CHAPTER V

AGRICULTURAL OUTPUT AND

INFLATION

5.1 Introduction

5.2 Trend in agricultural and food grains production

5.3 Agricultural production, food grains production and

inflation

5.4 Phase I: 1939 - 1949

5.5 Phase II: 1949 - 1969

5.6 Phase III: 1969-1991

5.7 Phase IV: 1991-2009

5.8 Volatile nature of food inflation

146

CHAPTER V

AGRICULTURAL OUTPUT AND INFLATION

5.1 Introduction Inflation in India is said to be very sensitive to the agricultural

production and particularly the food grains production. Though our

analysis of the previous chapter and several studies carried out in

Indian context confirm positive correlation between growth in money

supply and inflation, the former is not considered to be the originating

cause of the latter. The originating cause in Indian case is said to be the

fall in agricultural or food grains production, creating a situation of

food shortage relative to demand and thus leading to what is called as

food-shortage inflation,1 which through its spread to other sectors,

causes the general price level to move up.

Several studies pertaining to Indian economy have offered

enough evidence to show that inflationary pressures have emanated

from agricultural or food sector of the Indian economy.2 In Indian

economy, it is said, inflation begins when the aggregate supply,

particularly that of essential food stuff, fails to keep adequate pace of

growth with the demand or its growth rate declines relative to demand

on account of natural and structural constraints.3 This implies that

natural calamities like flood or drought, and infrastructural bottlenecks

in agriculture cause the production and thus the supply of agricultural/

food articles to fall short of demand, causing their prices to inch up.

The price rise so began gets further momentum when organized labour

succeeds in securing higher wages to compensate for the increase in

their cost of living. This means increased industrial costs which breeds

what is called as cost-push inflation.4 So price rise begins in the

147

agricultural or food sector whereby food prices rise on account of

shortfall in production and get transmitted to non-food articles,

resulting in inflation in the general level of prices.5

It thus can be said that the price level in India is largely

governed by the agricultural production and to be specific by the food

grains productions.6

It is on this background that this chapter endeavours to correlate

agricultural and food grains production with the inflation in India. First,

the trend in agricultural and food grains production is reviewed over a

period of 58 years and then an analysis of relation between agricultural

production, food grains production and inflation is presented. It is to be

noted that for want of data, similar analysis is not performed for the

whole of the first phase of our study period, that is, for the period from

1935 to 1949.

5.2 Trend in agricultural and food grains production:

From the above analysis it is clear that trends in agricultural

production and food grains production have implications for inflation.

This is particularly true in case of a developing country like India, as it

has been characterized by dominance of agricultural sector in terms of

contribution to national income and the number of people employed in

it. Low per capita income implies a large portion of income is devoted

to food grains7 and the demand for it being largely inelastic, a fall in

agricultural/food grains production causes steep rise in prices.

Though agricultural sector has been an important sector of the

economy it has not received due attention from the policy makers. First

five to six plans allotted around 20% of the plan outlay towards the

agriculture despite the fact that it was the largest employer and

148

contributed nearly half of India’s GDP. The strategy of economic

planning adopted since second five year plan emphasised the

development of heavy industries, and in the course of time agriculture

did not receive much attention causing the country to experience food

shortages, food crisis and food inflation, reinforcing the overall

inflation. Neglect of agriculture was said to be the original sin of the

planners of India’s destiny.8

The neglect of agriculture in the planning process of India had its

fallout in its continuous dependence on the behaviour of monsoon and

poor performance throughout the planning period and falling per capita

availability of food grains. The following table takes us through the

period of nearly 58 years and gives us an idea about the trend in

agricultural and food grains production.

Table No. 5.1

AGRICULTURAL & FOODGRAINS PRODUCTION IN INDIA

Agriculture & allied activities

( Rs. Crores) $

Agriculture ( Rs. Crores) $

Total Foodgrains €

Year At

Constant Prices

% variation

At Constant

Prices

% variation

(million tonnes)

% variation

1999-2000 series

1950-51 123884 108374 50.83

1951-52 125732 1.5 110151 1.6 51.99 2.3

1952-53 129697 3.2 114733 4.2 59.20 13.9

1953-54 139685 7.7 125051 9 69.82 17.9

1954-55 143791 2.9 128548 2.8 68.03 -2.6

1955-56 142549 -0.9 126646 -1.5 66.85 -1.7

1956-57 150298 5.4 134226 6 69.86 4.5

1957-58 143547 -4.5 127405 -5.1 64.31 -7.9

1958-59 158010 10.1 141733 11.2 77.14 20

1959-60 156420 -1 139666 -1.5 76.67 -0.6

1960-61 166954 6.7 149838 7.3 82.02 7

1961-62 167095 0.1 149355 -0.3 82.71 0.8

1962-63 163771 -2 146149 -2.1 80.15 -3.1

1963-64 167602 2.3 148887 1.9 80.64 0.6

149

1964-65 183062 9.2 164271 10.3 89.36 10.8

1965-66 162848 -11 142144 -13.5 72.35 -19

1966-67 160532 -1.4 138892 -2.3 74.23 2.6

1967-68 184404 14.9 162603 17.1 95.05 28

1968-69 184112 -0.2 162042 -0.3 94.01 -1.1

1969-70 195946 6.4 173788 7.2 99.50 5.8

1970-71 209843 7.1 186668 7.4 108.42 9

1971-72 205903 -1.9 181696 -2.7 105.17 -3

1972-73 195570 -5 171471 -5.6 97.03 -7.7

1973-74 209655 7.2 185920 8.4 104.67 7.9

1974-75 206461 -1.5 180797 -2.8 99.83 -4.6

1975-76 233074 12.9 206462 14.2 121.03 21.2

1976-77 219606 -5.8 193905 -6.1 111.17 -8.1

1977-78 241646 10 218172 12.5 126.41 13.7

1978-79 247210 2.3 222520 2 131.90 4.3

1979-80 215630 -12.8 192788 -13.4 109.70 -16.8

1980-81 243421 12.9 220624 14.4 129.59 18.1

1981-82 254622 4.6 231320 4.8 133.30 2.9

1982-83 253907 -0.3 230997 -0.1 129.52 -2.8

1983-84 279605 10.1 255837 10.8 152.37 17.6

1984-85 284037 1.6 259633 1.5 145.54 -4.5

1985-86 284930 0.3 260139 0.2 150.44 3.4

1986-87 283763 -0.4 259122 -0.4 143.42 -4.7

1987-88 279257 -1.6 254647 -1.7 140.35 -2.1

1988-89 322932 15.6 297543 16.8 169.92 21.1

1989-90 326773 1.2 298720 0.4 171.04 0.7

1990-91 339893 4 311500 4.3 176.39 3.1

1991-92 333256 -2 304301 -2.3 168.38 -4.5

1992-93 355421 6.7 325777 7.1 179.48 6.6

1993-94 367231 3.3 336136 3.2 184.26 2.7

1994-95 384549 4.7 352069 4.7 191.50 3.9

1995-96 381875 -0.7 348626 -1 180.42 -5.8

1996-97 419759 9.9 384886 10.4 199.43 10.5

1997-98 409039 -2.6 373446 -3 193.12 -3.2

1998-99 434892 6.3 400030 7.1 203.61 5.4

1999-00 446515 2.7 409660 2.4 209.80 3

2000-01 445403 -0.2 407176 -0.6 196.81 -6.2

2001-02 473249 6.3 433475 6.5 212.85 8.1

2002-03 438966 -7.2 398206 -8.1 174.78 -17.9

2003-04 482676 10 441360 10.8 213.19 22

2004-05 482910 0 441647 0.1 198.36 -7

2005-06 511114 5.8 467984 6 208.59 5.2

2006-07 531315 4 487010 4.1 217.28 4.2

150

2007-08 557122 4.9 511274 5 230.78 6.2

2008-09 566045 1.6 233.88 1.3

Average growth

1951-1969 2.4 2.5 4

1969-1991 3 3.3 3.4

1991-2009 3 3.1* 1.9

1951-2009 2.8 3** 3.1

Compound Growth Rate

1951-2009 2.61 2.68 2.47

Standard deviation

1951-1969 6 7 11

1969-1991 6.9 7.6 10.2

1991-2009 4.5 5* 8.6

1951-2009 5.9 6.6** 9.9 * 1991-2008 ** 1951-2008

$ Data for 2006-07 are provisional estimates, 2007-08 are quick estimates and 2008-

09 are revised estimates.

€ Data for 2008-09 are based on Advanced Estimates.

Source : 1. Handbook of Statistics on Indian Economy, RBI

It can be seen from the above table that wide variations have

occurred in the production of agricultural sector as a whole,

agricultural sector in isolation and food grains sector. The variation in

the production of agriculture and allied sectors took place in the range

of -12.8% (1979-80) and 15.6% (1988-89), while in case of

agricultural sector it happened in between -13.5% (1965-66) and 17.1%

(1967-68). For food grains sector, the variation was over a larger range

of -17.9 (2002-03) and 21.2 (1975-76). The standard deviation values

which show variation around the mean value indicate the same picture.

It is lowest for the agriculture and allied sector taken together (5.9) and

highest for the food grains sector (9.9). A high standard deviation value

for food grains production implies that it has exhibited much volatility

than the production of agricultural sector as a whole. This also implies

that production of food grains is highly dependent on the rainfall and

the erratic behaviour of the later gets reflected in the former.

151

As far as the average growth over the entire period is concerned,

it doesn’t appear to be satisfactory by any standard. The agricultural

sector along with allied activities recorded a growth rate of 2.8%, while

the agricultural sector in isolation and food grains sector recorded the

growth rates of 3% and 3.1% respectively. The compound annual

growth rate for the three sectors, viz. agriculture and allied activities,

agriculture and food grains, works out to be 2.61%, 2.68% and 2.47%

respectively. This poor growth in production relative to rapidly rising

demand for food on account of rising population and incomes of the

people has done all the damage in terms of high level of price rise in

the food grains category. The higher food inflation (7%) in annual

average terms than the inflation rates based on WPI (6.5%) CPI-IW

(6.7%) and GDP deflator (6.4%) bear testimony to this.

5.3 Agricultural production, food grains production and inflation:

India has made a very unsatisfactory progress in spreading the

irrigation facilities. After 60 years of economic planning, the irrigated

area has expanded just up to 40% of the gross cropped area.

Consequently, agriculture continues to be a gamble in the monsoon. A

deficient monsoon causes a sharp fall in agricultural production and

creates conducive conditions for inflationary price rise first in food

category and later in non food category. There is enough evidence to

prove that inflationary expectations were generated due to a sharp fall

in crop production.9 The inflation in the primary articles/food category

gets reflected in the overall inflation, as the weight assigned to it has

been very high, 22% at present.10

A normal monsoon, on the other hand, with well spread plentiful

rainfall helps in maintaining reasonable price stability.11

Thus, given

152

the monsoon dependent nature of India’s agriculture, agricultural and

food grains production has exhibited much volatility which ultimately

gets reflected in primary/food articles inflation. This can be proved by

comparing the standard deviation values for inflation in food articles

and in manufactured goods. For the former the value turns out to be 7.6,

while for the latter it is low at 4.9 over the period 1953-2009.

Based on the above arguments, it can be said that there must be a

definite correlation between changes in agricultural/food grains

production and price level. In this section, we therefore propose to

search if such correlation exists or not.

The following table juxtaposes the annual percentage variations

in agricultural and food grains production with that in food inflation,

WPI inflation and inflation based on other two indices, namely CPI-IW

and GDP deflator.

The analysis will particularly compare the changes in

agricultural and food grains production and changes in food category

inflation and WPI inflation. As the data available is from 1939-40, the

analysis is done for this period only.

5.4 Phase I: 1939 - 1949

The following table, which presents data on agricultural, food

grains production and inflation during ten years of first phase, reveals

that a negative growth in either agricultural production or food grains

production was followed by an upward movement in the prices of

agricultural commodities and general price level as a whole with a lag

of one year. For instance, the year 1940-41, which registered a

negative growth of 10% & 1% in agricultural and food grains

153

production respectively, was followed by a year (1941-42) with

considerable price rise. This is also true in case of 1944-45 & 1945-46.

The agricultural and food grains production thus appears to have

exerted great pressure on the prices of agricultural commodities and

the general price level as a whole.

TABLE NO. 5.2

AGRICULTURAL PRODUCTION & INFLATION 1939-40 TO 1949-50

Year

Index

of

foodgra

ins

producti

on

Variat

ion in

%

Index of

agricultu

ral

producti

on

Variat

ion in

%

Index

number

agricultu

ral

commodi

ty prices

Variat

ion in

%

General

index

(WPI)

Variat

ion in

%

1936-37 to 1938-39 = 100 August 1939 = 100

1 2 3 4 5 6 7 8 9

100 100 100 100

1939-40 100 0 99 -1 127.5 27.5 125.6 25.6

1940-41 90 -10 98 -1 108.6 -14.8 114.8 -8.6

1941-42 97 7.8 95 -3.1 124.2 14.4 137 19.3

1942-43 101 4.1 102 7.4 166.2 33.8 171 24.8

1943-44 110 8.9 106 3.9 268.7 61.7 236.5 38.3

1944-45 107 -2.7 101 -4.7 265.4 -1.2 244.2 3.3

1945-46 100 -6.5 94 -6.9 272.6 2.7 244.9 0.3

1946-47 100 0 96 2.1 313.8 15.1 275.4 12.5

1947-48 104 4 100 4.2 356.9 13.7 307 11.5

1948-49 112 7.7 95 -5 382.9 7.3 376.2 22.5

1949-50 115 2.7 100 5.3 391.3 2.2 385.4 2.4

Source: Mittra, S. (1972): "Monetary Politics in India", Vora & Co., Publishers

Pvt. Ltd.,Bombay ,p. 61.

5.5 Phase II: 1949 - 1969

For this phase, data is available for 18 years beginning with

1951-52. The data is presented in the following table.

154

Table no 5.3

AGRICULTURAL PRODUCTION, FOODGRAINS

PRODUCTION & INFLATION

Agriculture & allied activities ( Rs.

Crores) $

Agriculture ( Rs.

Crores) $

Total Foodgrains

(million

tonnes) €

inflation in the

category of Food of WPI

Contri-bution in WPI inflation WPI

CPI-IW GDPd

Year

at constant prices

% variation over previous year in % % variation over previous

year

1 2 3 4 5 6 7 8 9

1951-52 1.5 1.6 2.3 6.2 4 3.3

1952-53 3.2 4.2 13.9 -12.5 -0.9 -4.4

1953-54 7.7 9 17.9 6.7 74.4 4.6 2 2.5

1954-55 2.9 2.8 -2.6 -11.3 86.8 -6.8 -6.6 -9.7

1955-56 -0.9 -1.5 -1.7 -8.5 81.3 -5.2 -3 -1.4

1956-57 5.4 6 4.5 18.1 64.9 14 11.3 12.8

1957-58 -4.5 -5.1 -7.9 4.1 66 2.9 4.9 3.5

1958-59 10.1 11.2 20 8.2 99.2 4.1 5.2 3.8

1959-60 -1 -1.5 -0.6 3.3 44.2 3.8 4.2 2.7

1960-61 6.7 7.3 7 0.8 6.4 6.6 0.9 3.8

1961-62 0.1 -0.3 0.8 0.1 17.2 0.2 2.4 2.2

1962-63 -2 -2.1 -3.1 6.5 69.8 3.8 3.2 4.4

1963-64 2.3 1.9 0.6 8.4 57.1 6.2 4.5 8.4

1964-65 9.2 10.3 10.8 17.3 66.1 11 15.2 8.5

1965-66 -11 -13.5 -19 6.8 36.3 7.6 7.2 8.3

1966-67 -1.4 -2.3 2.6 18.3 56.2 13.9 13 13.2

1967-68 14.9 17.1 28 21.4 83.5 11.6 11.6 8.6

1968-69 -0.2 -0.3 -1.1 -5.2 691.9 -1.1 -0.5 2.4

1969-70 6.4 7.2 5.8 -0.1 -0.5 3.7 1.4 3.3

1970-71 7.1 7.4 9 3.6 25.7 5.5 5.1 1.6

1971-72 -1.9 -2.7 -3 1.1 5.8 5.6 3.2 5.4

1972-73 -5 -5.6 -7.7 10.1 30 10 7.8 10.8

1973-74 7.2 8.4 7.9 22.7 33 20.2 20.8 17.8

1974-75 -1.5 -2.8 -4.6 26 30.5 25.2 26.8 16.7

1975-76 12.9 14.2 21.2 -4.9 128.7 -1.1 -1.3 -1.6

1976-77 -5.8 -6.1 -8.1 -5.1 -76.8 2.1 -3.8 6

1977-78 10 12.5 13.7 11.8 64.9 5.2 7.6 5.6

1978-79 2.3 2 4.3 -0.7 246.2 0 2.2 2.5

1979-80 -12.8 -13.4 -16.8 8.2 14.3 17.1 8.8 15.7

155

1980-81 12.9 14.4 18.1 11.4 18.9 18.2 11.4 11.5

1981-82 4.6 4.8 2.9 13.1 43 9.3 12.5 10.8

1982-83 -0.3 -0.1 -2.8 11.1 39.8 4.9 7.8 8.1

1983-84 10.1 10.8 17.6 13.9 31.9 7.5 12.6 8.5

1984-85 1.6 1.5 -4.5 4.2 11.3 6.5 6.3 7.9

1985-86 0.3 0.2 3.4 1.7 6.6 4.4 6.8 7.2

1986-87 -0.4 -0.4 -4.7 10.2 30.6 5.8 8.7 6.8

1987-88 -1.6 -1.7 -2.1 9 19.3 8.1 8.8 9.3

1988-89 15.6 16.8 21.1 9.9 23 7.5 9.4 8.2

1989-90 1.2 0.4 0.7 1.2 2.9 7.5 6.1 8.4

1990-91 4 4.3 3.1 11.9 20 10.3 11.6 10.7

1991-92 -2 -2.3 -4.5 20.2 25.7 13.7 13.5 13.7

1992-93 6.7 7.1 6.6 12.4 21.3 10.1 9.6 9

1993-94 3.3 3.2 2.7 4.9 10.3 8.4 7.5 9.8

1994-95 4.7 4.7 3.9 12.8 15.7 12.6 10.1 10

1995-96 -0.7 -1 -5.8 8.3 16.1 8 10.2 9.1

1996-97 9.9 10.4 10.5 12.4 41.1 4.6 9.4 7.5

1997-98 -2.6 -3 -3.2 3 10.5 4.4 6.8 6.5

1998-99 6.3 7.1 5.4 12.7 33.2 5.9 13.1 8

1999-00 2.7 2.4 3 3.8 18.1 3.3 3.4 3.8

2000-01 -0.2 -0.6 -6.2 3 6.9 7.2 3.8 3.5

2001-02 6.3 6.5 8.1 3.3 15.6 3.6 4.3 3

2002-03 -7.2 -8.1 -17.9 1.8 8.5 3.4 4.0 3.8

2003-04 10 10.8 22 1.3 3.6 5.5 3.9 3.6

2004-05 0 0.1 -7 2.6 6.5 6.5 3.8 5.6

2005-06 5.8 6 5.2 4.8 18.9 4.4 4.4 4.2

2006-07 4 4.1 4.2 7.8 22.5 5.4 6.7 5

2007-08 4.9 5 6.2 5.5 17.1 4.7 6.2 4.9

2008-09 1.6 1.3 8 14.5 8.3 9.1 6.2

Average growth

1951-1969 2.4 2.5 4 5.9*** 3.9 4.4 4.1

1969-1991 3 3.3 3.4 7.7 8.3 8.2 8.2

1991-2009 3 3.1* 1.9 7.1 6.7 7.2 6.5

1951-

2009 2.8 3** 3.1 7**** 6.5 6.7 6.4

Standard deviation

1951-1969 6 7 11 9.6*** 7.1 5.7 5.6

1969-1991 6.9 7.6 10.2 7.9 6.5 6.6 4.7

1991-2009 4.5 5* 8.6 5.1 3 3.3 2.9

1951-2009 5.9 6.6** 9.9 7.6**** 6 5.6 4.8

156

Correlation ( 1951-2009) With

WPI 0.01 0.01** -0.05

With

CPI 0.12 0.12** 0.07

With

GDPd -0.11 -0.11 -0.14

With

food

inflation 0.2**** 0.21 # 0.19****

Partial Correlation ( 1952-2009)

M1 & WPI .Food prod

M1 & Food prod.

WPI

WPI & Food prod.

M1

M3 & WPI

.Food

prod

M3 & Food

prod.

WPI

WPI & Food

prod.

M3

0.51 - 0.20 0.06 0.39 - 0.16 0.01

* 1991-2008 ** 1951-2008 *** 1953-1969 **** 1953-2009 # 1953-2008

$ Data for 2006-07 are provisional estimates, 2007-08 are quick estimates and 2008-09 are

revised estimates.

€ Data for 2008-09 are based on Advanced Estimates.

Source : 1. Handbook of Monetary Statistics of Indian Economy, RBI

2.Office of the Economic Adviser, Ministry of Commerce and Industry, Government of India.

3. Handbook of Statistics on Indian Economy, RBI

4. Mithani, D.M. (1993) Dynamics of Monetary-Fiscal Policy: An Indian Perspective,

Himalaya Publishing House, Bombay, p. 90.

Graph No. 5.1

Foodgrains Productions, Food Inflation and WPI Inflation

-30

-20

-10

0

10

20

30

40

19

51

-52

19

53

-54

19

55

-56

19

57

-58

19

59

-60

19

61

-62

19

63

-64

19

65

-66

19

67

-68

19

69

-70

19

71

-72

19

73

-74

19

75

-76

19

77

-78

19

79

-80

19

81

-82

19

83

-84

19

85

-86

19

87

-88

19

89

-90

19

91

-92

19

93

-94

19

95

-96

19

97

-98

19

99

-00

20

01

-02

20

03

-04

20

05

-06

20

07

-08

V

ari

ati

on

in

%

Total Foodgrains (million tonnes)

inflation in the category of Food of WPI

WPI inflation

Year

Source: Based on Table No. 5.3

157

Looking at the column number 2, 3 and 4, it appears that there

were 6 years when agricultural sector as whole, agriculture in isolation

and food grains sector registered negative growth. There were two

more years which saw negative growth, but not in all the three sectors.

The year 1954-55 experienced negative growth in food grains

production only (-2.6%), while the year 1966-67 witnessed negative

growth in agricultural sector as a whole and agriculture in isolation.

For the year 1961-62, negative growth was seen in the production of

agriculture alone.

All these years of negative growth in agricultural and food grains

production co-existed either with negative inflation or very low

inflation in the category of food as also based on WPI. This implies

that a shortfall in agricultural and food grains production did not have

immediate impact on the price level. The impact however appears to

have worked with a lag of one year. For example, for the year 1955-56,

when the agricultural and food grains production registered negative

growth of -1.5% and -1.7% respectively, food inflation and WPI

inflation were also in the negative territory. However, the next year

(1956-57) saw a big leap in both food inflation and WPI inflation from

-8.5% and -5.2% respectively in the previous year to 18.1% and 14%

this year.

Similar lagged effect of fall in agricultural and food grains

production on the price level was also seen for other years like 1957-58,

1962-63, 1965-66 and 1966-67. The fact that the impact of fall in

agricultural and food grains production works with a lag of one year on

prices can also be seen in increased relative contribution of food

inflation in WPI inflation. For example the poor performance of the

agricultural sector in 1957-58 had an impact on price level of 1958-59,

with the latter going up from 2.9% to 4.1%. The rise in WPI inflation

158

in 1958-59 was primarily on account of the rise in food inflation, with

its relative contribution going up from 66% during the previous year to

almost 100% in this year.

It was not only that the bad performance of agricultural and food

grains sector had an impact on the price level, but the good

performance also had its mitigating impact on the price level and that

too working with a lag of one year. For instance, during the years

1953-54, 1956-57, 1958-59, 1964-65 and 1967-68 when the

agricultural and food grains production recorded increase, in the

subsequent years both the food inflation and inflation based on WPI

either fell or showed a smaller increase.12

Inflation during this phase,

thus appears to have tracked the movement in the agricultural and food

grains production by moving exactly in the opposite direction with a

lag of one year. There is thus a definite correlation between the change

in agricultural production especially of food grains and price level and

it is observed with a lag of one year.13

5.6 Phase III: 1969-1991

This phase saw the sharp rise in inflation measured in terms of

all the three indices. The inflation in the food grains category of WPI

increased from 5.9% during the previous phase to 7.7% during this

phase, in annual average terms. This was the result of relatively poor

growth of food grains production, notwithstanding the improvement in

the performance of the agricultural sector.

The higher food inflation during this phase can also be ascribed

to the suspension of aid in the form of supply of food grains under PL

480 agreement from United States in 1965.14

As against this, the

previous phase had a fortuitous circumstance in terms of lower average

159

food inflation, largely owing to the availability of free grain supplies

from time to time from USA under the PL 480 agreement.15

This phase however began with a negative or very mild increase

in food inflation during four years from 1968-69 to 1971-72 mainly

because of the favourable impact of green revolution, which helped

increase the food grains production by nearly 35% during this period.16

Looking at the year to year changes in production, it appears that

there were in all eight yeas when the agricultural sector as a whole,

agricultural sector in isolation and food grains sector registered fall in

production or negative growth. The year 1984-85 saw negative growth

in food grains production only. The correlation observed during the

previous phase, whereby the impact of fall in production works on

price level with a lag of one year, appears to be largely untrue during

this phase. The only exception is that of year 1976-77 when the impact

of fall in agricultural & food grains production was observed in the

next year in the form of higher food and WPI inflation.

It doesn’t however mean that fall in agricultural and food grains

production had no adverse impact on prices. The adverse impact was

observed as the inflation was high during the years following the

decline in agricultural and food grains production, but the impact can

not be distinguished as other adverse factors were also at works. For

example, the years 1972-73, 1973-74 and 1974-75 recorded highest

inflation rates of this phase, however they were not entirely because of

the negative growth rates of agricultural and food grains sector, but the

sharp hike in crude oil price had a large impact on them. Similarly, the

price spiral of 1979-80 to 1983-84 period carried the impact of second

oil price hike along with the impact of poor performance of the

agricultural sector during 1979-80 and 1982-83.

160

So the pattern of food and overall price level soaring up

following a year of poor agricultural performance, observed during the

previous phase, is not clearly discernible in this phase. Years of

impressive growth in agricultural and food grains production however

appears to have been followed by negative or very mild increase in

both food and WPI inflation. For instance, the years 1969-70, 1970-71,

1975-76, 1977-78, 1983-84 and 1988-89 witnessed spectacular growth

in agricultural and food grains production and were therefore followed

by the years of subdued inflation both for food category and WPI.

The upsurge in inflation rate during this phase thus carried the

impact of not only the shortfalls in agricultural and food grains

production, but to a great extent the hikes in international price of

crude oil. The fact that shortfalls in agricultural and food grains

production had limited impact on inflation during this phase in borne

out by the relatively lower contribution of the food inflation in WPI

inflation.

5.7 Phase IV: 1991-2009

This phase contains only five years when the growth in the

production of agriculture and food sector was in the negative zone.

Among these five years, the year 2002-03 witnessed steep fall in

production, particularly that of food grains (-17.9%). It was however

only twice that a negative growth in agricultural and food grains

production was followed by an upsurge in food and overall price level.

1995-96 and 1997-98 were those two years. For the year 1991-92,

though the growth of agricultural and food sector was in the negative

and it co-existed with high inflation in the same and subsequent year,

the impact of shortfall in agricultural and food production can not be

161

distinguished as other factors like Gulf crisis, devaluation of rupee

were also equally responsible.

The year 2002-03 was an exceptional year in the sense that it

experienced a severe drought after 14 years of normal or near normal

rainfall, but could not see any inflationary build up.17

The availability

of an abundant surplus stock of food grains and timely release of the

same helped in both keeping the inflation low and dampening the

undercurrents of inflationary expectations.18

In this regard, the RBI

Annual Report (2002-03) expressed satisfaction and stated, “in the past,

the occurrence of any one of the shocks experienced in 2002-03 in

isolation had produced a sharp loss of growth, higher inflation, balance

of payments difficulties, and even financial instability in the economy.

Seen in this context, the performance of the economy during 2002-03

demonstrated the developing resilience of the Indian economy.”19

Another year of this phase, 2004-05, which recorded a negative

growth (-7%) in food grains production on account of the deficient

monsoon, dominated the inflation outcome of the next year.20

Overall it appears that there has not been much change on the

agricultural production front. In fact, the annual average growth in

food grains production declined from 3.4% during the previous phase

to 1.9% in this phase. Consequently, country has not seen any respite

on the food inflation front. It stayed at a high level of 7.1% in annual

average terms during this phase. However, the relative contribution of

food inflation in WPI inflation appears to have declined to around 15

to 16%. Besides, this phase also witnessed decline in the variability in

food inflation, as reflected in the lower standard deviation quotient.

This is also true about the WPI inflation with a standard deviation

quotient of just 3, which certainly is the result of lower variation in

food inflation.

162

The fall in the variability of food inflation can not be linked to

the fall in the variability of food production, as the latter continues to

be high (standard deviation 8.6%). Food production continues to be

volatile as nearly 45% of the food grains production takes place in non-

irrigated or rain fed areas.21

The fall in the variability of food inflation

should therefore be linked with the factors other than the food grain

production, like imports and buffer stock operations of the government.

In an open economy, trade throws up an alterative in the form of

imports for the better management of inflation and the Indian

government appears to have tapped this alternative.22

In conclusion, it can be said that the growth in agricultural and

food grains production has not kept pace with the rising population and

incomes of the non-agricultural sector, which have been strong

influencing factors on the food demand. Consequently, the imbalance

between the demand and supply has grown and kept the food inflation

and the overall inflation high at around 7% over the entire period of 58

years. Though the pass through of food inflation to overall inflation has

moderated, perhaps because of the low weightage assigned to food

articles category in WPI, food inflation continues to stay high owing to

unimpressive growth in the production of food grains. Food inflation to

a great extent continues to be determined by the performance of the

agricultural and food grains sector, despite the efforts made by the

government to keep it under control through imports and buffer stock

operations.

The correlation values of agricultural production and food grains

production with the inflation rates based on WPI, CPI-IW, GDP

deflator and for the category of food articles are found to be close to

zero, which indicates the production and inflation do not move in the

same direction. Logically speaking they should move in the opposite

163

direction and therefore the correlation quotient should be in negative.

The absence of negative correlation between agricultural food grains

production and inflation perhaps implies the moderating impact of the

imports and buffer stock operations on the latter.

The partial correlation between variation in food grains

production and WPI inflation, assuming M1 and M3 to remains

constant turns positive from negative.

5.8 Volatile nature of food inflation:

The fact that agricultural and food grains production is an

important determinant of inflation in India can be seen in the much

volatility exhibited by the inflation in the category of food articles,

which is directly linked with the agricultural and food grains

production. Agriculture being a gamble in the monsoon with nearly

60% of the gross cropped area still to be irrigated, agricultural and

food grains production falls with a drought in the economy and

registeres a big increase with a normal and well spread rainfall.

Agricultural and food grain production thus follows a cyclical path on

account of the whimsical nature of the rainfall. A normal monsoon /

well spread rainfall with bumper agricultural and food grains

production causes the prices of agricultural articles to fall, while a

weak or deficient rainfall causes output shortfalls and generates

inflationary pressure in the economy, emanating particularly in the

agricultural goods category.

Volatility in agricultural and food grains production thus gets

mirrored in the volatility in food prices, which in turn causes the

general price level to exhibit wide variations in the absence of

mitigating efforts from the government.

The following table presents standard deviation values for all the

sub-categories of WPI inflation.

164

Table No. 5.4

COMPARISON OF VARIABILITY IN INFLATION FOR DIFFERENT CATEGORIES OF WPI

Standard Deviation

AC PA OF WHICH FPL&L MP

FA NF 1953-69 6.1 9.6 4.5 3.3

1969-91 6.5 8.4* 7.9 11.1* 11.2 5.9

1991-2009 3 4.7 5.1 7.8 6.1 3.4

1953-2009 5.6 6.9** 7.6 9.7** 8.5 4.9

* 1971-91 ** 1971-2009 AC : All commodities. PA:Primary articles. FA:Food articles. NF : Non-food articles.

FPL&L: Fuel, power, light & lubricants. MP: Manufactured products.

Note : 1.Major groups/sub-groups under the various series are not strictly comparable on

account of changes in classification of commodities overtime

2.In the series (Base: 1961-62=100), MP comprises sub-groups chemicals, machinery and

transport equipment and manufactures.

Source : Compiled on the basis of data taken from

1. Handbook of Monetary Statistics of Indian Economy, RBI

2.Office of the Economic Adviser, Ministry of Commerce and Industry, Government of India.

Graph No. 5.2 Variability in Inflation for Different Categories of WPI

0

2

4

6

8

10

12

1953-691969-91

1991-2009

1953-2009

Sta

nd

ard

de

via

tio

n

Period/Phase

FA

FPL&L

MP

AC

Source: Based on Table No. 5.4

165

During the second phase inflation in the food articles category

exhibited highest volatility and thus represented the fluctuations in

food grains production. The third and fourth phase saw fuel category

inflation fluctuating too much under the impact of oil price shocks of

1973-74, 1979-80 and 1990-91. However, if a comparison is done

between the inflation in the category of primary / food articles and that

in the category of manufactured goods, then it is crystal clear that the

former has been highly volatile as represented by the relatively high

standard deviation quotient over the period 1953 to 2009. The high

level of volatility in food inflation or the inflation in the whole

category of primary articles undisputedly carries the volatility in

agricultural or food grains production.

166

References:

1. Gupta, Suraj B. (1974): “Food Shortage, Demand-Pull, and

Inflation in India”, In ‘Inflation in India’, edited by Simha,

S.L.N., Vora and Co. Publishers Pvt. Ltd., Bombay, p. 155.

2. Sengupta, Keya (October 15, 1991): “Procurement Prices and

Inflation”, Yojna, Vol. 35, No. 18, p. 10.

3. Mithani, D.M. (1993): “Dynamics of Monetary-Fiscal Policy –

An Indian Perspective”, Himalaya Publishing House, Bombay, p.

121.

4. Ibid, p. 121.

5. Gupta, Suraj B., Op. cit., pp. 169-170.

6. Gupta, Raj Narain (October 4, 1959): “Deficit Financing and

Inflation”, Yojana, Vol. 3, No. 19, p. 12.

7. Sengupta, Keya, Op.cit., p. 10.

8. Singh, Charan (1978): “India’s Economic Policy-Ghandhian

Blueprint”, Vikas Publishing House, p.90.

9. Government of India (2003): “Economic Survey”, 2002-03,

Government of India, New Delhi, p.

10. Ibid, p.

11. Sethuraman, S. (July, 2005): “Effective Inflation Management”,

Yojana, Vol. 49, p. 55.

12. Iyengar, A.V.N. (July 1, 1975): “Inflation: The Indian

Experience”, Yojana, Vol. 19, No. 11, p. 15.

13. Ibid, p. 15.

14. Joshi, Vijay and Little I.M.D. (1999): “India Macroeconomics

and Political Economy 1964-1991”, Oxford University Press,

New Delhi, p. 49.

167

15. Vakil, C.N. (1978): “War Against Inflation, The Story of the

Falling Rupee: 1943-77”, Macmillan Company of India Ltd.,

Delhi, p. 3.

16. Joshi, Vijay ad Little, I.M.D., Op. cit., p. 51

17. Government of India, Op. cit., p.

18. Ibid, p.

19. Reserve Bank of India (2005): Report on Currency and Finance

2003-04, Reserve Bank of India, Mumbai, pp. 133-134.

20. Pattanaik, R.K. and Samantaraya Amaresh (January 28, 2006):

“Indian Experience of Inflation: A Review of the Evolving

Process”, Economic and Political Weekly, Vol. 41, No. 04, p.

353.

21. Government of India, Op. cit., p.

22. Pulapre, Balakrishnan (October, 2007): “Growth and Inflation”,

Yojana, Vol. 51, p. 10.