analysis of food prices and financial crisis in global and indian perspective

8/4/2019 Analysis of Food Prices and Financial Crisis in Global and Indian Perspective

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Analysis of Food Prices and Financial Crisis in Global and Indian Perspective

Abstract

During the last few years, there has been a significant increase in global food prices due to several

structural and cyclical factors. The global cereal prices increased 150 per cent during 2005 to second

quarter of 2008. Although there was a decline in food prices in the second half of 2008, these prices are still

higher than those in the beginning of this decade. India is less exposed to outside world in the case of food

grains and other commodities. The increase in food prices in India was much lower as compared to sharp

increase in global prices due to various measures. The objective of the study is to examine the impact of

rising food prices and financial crisis on the impact of women and children in India. It identifies the

pathways for dealing with the effects of these two crisis on households particularly women and children. It

also outlines the desirable macro and sectoral policies and measures, particularly in relation to social

protection, which would mitigate the negative effects of the crises and effectively protect households

against them through a special focus on the issues of nutrition, health, education and enhancement of child

protection.

Keywords:

Rise in food prices, financial crisis, Inflation, FAO, Food Price Index, Commodities.

1. Introduction

During the last few years, there has been a significant increase in global food prices due to severalstructural and cyclical factors. The global cereal prices increased 150 per cent during 2005 to secondquarter of 2008. Although there was a decline in food prices in the second half of 2008, these prices are stillhigher than those in the beginning of this decade. India is less exposed to outside world in the case of foodgrains and other commodities. The increase in food prices in India was much lower as compared to sharpincrease in global prices due to various measures. Cereal prices in India increased only 23 per cent ascompared to global price increase of 150 per cent during 2005 to 2008. However, the food prices in the lasttwo years have been higher than those in the period mid-1990s to 2004. Presently, the inflation for food

articles (more than 10%) is higher than the general inflation (below 6%). The volatility in food prices islikely to continue and would harm the poor.

Even before the food crisis, the poor and vulnerable were significantly left behind. Risingfood prices would further undermine the food security and livelihoods of the most vulnerable by erodingtheir already limited purchasing power. Poor people spend 60 to 70 per cent of their income on food andthey have little capacity to adapt as prices rise and wages may not adjust accordingly. Thus, the situation inIndia can still pose a threat to food and nutrition security of the country.

Apart from the problem of rise in food prices, India is also facing the adverse impact ofglobal financial crisis since the 3rd quarter of 2008. The current financial crisis originated in the financialsector of the United States and is being transmitted to countries around the world through several channels.The sub-prime mortgage lending and collapse of housing market, flawed regulatory systems have affectedthe financial institutions around the world. India has largely avoided the impact on banking system.However, the crisis has adverse impact on liquidity situation and the economic growth in India. This in turncan have adverse affect on the poor and food security of the country.

Although the underlying causes for the rise in food prices and financial crisis aredifferent, they are interconnected through their implications on financial stability, food security andpolitical security (Braun, 2008). At the global level, the capital was diverted from the collapsing housingmarket to speculation in agricultural futures. Speculative activities were partly responsible for the rise inglobal food prices. The food crisis increased general inflation and impact on macroeconomic policies.Similarly, the financial crisis can have impact on employment, poverty, agriculture investment and socialsector expenditures. Therefore, both food and financial crisis may have adverse impact on food andnutritional security of India and undermine the poverty reduction.

Efforts and the gains over the last several years if large sections of the population do notcope with rise in prices and financial crisis. These two crises can potentially further exacerbate and deepen


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existing vulnerabilities in India for the poor and disadvantaged groups including women and children. Thecoping strategies due to these crises could have adverse impact on the food security and humandevelopment of women and children.

1.1. Objectives of the Study :

To analyse the impact of food prices and financial crisis.

To study the negative effects of the financial crisis.

To suggest the strategies for resolving the above issues.

2. Macro policy Issues on the Rise of Food Prices and Financial Crisis

Global SituationThere are five major drivers of rising global food prices. They are:

long term supply problems;

Rise in oil prices;

Changes in demand due to bio fuels;

Depreciation in dollar and low interest rate in the US and speculative activities;

Export restrictions of developing countries.

Trends in Food Prices:

Global food prices in July 2011 remain significantly higher than their levels in July 2010. On average,

the World Bank Food Price Index remains 33 percent above its level a year ago. Similarly, price levels of a

number of major commodities are higher than their levels in July last year, for example, maize (84 percent),

sugar (62 %), wheat (55 %), and soybean oil (47 %). Crude oil prices remain 45 % higher than a year ago

and the price of fertilizers increased by 67 % over the same period.

Prices have declined slightly after peaking in February 2011, although

prices remain volatile for specific commodities. After peaking in February 2011, the World Bank Food

Price Index for the period April to July averaged 278.3, or roughly 5 percent below the price index in

February (see figure 1). This has been accompanied by modest declines in the prices of the major

components of the index in July from their February averages: grains (1 %), fats and oil (9%) and the

"other" food category (1%), which includes meat, fruits, and sugar (see table 1). However, these averagesconceal volatility within this period. For example, maize and wheat prices declined in June and then

increased in the first half of July. The price of rice fell from February to May, but has since increased.

World Bank Food Price Index

Source:World Bank DECPG.


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FAO Food Price Index:

The FAO Food Price Index (FFPI) averaged 234 points in June 2011, 1 percent higher than in May and

39 percent higher than in June 2010. The FFPI hit its all time high of 238 points in February. A strong risein international sugar prices was behind much of the increase in the June value of the index. International

dairy prices rose slightly in June, while meat prices were stable. Of all the major cereals, prices of wheat

fell most and rice increased. Among the oils and fats, prices of soybean oil were steady but palm oil

weakened.

FAO Commodity Price Indices:

Cereal Price Index averaged 259 points in June, down 1 % from May but 71 % higher than in June

2010. Improved weather conditions in Europe and the announced lifting of the export ban by the Russian

Federation (from July) depressed wheat prices. However, maize markets were supported by tight old crop

(2010) supplies and continued wet conditions in the United States. Prices of rice were mostly up in June,

reflecting strong import demand and uncertainty over export prices in Thailand, the world largest rice

exporter.


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Oils/Fats Price Index averaged 257 points in June, down marginally from May. Continued production

uncertainties and expectation of stronger world import demand sustained soybean oil prices. By contrast,

palm oil prices eased further, reflecting improved supply prospects and ample export availabilities in

Southeast Asia.

Dairy Price Index averaged 232 points in June, virtually unchanged from 231 points in May. This was

the result of diverging price movements, with prices of skim milk powder and casein up by 5 percent,

whole milk powder down by 3 percent, while prices of butter and cheese remained stable.

Meat Price Index averaged 180 points, marginally up from May. Poultry meat prices experienced a 3

percent rise, breaking a new record, while pig meat prices declined somewhat. Prices of bovine and ovinemeat were subject to modest increases, from already high levels.

Sugar Price Index averaged 359 points in June, up 14 percent from May and only 15 percent below its

January record. The price strength reflects dynamic short-term demand against tight exportable

availabilities, notably in Brazil, the worlds largest sugar producer where production is forecast to fall

below last years level.

Some of the Key causal factors of recent rise in food prices:

Weather disruptions, including serious droughts, have affected output in several key producing

countries (Australia, Turkey, Ukraine and parts of North America) in the mid-2000s. This has led

to two successive years of negative growth in world cereal production.

World production of cereals has slowed, causing a decline in stocks over the last decade. This

has weakened the ability of the world food system to cope with shocks and created conditions in

which short-term shocks cause large price increases (Wiggins, 2008).

High cost of oil and energy is affecting transportation of agricultural inputs and outputs,

mechanical cultivation, fertilisers and pesticides.

Increased demand due to use of food crops in biofuel production has resulted in reduced soybean

and wheat cultivation.

Under-investment in rural infrastructure and agricultural innovation.

Increasing urbanisation often means that more people are becoming purchasers rather than

producers of food.

Financial Crisis at Global Context:

The late-2000s financial crisis (often called the Credit Crunch or the Global Financial Crisis) is

considered by many economists to be the worst financial crisis since the Great Depression of the

1930s. The reasons for global financial crisis are well known. The crisis in the financial sector

originated in the US and transmitted to other countries. The financial sector in the US is largely

unregulated. In this environment,

Mortgage lending to subprime borrows had rapidly expanded in the US in 2000s. It is known that

by definition, the subprime borrowers either have prior default history or incomes to qualify for the loan they

seek in the prime market.

Lenders could sell the mortgages they issued to other financial institutions like Lehman Brothers.

These financial institutions in turn packaged a large number of the mortgages into a mortgage-

backed security and issued bonds of varying risks and returns backed by it.

Bonds with the highest value would carry the highest risk. Financial institutions and individuals

around the world invested in these instruments.


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As long as the US housing market boomed, mortgage-default rates remained low and remained

attractive.

But once the housing market collapsed, it impacted the balance sheets of financial institutions that

invested in the mortgage-backed securities and their derivatives, which turned toxic following

large scale defaults in the US housing market.

The financial crisis affected liquidity and economic growth in many countries. The US and

European countries had to announce bailout plans. The US is suffering from recession now.

Global GDP growth and Inflation:

Despite some negative surprises, global growth attained an annualized rate of 4.3 percent in the first quarter

of 2011.Key among the negative surprises was the devastating effect of the earthquake and tsunami on the

Japanese economy, with supply disruptions weighing heavily on industrial production, and consumer

sentiment and spending. Growth also disappointed in the United States, in part due to transitory factors

including higher commodity prices, bad weather, and supply chain disruptions from the Japanese


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earthquake on U.S. manufacturing.

Commodity prices have stabilized

Commodity markets have experienced volatility since late April. After surging through April, commodity

prices fell in May. The corrections partly reflected the unwinding of an earlier buildup of noncommercial

derivative positions with increased general financial volatility and in reaction to recent data on softer global

economic activity. Prices of crude oil briefly came close to $120 a barrel in April, fell sharply in May, but

have stabilized since. Current prices average about $107 a barrel, close to levels assumed in the April 2011.

Food prices also stabilized beginning in early 2011, following last years weather-related supply shocks.

Indian Situation

The global food, oil and financial crisis have affected India also although the impact is much lower thansome of the other countries.

Trend in Food Prices

Rising global food prices in 2011 are likely to have greater repercussions on Indias economic growth in2012 than the current year. In India, Indonesia, and Malaysia, in particular, the adverse effect of theincrease in global food prices in 2011 tend to take a larger toll on GDP growth in 2012 rather than 2011.Worldwide food prices have risen by an average of 31.2 per cent in the first two months of 2011 comparedto year-ago levels. The food price shock is temporary and hence assumes 5 per cent decline in global foodprices in 2012.

India measures economic growth from fiscal point of view. For 2010-11, Indian

economy is estimated to have grown by 8.6 per cent and the government expects Indian economy to growby 9 per cent this financial year. The figures for 2012-13 is not projected as yet, but the planningcommission is likely to peg economic growth in the range of 9-9.5 per cent a year on an average for the12th five year plan, which will start from next financial year. The global rise in food prices would takeaway over 0.6 per cent of GDP in India in 2012 against around 0.1 per cent this year. If global fuel pricesare also assumed to be rising by 30 per cent coupled with the same percentage rise in international foodprices, Indian GDP will be reduced by around 0.8 per cent this year and over 1.3 per cent next year.


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Commodity-wise Price Index:

FAO food price index indicates that it increased more than 80 per cent during the period 2005-2008. Thewholesale price index in India for food articles (foodgrains +non-foodgrains) increased 21 per cent overthis period.

Commodity Food Price Index -Monthly Price

Month Price Change

Jan-11 183.16 -

Feb-11 189.34 3.37%

Mar-11 184.34 -2.64%

Apr-11 190.88 3.55%

May-11 187.01 -2.03%

Jun-11 181.62 -2.88%

Jul-11 180.33 -0.71%

Source: International Monetary Fund

Note: Commodity Food Price Index, includes Cereal, Vegetable Oils, Meat, Seafood, Sugar, Bananas, and Oranges PriceIndices

Cereals

The WPI of Cereals increased by 6.5% during 2007-08 mainly due to increase of 15.1%in jowar, barley8.1%, in wheat 4% in rice 8.3% and 1.5% in bajra. The sharp increase in the prices of rice was due to a hikein the Minimum Support Price (MSP), hardening in international prices, low level of stock position etc. Theproduction of cereals for 2006-07 (final) was estimated to be higher at 203.08 million tonnes as comparedto 195.2 million tonnes in 2005-06. Production of rice and wheat were also higher at 93.35 million tonnesand 75.81 million tonnes during 2006-07 as compared to 91.79 million tonnes and 69.35 million tonnesrespectively in the previous year.

Pulses

The Whole sale Price Index (WPI) of pulses exhibited a decline of -2.2% during 2007-08 as against the riseof 15.3% in 2006-07. The gap in the demand and availability of the commodity is being bridged throughimports. Import of pulses for the period of 2007-08 (April-February) was 2.62 million tonnes (provisional)as compared to 1.98 million tonnes during the corresponding period last year.

Edible oils

The Whole sale Price Index (WPI) of edible oils exhibited an increase of 19.9% during the financial year2007-08 as compared to the rise of 13.81% in 2006-07 mainly due to decline in the domestic production ofoil seeds during the last year coupled with increase in international prices. Imports of edible oil during2007-08 (up to April-February) were 4.58 million tonnes as compared to 3.91 million tonnes during thecorresponding period last year.

Sugar

Sugar prices declined during the year 2007-08 mainly due to increased availability in the markets. In termsofWPI, the prices of sugar declined by 1.6% during 2007-08 as compared to the decline of 18.2% in a yearago. The production of sugar increased to 281.99 lakh tonnes during 2006-07 sugar season from 193.21lakh tonnes a year ago.


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Table depicts the Community Wise Price Index for the year 2006-2008:

Cereals Pulses Edible Oils Sugar

2007-2008 6.5% 2.2% (decline) 19.9% 1.6% (decline)

2006-2007 7.8% 15.3% 13.81% 18.2% (decline)

India Total Foodgrain Production To Touch 232.07 Million Tonnes In 2010-11

As per latest advance estimates of Agriculture Ministry, Indias food grain production will reach to232.07 million tones from 218.20 million tones of the last year, up 6.4%.

Indias Wheat production is estimated at 81.47 m.t in 2010-11 crop year, up almost 1% from thelast year. The Rice output is also estimated to reach 94.01 m.t against 89.09 m.t during last year.

The total production of pulses and cotton are also likely at all-time high of 16.51 m.t and 33.9 m.tbales, respectively in the current year

Reasons for the rise in Food Prices in India

The policy stance was to attempt insulation of domestic prices from the high world prices by combiningdifferent measures including high subsidies, lower tariffs and export restrictions.

First, one of the reasons for global price increase was increase in oil and fertilizer prices. Indiansubsidies on Oil and fertlizer subsidies have insulated the global transmission of prices. Only smallpart of diesel prices was passed on to farmers and consumers.

Second, there was 16% increase in foodgrain production over three years from 198 m.t. in 2004-5to 231 m.t. in 2007-08.

Third, large scale imports were mainly in case of edible oils and to some extent in pulses. Wheatwas also imported in 2006-07 (5.5 million tonnes) and 2007-08 (1.8 million tonnes).Simultaneously India was exporting rice varying from 3 to 5 million tonnes per year till 2007-08.

Fourth, import duties for wheat, pulses and edible oils were either reduced or permitted at zeroduty.

Fifth, some administrative measures were undertaken. There was a ban on export of rice,wheat,edible oil and pulses. Ban was imposed on futures trading in eight commodities viz., rice, wheat,pulses (urad, tur, chana), potato, rubber and soy oil. Food stock limits were imposed under EssentialCommodities Act from August 2006. State Governments have been given powers to take effectiveaction on hoarding of food stocks.

General Inflation in India

The general inflation in India was 4.4%, 5.4% and 4.7% in the years 2005-06, 2006-07 and 2007-08respectively. It started hardening from January 2008. It increased from 8.0% in April to nearly 13% inSeptember before declining to below 6% in December 2008. The high general inflation also affects thepoor and vulnerable sections. The average inflation of India in 2011 would be 8.95%.

Inflation Rate in India

The best known measure of Inflation is the CPI which measures the consumer prices. The GDP deflator

also measures inflation in the total domestic economy.

The inflation rate in India was last reported to be 9.44 percent in June of 2011.

Since the year of 1969 till the year of 2010, the average inflation rate in India was 7.99 percent. The

inflation rate of the country reached an historical high of 34.68 percent during the month of September in

the year of 1974. The lowest was recorded in the month of May in the year of 1976. It was reported to be as

low as -11.31.


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Reasons for increase in general inflation in India

Increase in global crude oil prices was one of the main reasons for increase in general inflation inIndia.

Global crude oil prices increased 150 per cent during February 2007 to August 2008. Recentdecline in inflation in India was mainly due to decline in crude oil prices to less than US $ 40.

The increase in inflation to around 13% in the middle 2008 was on account of supply side pressuressuch as the one-off increase in domestic petrol and diesel prices, continuous hardening of prices ofpetroleum products that were not administered, rise in prices of wheat and oilseeds and adjustmentin steel prices, and increased demand side pressures (RBI, 2008).

The prices of non-administered petroleum products increased in the range of 19-56 per cent overend March-2008.

Apart from fuel prices, the intermittent but sharp increase in basic metals prices in line withinternational trends, along with iron ore prices were the other major factors that have contributed toinflation during 2008-09.

Financial Crisis in India

Even before the financial crisis, there were problems regarding economic growth including growth ofindustry and services partly because of tight monetary policy which was due to higher inflation. The global

financial crisis has impact on India indirectly in terms ofliquidity problems and lower economic growth.Developments, on both international and domestic fronts, particularly from mid-September 2008, haveimpacted domestic liquidity conditions. The bankruptcy/sell out/ restructuring of some of the world'slargest financial institutions beginning mid-September 2008 brought some pressures on the domesticmoney and foreign exchange markets, in conjunction with temporary local factors such as advance taxoutflows (RBI, 2008 a).

The global financial environment deteriorated with the number of troubled financialinstitutions rising, stock markets weakening and the money markets coming under stress. Central banks inseveral major advanced and emerging market economies responded to these extraordinary developments bysynchronised policy actions, including measures for liquidity infusion. The RBI has acted swiftly toaugment liquidity in the system by reducing CRR (cash Reserve Ratio), SLR (Statutory Liquidity Ratio)and the repo rate (the rate at which RBI lends to banks). These measures started in September, 2008 havecontinued till January 2009. The repo rate has been reduced during October 2008 to January, 2009 from 9%to 5.5% - a decline of 3.5% percentage points.

Now the problem of general inflation has come down. Inflation is expected to be less than5% by March 2008. However, the consumer price index and food articles are still showing higher inflation.As shown below, the global financial crisis will have significant impact on economic growth, employmentand food security of poor in India.

3. Measures to reduce negative effects of financial crisis


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Enhance pro-poor public investment: This includes expansion of rural infrastructureconsisting

of rural infrastructure, roads providing connectivity, housing, drinking water, sanitation and rural

production infrastructure.

Strengthen and expand NREGA: With few exceptions, the employment generatedunder NREGA

is less than 100 days. The Commission provides suggestions for strengthening and expanding

NREGA.

Introduce an Urban Employment Guarantee Programme: In order to complement NREGA, anurban employment guarantee programme has to be introduced. The activities can include low

income housing especially for slum dwellers, electrification, water supply, slum improvement, low

cost waste management etc.

Strengthen and expand self employment programmes: A number of measures have tobe taken

to graduate micro finance to livelihood finance. The measures can assist both farm and non-farm

workers who are likely to face reduced prospects of employment in the wage market.

Special Programme for Marginal and Small farmers: Institutional Credit for small andmarginal

farmers have to be improved. Special programmes like land improvement, minor irrigation,

capacity building, training etc. can be given to these farmers.

Enhancing access to credit to micro entereprises: In times of financial crisis, the smallproducers

will be rationed out of the credit market. Steps have to be taken to increase credit to unorganise

sector micro enterprises.

Create a National Fund for Unorganized Sector: A national fund for unorganizedsector has to

be established in order to step up credit and developmental effort for this sector.

A programme for Skill Development in the Informal Economy: The government hasprovided

measures to expand skill training. But, they remain mostly to organized workers. There is a need to

have a programme for receiving on-job training in unorganized enterprises. This scheme aims at

workers who have primary but less than secondary level education.

A National minimum social security for informal workers: As mentioned above, the

Commission proposed a universal but minimum level of social security for all the unorganized

workers in the country.

4. Results and Discussion

Lack of Education

Improper Implementation of Government Schemes

Black Marketing

Large number of Intermediaries

Huge wastage of Foodgrains

No proper Warehousing

5. Suggestions

Avoid high volatility in monetary policy

Appropriate response of monetary policy to asset prices

Manage capital flow volatility

Look for signs of over leveraging

Active dynamic financial regulationa) Capital buffers, dynamic provisioningb) Look for regulatory arbitrage incentives/ possibilities


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6. Conclusion

The successful resolution of the food crisis should be measured not primarily by declines in food prices, butby significant declines in the number of food-insecure people. A new boost in technological and policyinnovation is essential for achieving this goal. The CGIAR (Consultative Group on International

Agricultural Research) and national agricultural research systems have key roles to play in building asustainable and resilient agricultural system through solid research insights and innovative policyapproaches. The worlds poor and food-insecure people need a bailout through agricultural growth, stablefood markets, and protection of their basic nutrition. Such a bailout not only is an ethical and humanitarian

imperative, but also makes economic sense.All of the emerging markets deal with suddenly surging prices for many commodities. As

they are still in the commodity-intensive phase of their growth curves, this means, at the very least, the arcof their economic growth rates ought to flatten out for a time. At worst, they are vulnerable to social unrest,as most also have large poor populations. The unfolding food crisis in the context of the broader sweep ofrising commodity prices. Everything from oil to corn seems to be making new highs.It is projected that thepopulation will increase to 1.3 billion in 2020, and would leave behind China in 2050 if the populationgrowth remains unchanged. To feed the large population we require millions of tons of food grain. It isestimated that India would require 343.0 million metric tons of food grains in 2020 to feed the wholepopulation.

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analysis of food prices and financial crisis in global and indian perspective

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