RBI Working Paper Series 10: Analytics of Food Inflation in India

The Reserve Bank of India on 13.10.2014 placed on its web­site a Work­ing Paper titled “Ana­lyt­ics of Food Infla­tion in India” under the Reserve Bank of India Work­ing Paper Series*. This paper is writ­ten by Thangza­son Son­na, Dr. Himan­shu Joshi, Alice Sebas­t­ian and Upasana Sharma.

Food infla­tion in India has remained stub­born in recent years. Var­i­ous fac­tors, such as, increas­ing demand — par­tic­u­lar­ly that aris­ing from high­er rur­al wages, ris­ing agri­cul­tur­al cost of pro­duc­tion, chang­ing con­sump­tion pat­tern favour­ing pro­tein items, increase in min­i­mum sup­port prices (MSPs) and droughts in cer­tain years are believed to have led to high­er food infla­tion. In this back­drop, the study attempts to elic­it the sta­tis­ti­cal sig­nif­i­cance of these fac­tors in deter­min­ing food infla­tion. The authors use stan­dard co inte­gra­tion and error cor­rec­tion method­ol­o­gy based on Johansen’s mul­ti­vari­ate co inte­gra­tion frame­work for this purpose.

The empir­i­cal evi­dence shows that increas­ing real rur­al wages have played the most dom­i­nant role in deter­mi­na­tion of over­all food infla­tion in India in the long-run. Though sta­tis­ti­cal­ly sig­nif­i­cant, the long-run impact of hikes in MSP of food crops, name­ly, rice and wheat and input cost infla­tion (except wages) on food infla­tion were not as over-bear­ing as was gen­er­al­ly per­ceived. Sim­i­lar­ly, the long-run impact of pro­tein expen­di­ture on food infla­tion, though sig­nif­i­cant sta­tis­ti­cal­ly, was found to be weak. In the short-run, the impact on food infla­tion stems from the same fac­tors that are impor­tant in the long-run, name­ly, increas­es in rur­al real wages, MSP and input price pres­sures. Empir­i­cal results also indi­cate that the intro­duc­tion of Mahat­ma Gand­hi Nation­al Rur­al Employ­ment Guar­an­tee Scheme (MGNREGA) does not seem to have caused any sig­nif­i­cant increase in food infla­tion as is gen­er­al­ly perceived.

The paper con­cludes that since the increase in real wages has the largest influ­ence in dri­ving food infla­tion, there is a need to raise agri­cul­tur­al pro­duc­tiv­i­ty through enhanced invest­ments and improved tech­nol­o­gy in line with the increase in real wages to assuage food price pres­sures. Reduc­ing the sup­ply-demand gap in agri­cul­ture pro­duc­tion in the long-run and improv­ing sup­ply logis­tics will be of utmost impor­tance for mod­er­at­ing food price pres­sures and for sus­tain­ing the pace of eco­nom­ic activ­i­ty by secur­ing ade­quate food avail­abil­i­ty at rea­son­able prices.

  • The Reserve Bank of India intro­duced the RBI Work­ing Papers series in March 2011. These papers present research in progress of the staff mem­bers of the Reserve Bank and are dis­sem­i­nat­ed to elic­it com­ments and fur­ther debate. The views expressed in these papers are those of authors and not of the Reserve Bank of India. Com­ments and obser­va­tions may kind­ly be for­ward­ed to authors. Cita­tion and use of such papers should take into account its pro­vi­sion­al character.

Source : www.rbi.org.in

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