). Against this, global food production improved after October 2008 (RBI 2009).

3 Causes of Food Inflation in India
3.1 Role of Demand Pressure

One popular explanation for the higher food prices in recent years is the rising demand for high-value agriculture products like pulses, milk, livestock, fishery, vegetables and fruits which, in turn, is attributed to rising per capita income and the consequent diversification of Indian diets (GoI 2011a; RBI 2011). As the supply response to growing demand in the high value agriculture products has been weak, their prices continued to remain high thereby providing a structural character to food infl ation.

May 19, 2012 vol xlviI no 20

Table 5: Trends in Percentage Composition of MPCE (at Current Prices) on Groups of Food Items (Share in reveals many infi rmities in the demand-Total Consumer Expenditure on Food)

side explanation for high food infl ation.

Rural Urban

First, with the exception of pulses,

1987-88 1993-94 1999-2000 2004-05 2009-10 1987-88 1993-94 1999-2000 2004-05 2009-10

the increase in the expenditure shares

Cereals 40.99 38.30 37.31 32.72 29.19 26.46 25.69 25.70 23.65 22.25 (-2.69) (-0.99) (-4.59) (-3.53) (-0.77) (0.01) (-2.04) (-1.40) of other high-value commodities in

Gram 0.38 0.28 0.22 0.24 0.30 0.29 0.32 0.23 0.25 0.30 (-0.10) (-0.06) (0.02) (0.06) (0.03) (-0.09) (0.01) (0.05)

Cereal substitutes 0.21 0.17 0.12 0.13 0.13 0.12 0.12 0.09 0.12 0.11 (-0.04) (-0.04) (0.00) (0.01) (0.00) (-0.03) (0.03) (0.00)

Pulses and pulse 6.22 6.02 6.41 5.59 6.89 6.04 5.55 5.90 5.03 6.54 products (-0.20) (0.39) (-0.82) (1.30) (-0.49) (0.35) (-0.87) (1.51)

Milk and milk products 13.52 15.02 14.74 15.38 16.13 17.06 17.94 18.05 18.62 19.07

(1.50) (-0.28) (0.64) (0.75) (0.88) (0.11) (0.57) (0.45)

Sugar 4.47 4.84 4.01 4.31 4.55 4.19 4.35 3.41 3.55 3.79

(0.36) (-0.83) (0.30) (0.24) (0.16) (-0.95) (0.14) (0.24)

Edible oil 7.82 7.03 6.29 8.36 6.87 9.47 8.03 6.53 8.13 6.34 (-0.79) (-0.74) (2.07) (-1.49) (-1.44) (-1.50) (1.60) (-1.79)

2009-10 was only marginal and not significantly different than in other periods (Table 5). Second, the shares of edible oils and fruits have exhibited a negative growth during 2004-10. Third, the expenditure shares of sugar and vegetables registered in 2009-10 are not new highs. Whereas, the share of sugar was the highest in 1993-94 in both rural and urban sectors, in the

Egg, fish and meat 5.07 5.29 5.59 6.05 6.49 6.33 6.19 6.52 6.36 6.60

(0.22) (0.30) (0.46) (0.44) (-0.14) (0.33) (-0.16) (0.24)

Vegetables 8.16 9.56 10.38 11.08 11.51 9.39 9.99 10.69 10.47 10.54

(1.40) (0.82) (0.70) (0.43) (0.60) (0.70) (-0.22) (0.07)

Fruits and nuts 2.55 2.76 2.89 3.39 2.37 4.49 4.87 5.03 5.29 4.06

(0.21) (0.14) (0.49) (-1.02) (0.39) (0.16) (0.25) (-1.23)

case of vegetables the year 1999-2000 recorded the highest share (in urban India). Fourth, the share of expenditure on pulses and eggs, meat, fi sh group (in urban sector) was over 6% on

(i) Figures in the brackets are percentage points change over the years.

several occasions in the past. Fifth, an

(ii) Percentage shares of individual food items do not add to 100 since salt and spices and beverages, etc, are excluded. Source (Basic Data): Household Consumer Expenditure in India, 2007-08; NSS 64th Round (Report No 530) (for 1987-88 to analysis of MPCE in real terms on vari2004-05) and Key Indicators of Household Consumer Expenditure in India, 2009-10; NSS 66th round (Report No KI(66/1.0) (for

ous food items in urban India6 reveals

2009-10). Table 6: Real MPCE on Groups of Food Items by Urban India (in Rs)

1993-94 1999-2000 2004-05 2009-10
Cereals 27.59 26.98 25.87 24.80
(25.78) (24.64) (24.43) (23.44)
Pulses and pulse products 5.50 5.83 5.14 4.55
(5.14) (5.33) (4.85) (4.30)
Milk and milk products 20.91 22.38 21.75 23.79
(19.54) (20.44) (20.54) (22.48)
Edible oil 9.84 11.29 11.89 12.33
(9.19) (10.31) (11.23) (11.65)
Egg, fish and meat 6.65 6.79 5.97 5.85
(6.21) (6.20) (5.64) (5.53)
Vegetables and fruits 16.34 18.06 17.57 16.09
(15.27) (16.49) (16.59) (15.20)
Food total 107.00 109.51 105.90 105.83
  • (i) Figures in the brackets are percentage share in total food consumption.
  • (ii) Individual food items do not add to food total as only selected food commodities are considered. Source (Basic Data): (i) As in Table 5.
  • (ii) Ministry of Labour and Employment, Labour Bureau (Shimla), Government of India (GoI) and Central Statistics Office, Ministry of Statistics and Programme Implementation, GoI [For subgroup indices in respect of CPI (IW) and CPI (UNME) respectively].
  • Tables 5 and 6 present the trends in the food expenditure pattern at current and constant prices, based on the household consumer expenditure survey conducted by the National Sample Survey Offi ce (NSSO) on a quinquennial basis. Although the share of high value food commodities, namely, pulses, milk, sugar, egg, fish, meat and vegetables in total monthly per capita consumer expenditure (MPCE) on food at current prices has increased in rural and urban India over a four-year period from 2004-05 (July to June) to 2009-10 (Table 5), we find it hard to conclude on this basis that (a) rising domestic demand pressures have contributed significantly to the food price spiral, and

    (b) a “secular shift” in food consumption pattern towards highvalue food items has occurred in India in recent times. This is because a deeper examination of the food expenditure pattern

    Economic & Political Weekly

    May 19, 2012 vol xlviI no 20

    that the expenditure on cereals, pulses, eggs, meat, fish, fruits and vegetables declined during 2004-10 (Table 6 and Figure 4, p 50). Also, the real MPCE on these food items recorded in 2009-10 was the lowest since 1993-94. Although the expenditure on edible oils increased between 2004 and 2010, the growth in expenditure during this period not only declined sharply but was also significantly lower compared to the past trends (Table 7). Only in the case of milk, did real MPCE record an increase during 2004-10 both in terms of absolute amount and growth.7 Finally, the growth rate of India’s GDP and per capita GDP was considerably low in 2008-09 and 2009-10, compared to the previous three years (Table 4). Since the demand for high value food commodities is income elastic (Gulati 2010), it is highly unlikely that India experienced any significant diet diversification in these years of an economic slowdown. The slump in private consumption expenditure, the largest contributor of domestic demand (RBI 2011), substantiates this view point (Table 4). Table 7: Compound Annual Growth Rate of Real MPCE on Groups of Food Items in Urban Areas (%)

    1993-94 to 1999-2000 to 2004-05 to 1993-94 to
    1999-2000 2004-05 2009-10 2009-10
    Cereals -0.37 -0.84 -0.84 -2.13
    Pulses and pulse products 0.97 -2.52 -2.44 -3.79
    Milk and milk products 1.13 -0.57 1.79 2.58
    Edible oil 2.29 1.04 0.73 4.51
    Egg, fish and meat 0.35 -2.57 -0.41 -2.56
    Vegetables and fruits 1.67 -0.55 -1.76 -0.31
    Food total 0.39 -0.67 -0.01 -0.22

    Source: Based on Table 6.

    3.2 Role of Supply-side Constraints

    We begin our analysis of the supply-side factors with the role played by oil prices in fuelling food inflation. It is well known that oil prices in India are determined by global crude oil

    Figure 3: Monthly Movements in Fuel Inflation – India vs World (%) (January 2007 to July 2010)









    -60.00 Source: As in Figure 1.

    Jan.2007Mar.2007May.2007Jul.2007Sep.2007Nov.2007Jan.2008Mar.2008May.2008Jul.2008Sep.2008Nov.2008Jan.2009Mar.2009May.2009Jul.2009Sep.2009Nov.2009Jan.2010Mar.2010May.2010Jul. 2010 India World

    prices and government’s administrative decision to revise the prices. By and large, fuel prices are revised only partially that too with a time lag in response to changes in international oil prices (Rakshit 2009). Figure 3 depicts this aspect clearly. In response to surging international oil prices from September 2007 to September 2008 and November 2009 to July 2010, the WPI inflation rate of mineral oils remained high in India during March 2008 to November 2008 and January 2010 to July 2010. Notably, the escalation in domestic oil prices coincided with acceleration in the food price inflation (Figure 5, p 51). Therefore, it appears that the oil price increase has had an impact on food prices in India.8 In fact, since January 2007 mineral oil and food inflation in India have behaved similarly (Figure 5). The only exception to this trend was the period from April 2009 to November 2009 (circled portion in Figure 5), during which the lower mineral oils inflation has not resulted in a moderation in food inflation. This, as pointed out earlier, is due to the overwhelming effect of two back-to-back agricultural supply shocks that occurred in 2008-09 and 2009-10 (Tables 4 and 12).

    The rest of this sub-section explores the supply-side factors responsible for high infl ation witnessed in the following food commodities during January 2008 to July 2010: rice, pulses, fruits, vegetables, milk, egg, meat, fish, spices, tea, coffee and sugar.

    (a) Rice: The production of rice was quite comfortable for four consecutive kharif marketing seasons (KMS) from 2005-06

    Figure 4: Real MPCE on Food Subgroups – Urban India (in Rs)








    Cereal Vegetables and fruits Egg, fish and meat Pulses and pulse products

    1993-94 1999-2000 2004-05

    Source: Table 6.

    on to touch a peak of 17.23% in December 2008. The average inflation rate of rice recorded in 2007-08, 2008-09 and 2009-10 respectively are 11.30%, 14.83% and 12.31%.

    Interestingly, the upward movement in rice infl ation from November 2006 has coincided with the not-sorobust buffer stock position of the grain. The actual buffer stock was closer to the minimum norm between October 2006 and July 2008 (Figure 6, p 51). The primary reason for the emergence of this situation appears to be the higher export of rice during 2005-06 (April-March), 2006-07 and (October- September) to 2008-09 (Table 8).9 In fact, for the fi rst time in India’s history, rice output hovered over 90 million tonnes (MT) for four consecutive years from 2005-06. The only other occasion during which rice production touched the 90-MT mark was in 2001-02. In response to higher production, there was healthy procurement of rice during the four years running from 2005-06 (Table 9, p 51). Despite this favourable scenario, the infl ation rate of rice started picking up from November 2006 and went

    Table 8: Production and Growth in Production of Rice

    Year Production Year-on-Year
    (in MT) Growth (%)
    2000-01 84.98 -
    2001-02 93.34 9.84
    2002-03 71.82 -23.06
    2003-04 88.53 23.27
    2004-05 83.13 -6.10
    2005-06 91.79 10.42
    2006-07 93.35 1.70
    2007-08 96.69 3.58
    2008-09 99.18 2.58
    2009-10 89.09 -10.17

    Source: Department of Agriculture and Cooperation, Ministry of Agriculture, Government of India ( Agristatistics.htm).

    2007-08 (Table 10, p 51). In fact, rice exports remained high from 2001-02, the cause of which was the mismanagement of the foodgrain economy. Starting from 2000, India experienced a phase of mounting rice stocks due mainly to a signifi cant increase in the rice procurement by the government10 (Figure 6, Table 9). Consumption has fallen due to sharp hike in the central issue price (CIP)11 of rice and increase in the open market rice prices, both of which were the outcomes of the high minimum support price (MSP) prevailing in the 1990s (Chand 2005). In order to bail itself out of administrative and


    financial burden involved in managing the rice mountain, as a knee-jerk response, the government decided to permit exports of rice from 2001 at a heavy discount price (Hoda and Gulati 2007).12

    Thus, one major reason for the rising infl ation of rice starting from November 2006 was the higher export of rice in 2006-07 and 2007-08. A similar conclusion was arrived at by Chand (2010). However, exports were only a trigger factor. The inflationary pressure on rice has sustained and accentuated by two reasons. The first is the sharp increase in the MSP of rice for two consecutive

    May 19, 2012 vol xlviI no 20

    Figure 5: Monthly Movements in Food and Mineral Oils Inflation in India (%)

    Figure 5: Monthly Movements in Food and Mineral Oils Inflation in India (%) (January 2007 to July 2010) this favourable scenario were (a) a further

    (January 2007 to July 2010)

    hike in the MSP in 2009-10 to Rs 1,000 and

    (b) emergence of infl ationary expectations

    due to deficiency of the south-west mon

    Jan.2007Mar.2007May.2007Jul.2007Sep.2007Nov.2007Jan.2008Mar.2008May.2008Jul.2008Sep.2008Nov.2008Jan.2009Mar.2009May.2009Jul.2009Sep.2009Nov.2009Jan.2010Mar.2010May.2010Jul. 2010 Food Mineral Oils
    soon in 2009, the worst since 1972, and un

    15.00 usually heavy rainfall in some parts of the country in late September and early Octo



    ber 2009 leading to fl oods (EACPM 2010;


    December 2008 -

    GOI 2010b). In fact, these unfavourable cli

    matic conditions ultimately resulted in a

    significant fall in the rice production during

    KMS 2009-10 (Table 8).

    November 2009 Source (Basic Data): CSO.

    (b) Pulses: Due to poor growth of produc-

    Figure 6: Month-wise Rice Stocks in Central Pool from January 2000 to December 2010

    Figure 6: Month-wise Rice Stock in Central Pool from January 2000 to December 2010 tion in 2008-09 and 2009-10, pulses wit

    (in Million Tonnes as on 1st of the Month)

    (in Million Tonnes as on 1st of the Month)

    nessed high inflation between August 2008 and July 2010 (Table 12, p 52).15 In response,

    0 5 10 15 20 25 30 Actual rice stock (million tonnes) Minimum buffer norm (million tonnes)

    India imported a higher quantity of pulses

    during 2009-10 (Table 13, p 52). The lower glo

    bal foodgrain inflation during October 2008

    to October 2009 did not help in cooling

    down domestic prices of pulses by way of cheap imports. This may be because, as

    Sathe and Agarwal (2004) have observed from historical data, pulses imports do not augment supply to the extent of reducing the

    Jan.2000May 2000Sep.2000Jan.2001May 2001Sep.2001Jan.2002May 2002Sep.2002Jan.2003May 2003Sep.2003Jan.2004May 2004Sep.2004Jan.2005May 2005Sep.2005Jan.2006May 2006Sep.2006Jan.2007May 2007Sep.2007Jan.2008May 2008Sep.2008Jan.2009May 2009Sep.2009Jan.2010May 2010Sep.2010

    Source: Food Corporation of India (, accessed on 4 March 2011).

    domestic prices due to predominance of the KMS 2007-08 and 2008-09 (Table 11) which, in turn, jacked up demand factor. For many years, production of pulses in India open the market price of rice. A higher MSP was declared with r emains highly inadequate compared to the level of domestic the purpose of incentivising rice procurement in the light of the demand (EACPM 2009). Table 10: Export and Import of Rice (in

    '000 tonnes)

    decline in wheat procurement during the rabi marketing sea-Also, some of India’s popular

    Year Export Import

    son (RMS) 2005-06 to 2007-08 (GOI 2009a; Nair and Eapen pulses varieties are not culti

    2000-01 1,531.29 13.19

    2011).13 Second, due to a not-so-comfortable buffer stock, the vated to a signifi cant extent

    2001-02 2,208.56 0.06

    Food Corporation of India (FCI) did not resort to a sale of rice in in other parts of the world

    2002-03 4,967.87 0.87 2007-08 and 2008-09 through the Open Market Sales Scheme thereby limiting the import 3,412.06

    2003-04 0.54 (OMSS)14 window (GOI 2009b). To sum up, the key factors options (EACPM 2010). 2004-05 4,778.1 responsible for high inflation of rice during 2007-08 and 2005-06 4,088.17 0.26 2008-09 are larger exports, hike in MSP and absence of rice (c) Fruits, Vegetables and 2006-07 4,747.95 0.16 Table 9: Production and Government sale to the open market Milk: The slippage in pro-2007-08 6,469.44 0.15 Procurement of Rice (in MT) 2008-09 2,488.3 0.09

    through OMSS. duction during 2008-09 and

    Year Production Procurement Procurement

    2009-10 (P) 2,155.28 0.06

    as% of Although the buffer 2009-10 was primarily re-

    P - Provisional.


    stock of rice started in-sponsible for high prices of Source: As in Table 8. 1995-96 76.98 9.93 12.90

    creasing from August fruits and vegetables (Table

    Table 11: Minimum Support Prices of

    1996-97 81.73 11.88 14.54

    2008 and soon went be-12). Though vegetable pro-Paddy Inclusive of Incentive Bonus (Rs

    1997-98 82.54 14.54 17.62 Per Quintal)

    yond manageable limits duction has picked up in

    1998-99 86.08 11.55 13.42 Marketing Season Common Grade Grade 'A'

    (Figure 6), infl ation of 2009-10 despite the failure

    1999-2000 89.68 16.62 18.53

    2000-01 510 540 2000-01 84.98 18.93 22.28 rice continued to remain of the monsoon followed by

    2001-02 530 560 2001-02 93.34 21.12 22.63 high in 2009-10 as well. floods in some parts of

    2002-03 530 560 2002-03 71.82 19.00 26.46 The surging buffer stock I ndia, the rate of growth was 2003-04 550 580 2003-04 88.53 20.78 23.47 was made possible due unimpressive in relation to 2004-05 560 590 2004-05 83.13 24.04 28.92

    to high levels of produc-trends in the recent past. 2005-06 570 600 2005-06 91.79 26.69 29.08

    tion and procurement of The primary source of oil 2006-07 620 650

    2006-07 93.35 26.30 28.17

    2007-08 745/850~ 745/880~

    rice in KMS 2008-09. cake production is oil seeds.

    2007-08 96.69 26.29 27.19

    2008-09 900 930

    The key factors responsi-As a consequence of lower

    2008-09 99.18 32.84 33.11

    2009-10 1,000 980

    ble for high infl ation of oil seeds output in 2008-09

    2009-10 89.09 32.59 36.58

    ~ From 12 June 2008. Source: HSIE 2009-10, RBI. rice in 2009-10 despite and 2009-10, the infl ation Source: As in Table 8.


    May 19, 2012 vol xlviI no 20

    in oil cake prices was ruling high between January 2008 and March 2010 (Tables 2 and 12).16 This, in turn, passed through to the prices of milk and dairy products as oil cake is used as animal/livestock feed. In addition, the consistent fall in the growth of milk production since 2006-07 might have added to the price pressure (Table 12). Being the second largest producer of milk in the world after the United States (US) (GOI 2010a), India continues to be the predominant net exporter of milk and related products (Table 13). However, in 2008-09 and 200910, milk export has taken a hit with the dip being severe in 2009-10. On the other hand, India imported a higher quantity of milk and dairy products during the same period (Table 13). Though the international prices of dairy products were ruling low between October 2008 and Oct ober 2009, imports did not translate into lower domestic inflation of milk and dairy products. This may be because the cost push effect of high oil cake inflation might have overshadowed the benign infl uence of cheap imports. Also, imports might have turned out inadequate in relation to higher domestic requirement (Table 6).

    (in %)

    Table 12: Year-on-Year Growth of Production of Various Food Commodities

    Items 2005-06 2006-07 2007-08 2008-09 2009-10
    Pulses 1.98 6.05 3.94 -1.29 0.14
    Fruits -7.54 7.60 10.11 4.39 2.47
    Vegetables 10.03 3.23 11.70 0.49 4.77
    Tea 4.64 2.54 1.43 -1.44 1.89
    Coffee -0.54 5.11 -9.03 0.11 10.41
    Milk 4.97 3.91 3.87 3.53 3.23
    Egg 2.21 9.74 5.52 3.39 8.03
    Meat (mutton) 3.81 16.93 -15.71 7.59 2.72
    Fish (marine) 1.33 7.39 -3.44 1.99 -9.70
    Fish (inland) 6.55 2.37 9.41 10.27 4.81
    Spices -53.98 6.69 10.22 -4.87 -3.11
    Oilseeds* 14.91 -13.19 22.52 -6.85 -10.06
    Edible oils 14.75 -11.38 17.42 -0.65 -4.63

    * Total of nine oilseeds Source (Basic Data): (i) As in Table 8 (for pulses, milk, oilseeds and edible oils). (ii) GoI (2010a) (for egg). (iii) GoI (2011b) (for fish). (iv) GoI (2010c) (for 2008-09 and 2009-10 data on edible oils). (v) Indian Horticulture Data Base (various issues), National Horticulture Board, Ministry of Agriculture, GoI (for fruits and vegetables). (vi) Basic Animal Husbandry Statistics (various issues), Department of Animal Husbandry, Dairying and Fisheries, Ministry of Agriculture, GoI (for mutton). (vii) HSIE 2009-10, RBI (for tea). (viii) Coffee Board of India (for coffee). (ix) Spices Board India, Cochin, Ministry of Commerce and Industry, GoI and (for spices).

    Table 13: Export and Import of Agricultural Products (in ‘000 tonnes)

    Commodity 2005-06 2006-07 2007-08 2008-09 2009-10 (P)
    Pulses Export 447.44 250.7 164.2 136.27 100
    Import 1,695.95 2,270.97 2,835.05 2,474.11 3,448.35
    Edible oils Export 273.94 313.48 342.21 359.35 399.81
    Import 4,288.10 4,269.38 4,903.39 6,719.35 7,968.49
    Spices Export 400.24 482.8 614.86 673.87 680.6
    Import 108.93 118.51 144.63 122.85 150.03
    Tea Export 162.86 185.63 197.39 207.46 208.55
    Import 18.75 23.29 19.73 25.16 33.64
    Coffee Export 177.68 213.65 178.3 174.08 177.23
    Import 24.94 5.71 9.35 14.19 16.55
    Milk and cream Export 67.10 41.00 58.07 50.10 26.74
    Import 1.63 3.09 1.98 3.23 8.24

    P - Provisional. Source: (i) As in Table 8. (ii) Export Import Data Bank, Ministry of Commerce and Industry, department of commerce, GoI ( [for export of edible oils and milk and cream]. (iii) Ministry of Commerce and Industry, department of commerce, GoI (for coffee).

  • (d) Egg, Meat and Fish: The possible reasons for the high inflation of egg prices were the decline in the growth of egg production in 2008-09 (Table 12) and cost escalation due to rising price of livestock feed. The key product responsible for high meat prices during March 2008 to July 2010 was mutton ( Table 1). In fact, this phase of high inflation in mutton prices started in October 2007 and the reason is not diffi cult to discern. The growth rate of mutton output has not been healthy since 2007-08 (Table 12).
  • The relatively lower growth rate of production of inland fi sh during 2009-10 compared to the previous year (Table 12) pushed up the price of this product between June 2009 and July 2010. Similarly, the poor output for two consecutive years from 2008-09 resulted in high inflation of marine fi sh from July 2008 to July 2010.
  • (e) Spices, Tea and Coffee: India is the world’s leading producer and consumer of spices.17 Also, it was the world’s second largest exporter (in 2003) and fourth largest importer (in 2005) of spices.18 Despite vast amount of spices being produced each year, imports are necessitated due to higher domestic demand. No wonder the significant drop in the growth of spices production in 2008-09 and 2009-10 resulted in high inflation of spices (Tables 1 and 12). However, despite domestic shortage, spices export was not compromised (Table 13). This may have aggravated the demand-supply gap, thereby causing further price pressure.
  • India is world’s second largest producer and fourth largest exporter of tea.19 The growth of tea output was much lower from 2007-08 onwards compared to the previous three years (Table 12).20 However, tea exports continued to remain high in absolute terms (Table 13). This suggests that export of tea was allowed at the cost of domestic availability in order to take advantage of the high price situation prevailing in the international market between February 2008 and April 2010 (Table 3). Due to higher international prices, the larger tea imports did not turn out to be a breather.21 Thus, the high inflation in tea prices can be attributed to lower production, higher exports and high cost imports.

    Inflation in coffee prices ruled high between March 2008 and April 2010. The possible reasons are the following: (a) an abysmally low growth of coffee production in 2008-09 (Table 12) and (b) higher consumption in 2009-10. There was a significant jump in the domestic consumption of coffee from 94,400 MT in 2008 (calendar year) to 1,02,000 MT in 2009, an increase of 8.05%. This is the second highest rate of growth of consumption recorded since 2000.22 In spite of this situation, export of coffee did not witness any significant downward pressure in 2008-09 and 2009-10 in absolute terms (Table 13). On the other hand, during the same period coffee imports increased. Given that the infl ation of coffee at the global level was ruling negative between October 2008 and October 2009, imports should have provided some relief to the consumers. But that did not occur. This may be due to the inadequacy of imports compared to the domestic need.

    May 19, 2012 vol xlviI no 20

    (f) Sugar: The major trigger for the rising sugar prices starting faced upward price pressure due to supply-side constraints. from July 2008 was the sudden reversal from the favourable They include pulses, fruits, vegetables, meat (mutton), fi sh (insugar supply situation from the second half of 2008. Due to land and marine), spices, tea, coffee and sugar. On the other various reasons.23 sugar production was lower during the sugar hand, the prices of milk and eggs remained high though there seasons (October-September) 2008-09 and 2009-10 (Table 14). was no serious shortage in the market. This was due to the This has led to a tightening of the domestic sugar supply situa-cost-push factor, namely, high inflation in the animal feed (oil tion, thereby putting upward pressure on sugar prices. To aug-cakes), resulting from a shortfall in the production of oil seeds. ment domestic supply and contain prices, India allowed duty-Despite a favourable supply scenario, rice, the most important free import of sugar. However, higher imports did not help foodgrain, witnessed high inflationary pressure due to a comtame skyrocketing sugar prices as imports were contracted at plex interplay of a set of factors. The genesis of these factors higher ruling international prices (Table 3). Thus, the rising lies in the following two systemic problems plaguing India’s sugar prices witnessed in India between July 2008 and July 2010 foodgrain management: high MSPs and imprudent piling up of was on account of the domestic supply shock and pass-through grain stocks in government depots at this higher MSP. Besides of high global sugar prices via increased imports.

    Table 15: Factors Contributing to High Food Inflation from April 2008 to Table 14: Sugar Season-wise Key Indicators (in Lakh Tonnes) July 2010

    2005-06 2006-07 2007-08 2008-09 2009-10 (P) Commodities Reasons for High Inflation

    1 Closing stock 44 110 105 38.57 51.25 Rice Higher exports, high MSP, lack of sale under OMSS, 2 Carryover stock* 40 44 105 100 35.83 and inflationary expectations due to unfavourable3 Production of sugar 189.59 282 263 146.7 188

    climatic condition

    4 Availability without Imports (2+3) 229.59 326 368 246.7 223.83 Pulses Production shortfall 5 Import of sugar 3.62 0 0 24.47 41.08 Fruits and vegetables Production shortfall

    6 Total availability (4+5) 233.21 326 368 271.47 265.63 Milk High inflation of oil cake due to lower oil seeds 7 Internal consumption 183.21 191 215 230.08 211.98

    production, decline in the growth of milk production and higher demand

    8 Excess supply (6-7) 50 135 153 41.39 53.65 Egg High inflation of oil cake due to lower oil seeds

    9 Exports 13.68 25 58 2.1 2.4

    production and supply shortfall

    * - Not equal to closing stock on account of spoilage, sugar sales under court orders, etc. Source: Annual Reports, Department of Food and Public Distribution, Ministry of Consumer Meat (mutton) Production shortfall Affairs, Food and Public Distribution, GoI.

    Fish (inland and marine) Production shortfall Some analysts have summarily blamed high sugar exports Spices Production shortfall and higher exports (in 2007-08) for soaring sugar prices during 2008-09 (Chand Tea Lower growth of production, high cost imports and higher exports

    2010; Kumar et al 2010). But in hindsight the facts suggest that

    Coffee Production shortfall and higher demand

    the government’s move to allow higher sugar exports was in-

    Sugar Production shortfall, high cost imports and

    evitable and hence there is nothing “inexplicable” about it.

    higher exports

    Thanks to a bumper sugar output in 2006-07 and 2007-08 seasons, the market was glutted with excess sugar supply this, the inflationary expectation caused by erratic rainfall in measuring 13.5 MT and 15.3 MT, respectively in these seasons 2009-10 played a role in jacking up rice prices. Contrary to (Table 14). As a result, the price of sugar in the open market popular perception, it is revealed that, barring milk, the recent started declining from August 2006 and this downward price phase of high food inflation cannot be attributed substantially rally continued till June 2008 with a period average of -9.12%. to structural demand-side factors relating to non-cereal food As this price environment has constrained the capacities of items. At best, food inflation was a short-term supply issue. The sugar mills to pay cane price to the farmers, in a move to avoid developments in the global economy influenced the domestic cane price arrears, the government lifted the ban on sugar food price scenario mainly through “passing on” of world oil price exports from January 2007 (GoI 2009b).24 increases. Only in the case of sugar and tea, the world market

    prices had an infl uence on domestic prices via costly imports. 4 Summary In fact, for a substantial part of the period between January In this paper, we have examined the factors responsible for 2008 and July 2010, the food infl ation rate at the global level high inflation experienced in various food commodities in India was in the negative zone. This reiterates the fact that high food between January 2008 and July 2010. Table 15 summarises the inflation witnessed in India during 2008-09 and 2009-10 was findings of our analysis. A majority of the food commodities primarily due to domestic constraints on the supply-side.

    Notes average inflation rate for a reference period through IMF’s alternative index, namely the wherever necessary.average petroleum spot index of UK Brent,

    1 The WPI of food consists of two sub-components, 3 An overall measure of food infl ation was com-Dubai, and West Texas.

    namely, primary food articles and manufactured food products.

    puted using a combined WPI of food, derived 5 Mineral oils group includes petrol, high speed by taking the weighted average of WPI for food and light diesel oil, LPG, kerosene, aviation 2 Average inflation is calculated based on the articles (weight: 14.34%) and food products turbine fuel, naphtha, bitumen, furnace oil and

    change in the average value of the WPI over a certain period (e g, January 2008 to July 2010)

    (9.97%). lubricants.

    with respect to the average value of the WPI 4 Global oil prices were measured using IMF’s 6 The MPCE at constant prices for urban India in over the corresponding period (January 2007 Fuel (energy) Index, which comprises crude oil respect of various food commodities was measto July 2009) the year before. Throughout this (petroleum), natural gas and coal. The trend in ured by deflating nominal MPCE using sugrouppaper this method is followed to calculate the global oil inflation remain the same if seen wise consumer price index (CPI) numbers for

    May 19, 2012 vol xlviI no 20

    urban non-manual employees (UNME) with base 1984-85=100. As the release of CPI (UNME) was discontinued from May 2008, a linked series was computed for the remaining period based on the methodology given by National Statistical Commission. Accordingly, the average ratio of CPI (UNME) numbers to CPI (Industrial Workers) numbers for the two-year period from January 2006 to December 2007 was used as the linking factor to arrive at the indices in respect of CPI (UNME) beyond April 2008 (see The real MPCE on various food items for rural India cannot be computed because subgroup-wise CPI numbers for agricultural/rural labourers is released only from April 2008.

    7 It is true that between 1993-94 and 2009-10, the real MPCE on milk and edible oils, presently constituting more than 30% of the urban India’s food budget, has witnessed a positive growth and a secular rise in the absolute sense (Tables 6 and 7). However, our focus in this paper is on the shifts that have occurred in food consumption during 2004-05 to 2009-10 so as to explain the role played by the demand-side factors in causing the recent phase of high food infl ation. Also, the growth in real expenditure on milk and edible oils between NSSO rounds reveals that the pace of increase has been falling for edible oils and in the case of milk the same has been fluctuating (see Table 7).

    8 Interestingly, at the global level also this seems to be the case as evident from the simultaneous movement of world fuel and food infl ation (see Figures 1 and 3).

    9 In India over 80% of the rice crop is grown during KMS. Sowing and harvesting of kharif crop takes place during June-October and November-April every year respectively.

    10 On average basis, per capita availability of rice for human consumption declined to 196.17 grams per day during 2000 to 2005 from

    208.25 grams per day recorded between 1994 and 1999 (

    11 CIP is the price at which foodgrains are supplied under targeted public distribution system (TPDS). The CIP of rice for above poverty line cardholders prevailing between the years 2000 and 2005 ranged from Rs 730 to 1180 per quintal against Rs 700 between 1997 and 1999. For below poverty line (BPL) benefi ciaries the same figures respectively are Rs 350 to 590 and Rs 350 (

    12 The export price was equivalent to TPDS issue price of rice for BPL families and the Open Market Sales Scheme price. In addition, the government has refunded post delivery expenses and external freight charges incurred by the exporters and provided a cash subsidy to cover inland transportation cost (Hoda and Gulati 2007).

    13 Note that, due to differences in the crop cycle, the MSP for KMS (October to September) rice is usually declared after the announcement of MSP applicable for RMS wheat (April to March).

    14 Under OMSS, as and when the need emerges, the FCI resorts to sale of foodgrains at predetermined prices to the open market so as to enhance the supply and moderate the prices.

    15 Sathe and Agarwal (2004) have found a positive but weak relationship between domestic pulses production and prices in India both on a year-to-year and one-year lag basis. However, the relationship is relatively stronger on a year-to-year basis. They also found a fairly strong and negative relationship between domestic pulses production and imports on one-year lag basis.

    16 However, despite the poor oilseeds output, the inflation of edible oils was ruling low during


    the same period with a period average of just 0.91%. This appears to have happened due to inexpensive imports, made possible by lower edible oil inflation at the international level between October 2008 and October 2009 (Tables 3 and 13). Also, the relatively better import network available for edible oils has resulted in faster imports (Chand 2010).

    17 India’s share in world spices production and consumption respectively was 47.18% (in 2005) and 46% (in 2003). See les/TIB-Spices-fi nal.pdf, accessed on 23 October 2011.

    18 China tops world spices exports with 25.90% share. The lower export share of India (14.4%) is due to higher domestic consumption. India consumes most of the spices it produces.

    19 See, accessed on 22 October 2011.

    20 The slowdown in tea production was caused by adverse climatic condition, rising labour cost, and labour unrest (As told by Tea Board of India offi cial).

    21 Imported tea is blended with domestic tea and then sold locally or exported.

    22 The previous high was 9.09% in 2000 over the previous year. See http://www.indiacoffee. org/indiacoffee.php?page=CoffeeData, accessed on 22 October 2011.

    23 The key factors contributing to lower sugar output in 2008-09 and 2009-10 are: (a) fall in the area under sugar cane cultivation caused by steep hike in MSP of foodgrains and problems of cane arrears in previous two years; (b) decline in yield on account of delay and defi ciency of rains; (c) drop in the sugar recovery from cane due to climatic factors; and (d) increased diversion of sugarcane for production of gur and khandsari (GoI 2009b, 2010c).

    24 However, sugar exports were restricted again from January 2009 in view of expected low production of sugar in 2008-09 season (GoI 2010c).


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