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India struggles under rampant food inflation

Shop owner Yogesh Saini says his costs to restock his store have doubled but his margin remains the same Baghpat, India March 2010.

Andy Hoffman/ The Globe and Mail

Shyam Singh Rana squats on the dirt floor of a makeshift hut and smiles wryly as he talks about his new business venture.

Fuelled by surging demand for goods, government duties and drought, runaway inflation is rocking India.

The unwelcome trend has forced the wizened sugar-cane farmer to oversee a rudimentary factory that produces jaggery - unrefined sweet patty cakes that are coveted by many for their rich taste and health benefits.

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Retail sugar prices have surged 55 per cent in India in the past year, but prices paid by sugar mills to Indian farmers for raw sugar cane have increased by only 25 per cent. So instead of selling his sugar cane directly to the mills this year, Mr. Rana is using his crop and those of his fellow farmers in the village of Daha, in the state of Uttar Pradesh, to make jaggery.

The sugar mills are promising to raise prices soon but Mr. Rana and the other farmers are making jaggery because they need money now to cover the rising cost of food and other basic necessities.

"I have been a farmer for 36 years. I have never seen inflation like this," he says.

Before, if there was inflation, there would be some relief. Some products would be more expensive but the rest of the products would be cheaper. Now the basic products like food have all gone up so high," Mr. Rana said.

The worry is that India's inflation problem could crop up in the rest of Asia and, subsequently, the global economy, which is struggling to emerge from the worst financial crisis since the Great Depression. Central banks have responded to the crisis by keeping lending rates artificially low, triggering concern that the excess liquidity will cause rapid price increases and derail the recovery.

Soaring prices threaten not only India's economic comeback but also its position (alongside China) as a world leader in the global financial revival. China and India's continued strong demand for natural resources and consumer products helped keep the global economy afloat through the downturn. But in China, worries about rising prices are beginning to take root following more than a year of extremely loose lending policies.

Chinese consumer price inflation hit 2.7 per cent in February, a surprise spike from January's 1.5-per-cent level. Beijing is targeting consumer price inflation at around 3 per cent this year but may be hard-pressed to keep prices in check unless it raises lending rates or allows China's currency to appreciate.

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Even in Canada, inflation worries are starting to emerge in the aftermath of record low interest rates. Canada's consumer price index (which strips out volatile food and gasoline prices) accelerated to 2.1 per cent in February from a year ago - the highest level in 14 months and slightly above the Bank of Canada's inflation target of 2 per cent.

India managed to largely sidestep the global financial crisis last year and along with other emerging market economies has been a key driver powering the global turnaround.

But there is a dark side to India's impressive economic performance as Mr. Rana and other Indians are enduring a staggering annual food inflation rate that recently spiked to almost 18 per cent.

It's not just sugar prices that are skyrocketing. Prices for rice, wheat, milk, vegetables and pulses are soaring too. Now there is concern that the ballooning food inflation is spilling over into other areas. India's overall inflation rate jumped to 9.89 per cent in February as a government decision to raise duties on diesel and gasoline sent fuel prices surging higher. Consumer prices are up more than 16 per cent from a year ago, giving India the world's second highest inflation rate according to Bloomberg, ahead of only Venezuela on a list of 78 countries. Despite weak loan growth, India's central bank recently ordered a surprise increase in lending rates in hopes of controlling rising prices.

"Because of inflation, my cost of plowing the land has gone up, the cost of planting crops has gone up and the cost of diesel fuel has gone up. What used to cost 150 rupees [about $3.40CDN]now costs 300 rupees. Water, fuel and electricity. Everything has gone up. It's getting very difficult," Mr. Rana says.

To be sure, India's struggles with rising food costs are more extreme than most. Sugar is a prime example. India has the world's biggest sweet tooth. It consumes more sugar than any other country on the planet thanks to a healthy appetite for sweets, a widespread use of sugar in mainstay dishes and a taste for cavity-inducing chai (tea).

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Until recently, India had been largely self-sufficient in sugar, but a poor rainy season or monsoon in July severely hurt cane production. The drought forced India to become a net importer of sugar in 2009 and it is expected to remain so for most of 2010.

As India's economy and population has grown, demand for food has outstripped supply. While demand has increased by about 7 per cent a year, food production has increased by between 3 and 4 per cent.

Unlike North America, Europe and parts of China where large agri-businesses have improved crop yields, agriculture in India remains primarily a small-business enterprise. Even though farming employs more than half the country's work force, India's major private-sector firms have largely avoided getting into the agriculture business.

The small farmers' reaction to food inflation has only exacerbated the problem. Facing a cash crunch, Mr. Rana and his fellow farmers in the village of Daha are inadvertently tightening the supply of refined sugar by producing jaggery instead of selling their raw sugar cane to the mills.

In New Delhi, India's federal government has been quick to acknowledge the food inflation crisis, but its annual budget unveiled in late February provided little relief to India's poor and middle class who are most affected. If anything, the increased levies on fuel and diesel made the situation worse.

"It is huge," says Jayati Ghosh, an economist and professor at Jawaharlal Nehru University in New Delhi. Prof. Ghosh noted that 40 per cent of India's population already spends half its income on food and half the overall population is dependent on basic foods like rice, sugar and grain.

The lack of strong public outcry to soaring food prices has, however, surprised the academic. The widespread political unrest that led to the state of emergency declared on the advice of then-prime minister Indira Gandhi in 1975 was due in part to runaway inflation, Prof. Ghosh points out.

Now the economic reforms of Prime Minister Manmohan Singh are under scrutiny. While the former finance minister's economic policies have been widely praised, Prof. Ghosh says that the inflation crisis is highlighting the government's unwavering focus on strong GDP growth at the expense of true economic development.

Government leaders are promising that inflation relief for India's battered consumer is on the way. The Reserve Bank of India has begun raising some lending rates, which should help cool inflation. India's relatively weak credit growth has finally started picking up and that should give the central bank confidence to raise lending rates further to help its inflation battle. Food inflation has recently dropped to a 16-per-cent annual rate.

India's latest GDP data, which is expected to be released Wednesday, will be closely scrutinized by market watchers the world over for signs that inflation is starting to affect economic growth.

Still, Finance Minister Prana Mukherjee warns that the country may be saddled with high inflation for some time. "I will not be surprised if it reaches double digits," he says.

SMALL FARMERS

Food prices in India are rising at an annual rate of more than 16 per cent, but the country's small farmers aren't cashing in.

In the village of Hadoli, for example, a group of frustrated farmers say that rather than focusing their labour on sugar-cane production, they now also have to plant wheat, rice and beans for their own use, because prices for those staples at the local market are too expensive.

"In the market, we can't afford to buy these things. If we can produce it, why not?" said farmer Munish Kumar.

Farmers are also scrambling to adjust to rising costs for basic necessities including electricity, food and fuel.

Mr. Kumar said the state government has slashed subsidies for manure and fertilizer, which has further hurt crop yields.

At the same time, there has been less electricity and water available to improve production.

"We are not at fault," he said.

"The government should motivate the farmers. We don't get things on time. They should see to it that we get enough electricity and water and they should return the subsidy on manure."

India's overall annual inflation rate is almost 10 per cent - a price surge that threatens to undermine the country's strong economic growth.

India and other emerging market economies in Asia have been key pillars of strength during the global recession and a pullback in the region could hurt the nascent economic recovery in North America and Europe.

Just as India's farmers are failing to benefit from its massive food inflation, some retailers are also feeling the pinch.

Yogesh Saini has run a small provision store selling sugar, rice, onions, potatoes, sweets and candy in the village of Budhara for nine years.

He says maintaining the retail operation is becoming increasingly challenging.

"Earlier it was fun to do business. Now we are barely managing it. The profit is exactly the same," he said.

While it used to cost Mr. Saini 50,000 rupees (about $1,130) to restock his store, it now costs about 100,000 rupees.

Yet he says his margins remain the same, even though many of his customers suspect he is benefiting from the higher food prices.

"They get frustrated. They are always anxious. They abuse the government a lot. They abuse us less but they still abuse us saying we are increasing our margin. But we are not increasing our margins," he said.

The shop owner wants the government to keep food prices level by alleviating the region's chronic electricity and water shortages.

"The basic things should become available to maintain the price balance. They should concentrate on the basic necessities," Mr. Saini said.

Prof. Ghosh said the Indian government needs to vastly improve its public distribution system of basic foods that should be expanded to include many people who live above the country's poverty line.

She also blames speculators and food hoarders for the price increases, because they take advantage of a tight food supply to make profits at the expense of others.

Prof. Ghosh said the Indian government should provide a parallel food distribution system to prevent such opportunistic activities.

"Food is far too crucial a commodity to leave to market forces," she said.

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About the Author
Asia-Pacific Reporter

An award-winning journalist, Andy Hoffman is the Asia-Pacific Reporter for Canada's national newspaper, The Globe and Mail. More

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