Rising prices and the tactics opted by common man

Price hike in essential commodities has been a norm in our country. The pattern is very frequent, for instance, the petrol prices have been hiked ten times in the last 6 years. The ever increasing cost of living has once again proven the age old theory of Survival of the Fittest. Petrol price hike is an epitome to show govt.’s incapability or lack of accountability. Though, the international fuel prices have fallen sharply by almost 100% in 2009, the Indian govt. shows no signs of reducing the price in the domestic market. Petrol, diesel and other petroleum products have an enormous impact on almost all the other commodity prices.

The reason given by the government for hiking the petrol and diesel prices across the board is:

to reduce the fiscal deficit and this increase will lead to generation of more revenue for the government.

In the recently concluded 3G spectrum auctions, the government declared that they got bids in excess of what they had expected and that this would mean that this excess can easily be added to the extra revenue for the government.

The income tax department this time as well as last time collected huge IT returns and all these returns go to the government revenue list.

So, one fails to understand that why did the government give generating extra revenue through rising petroleum prices as a reason for increasing these prices. Surely there is more to this reason than what meets the eye. Another thing that might puzzle the common man is what was the need to give full power to Oil Companies to increase the prices as much as they feel is necessary? Why was Government control removed suddenly?

LPG prices:Yet another thing that baffles the mind is why such a great hike in LPG prices. As it is the LPG Cylinder was expensively priced at Rs.310 and now it will cost Rs.345. What kind of impact will this decision of the government have on the common man?

The restaurants will make the food they sell expensive since they use many cylinders to make the large quantity of food that they make

To the people who entertain guests at their home , have to cook food in bulk? Will this mean that they will serve less food to the guests to conserve gas

Property rates

According to the new revised rates, the houses which were already out of bounds for the common man have gone even further out of bounds due to this increase in property rates. According to the revised circle rates , the lowest circle rate now is Rs.9000 per sq meter and the highest circle rate is Rs 1,25,000 per sq meter. If you want to purchase a flat in having more than 4 stories (including lift) then the minimum value is 18 lakhs plus stamp duty of 1,44,000, so that means a total of Rs 19,44,000 will have to be spent to buy a flat in this kind of a society! Now with rates so high for buying property, the rent in posh areas is becoming far more expensive , and now with this increase in circle rates the rents are set to go up by at least Rs 2000. So that means that if you were paying 15,000 for a 2-bedroom flat then now you will have to pay 17,000, what to talk of 3-bedroom flats.

Auto and Taxi rates

The increase in fuel price made the auto rates to zoom up in Coimbatore city from Rs.20 to 30 for the first two kilometres and then Rs.10 for the following kilometres. And the taxi rates increases from Rs.50 to Rs.80 for the first two kilometres and then Rs.30 for the following kilometres.

Food Price Rise

For decades, food prices had been declining in real terms, allowing millions of people around the globe to escape from the trap of poverty. This long-term trend took place despite rapid income and population growth, as agricultural productivity rose steadily. However, productivity gains began to stagnate in the face of continuing growth in demand, bringing about a reversal of this long-term trend. Rising food prices contributed to an acceleration of inflation across the Asia and Pacific region during 2007, and in 2008 the further rise in food prices has reached alarming proportions. The rise in food prices is worrisome precisely because food price inflation is the most regressive of all taxes-it hurts the poor the most.

The year 2009-10 has been an unusual one as far as the inflation trend goes, with food inflation soaring while inflation in the non-food sector was negligible. Only twice before in recent history-1992-93 and 1996-97-have seen a combination of double-digit food inflation and deflation in the rest of the economy. Every other major inflationary episode since 1971 has seen prices of food and non-food items shooting up in tandem. The Economic Survey released even came up with a new name for such lopsided price trends-skewflation.

In the country’s inflation history from 1971, this kind of inflation, where food inflation is above 10 per cent and non-food inflation negative, has happened only twice before – in 1992-93 and 1996-97. And food inflation 10 per cent, non-food inflation negative and fuel inflation less than 10 per cent has never occurred.

There are several other years where the pattern was the same. “The inflation trend stands out for its lopsidedness across sectors. In 2009-10 (April-November), food inflation was 12.6 per cent and non-food inflation minus 0.4 per cent.”The wholesale food prices in India touched a 10 year high with food inflation coming at 19.95% for the week ended December 5, 2009. The table below gives the retail prices for some of the key agricultural commodities in four Indian metros. This is just to give an idea of how the prices have moved in the last one year.

Clearly, the prices of all key agricultural commodities have risen sharply. Significant price increase has been observed in commodities like arhar dal, sugar, potatoes and onions.

EXPLAINING THE UNDERLYING CAUSES OF HIGH FOOD PRICES

Prices of close substitutes for rice are rising sharply as well: wheat, maize, and soybeans are all at record highs. Three sets of factors must be taken into account in order to explain what is happening to food prices in developing Asia. First is the distinction between structural and cyclical factors; second is the distinction between supply and demand; and third is the relationship between international and domestic markets.

STRUCTURAL AND CYCLICAL FACTORS

Structural factors are fundamental in explaining what has happened to international rice and food grain prices in recent years. Falling global stocks of rice and other cereals are indicative of the fact that production growth has fallen below consumption growth for several years. Rice and wheat stocks have ebbed and now are about 200 million metric tons, compared with 350 million metric tons in 2000, a decline of about 43% (USDA 2008).

Cyclical factors as well have been unkind in influencing price trends. Adverse weather including the drought-related harvest failure of wheat in Australia in 2007 and the flooding in South Asia have harmed production as did outbreaks of brown plant hopper infestation in Viet Nam. Recent financial market turmoil has also exerted a cyclical effect as investors turn to commodities with high expected rates of return in contrast to poor returns from equities, bonds, and money market instruments.

DOMESTIC AND WORLD MARKETS

Government short-term responses have made matters worse by attempting to paper over relative price changes and shield consumers through beggar-thy-neighbor policies of restricting exports and using administrative measures in an attempt to control prices. In order to shield consumers, taxes and import duties on imported grains are being reduced in net importing countries-temporarily. Price subsidies are also widely applied throughout the region for staple foods such as rice and for suppression of food prices.

The burden of general rice and wheat price subsidies will become much heavier as a result of the spike in prices in 2008. In the Philippines, the leading importer of rice in the world in 2007, the fiscal cost of subsidized rice in 2008 is estimated to be P32.8 billion with a purchase price of P29.4/kg_ versus a selling price of P_7.25/ kg. Indonesia has budgeted in 2008 an increase in food subsidies of Rp 9.8 trillion from Rp7.2 trillion-an increase of $_.4 billion or 3% of all government expenditure.It is not possible to untangle all the causes of rising prices without conducting a more detailed statistical analysis or decomposition of price movements. However, it appears from the discussion of these three sets of factors above that structural factors are swamping cyclical factors, as price spikes have occurred in the context of slowing world growth. The International Monetary Fund in its World Economic Outlook 2008 (IMF 2008) has cut its forecast for world growth drastically in 2008 from 4._% down to 3.7%. In spite of this slowdown, prices have been accelerating, indicating that it would be unwise to be complacent, and that higher food prices are not merely a short-term phenomenon that markets will automatically correct. This has strong implications for macroeconomic stability, poverty incidence and inequality and for corrective measures over time.

Reasons for rise in prices:

The primary cause of the recent food-price inflation was the severe drought of 2009, which caused a downturn in food production in the third quarter of 2009-10 and the expectation of the resultant price rise itself fed further into the inflation.

However, some other reasons (not so much talked about) for the spiralling food price inflation in India.

In 2008, it was estimated that India loses INR 58,000 crore worth of agricultural food items due to lack of post harvesting infrastructure such as cold chains, transportation, and storage facilities. If the Government ensured proper storage facility, food inventory would have been more then sufficient leading to prices remaining under control. It is not sure if the Government is still doing enough to have proper food storage facilities in the country.

The Indian farmers are largely dependent on the four-month monsoon season during which 80% of the year’s total rainfall takes place. The reason is that 60% of the country’s total cropped area is not irrigated. The Government has again been talking about inclusive growth and stress on rural India. These facts don’t point to any meaningful efforts to help farmers in a country where over 10,000 farmers have committed suicide over the last decade.

The per hectare agricultural yield in India is half that of China. This again points of inefficiency and the failure to help the farmers adopt latest technology in order to increase the crop output.

Increased bio-fuel production has contributed to the rise in food prices:

Concerns over oil prices, energy security and climate change have prompted governments to take a more proactive stance towards encouraging production and use of bio-fuels. [] This has led to increased demand for bio-fuel raw materials, such as wheat, soy, maize and palm oil, and increased competition for cropland

Implications:

Steep rise in food prices may cripple India’s growth:

Even as India was settling in the comfort of an independent government after many successive coalitions, the political stability has been threatened by the surging prices of food and other basic commodities. For a long time, India has struggled with strengthening it’s Public Distribution System (PDS).In a world, which is still stumbling and trying to recover from one of the worst even economic setback, Asia has been confidently surging ahead. However, it seems that the ever rising food prices may cripple this recovery and pose a major threat to the strong GDP rise. This will not only be a setback to India, but to the rest of the continent as well, many parts of which are dependent on India to meet their food shortages.

This year, food prices have seen a steep rise of 19.95 per cent, one of the highest ever recorded. What is of more concern is the fact that this steep rise has significantly out paced the rise on per capita income. Even staple foods like rice and wheat have become so expensive that they’ve gone out of reach of the common man.

Food Price Rise Affects Rural Areas Adversely

Objective:

The purpose of this article is to analyze on the spiraling food price in India, future trend of food prices, analyzing, how much the people spend on food items and others, which calls for the stratagem to be opted by the common man, and by finding out the ways to save and to find the new sources of income to troubleshoot the crisis.

Review of Literature

Sushma Swaraj, one of the senior members of the BJP, said: “The price rise is not an outcome of any natural calamity, it is the outcome of the wrong policies of the government.”

Mohanty, Rath and Ramaiah (2000) argued that a large array of commodities show relative price volatility over time; hence, it is not appropriate to remove them all from core measure. The basket of commodities whose prices are volatile is not time invariant; therefore, excluding certain commodities permanently will result in loss of information about underlying inflation. Moreover, primary commodities are sizable in the consumption basket of consumers and their influence on underlying inflation is substantial. Therefore, core measure that excludes primary commodities cannot be a good indicator of inflation.

Joshi and Rajpathak (2004) used new series on WPI and constructed core inflation following exclusion and trimmed mean methods. They conclude that WPI excluding food and 20 percent trimmed mean satisfy most of desirable properties of the core measure.

India’s annual food and fuel inflation quickened in the week to April 10, putting upside pressure on the headline inflation and central bank to take action before its next policy review in July. The food price index rose 17.65%  in the 12 months to April 10, marginally higher than an annual rise of 17.22% .

Rising food and fuel prices risk fanning wider inflation as the companies look to pass on cost increases and could prompt the central bank to raise its key rates again ahead of its next policy review in July.The Reserve Bank of India (RBI) raised key interest rates by 25 basis points and warned price pressures were fast becoming a demand-driven phenomenon Reuters poll found a narrow majority of economists expect another increase in rates by the end of June, or before the RBI’s next quarterly review. Government officials, however, keen to keep the economy on track to exceed 8%  growth this year, said inflationary pressures were waning and played down the need for aggressive tightening.

Research methodology

Research methodology is a way to systematically solve the research problem. It is necessary for the researcher to know not only the research methods/techniques but also the methodology. Researchers also need to understand the assumptions underlying various techniques and they need to know the criteria by which they can decide that certain techniques and procedures will be applicable to certain problems and others will not. He has to specify very clearly and precisely what decisions he selects and why he selects them so that others can evaluate them also.

Research design is the arrangement of conditions for the collection and analysis of data for a research study, which will have relevancy and scientific approach to the study. The research design is Exploratory in nature. Opinion survey is used to find out the Impact of Food inflation on Indian consumers and Secondary data, have been used which are already gathered by others. The researcher has been collecting information through internet, finance journals and books

Techniques like Linear growth rate, correlation, Chi-square and trend analysis were been used to check out the future trend in food price and its impact on the common people.

In the above table food prices and non food prices are been rising year by year in which CPI rises by 1.75% and food group by 0.3% and non food group by 5.93% year by year..

The observed increase in food prices is not a temporary phenomenon, but likely to persist in the medium term. Food crop prices remains high in 2008 and 2009 and then begin to decline as supply and demand respond to high prices; however, they are likely to remain well above the 2004 levels through 2015 for most food crops.

There is a high relation between crude oil and food items. As the price of crude oil increases the prices of food items also increases.

There is high relation between GDP,CPI,PPI and WPI. As GDP increases year by year consumer,producer,wholesale price index also increases. Finding Answers to Food Inflation prompts consumers to cut down unnecessary expenditure

The younger generation feel that they would feel save by investing in pension fund then the fixed deposit rather than investing in shares and securities.

Suggestions

However, looking into the very near term, some ways to ease food prices would be:

Crackdown on hoarders and black marketers could help prevent prices from rising further. This step might not significantly reduce prices but will ensure that prices don’t escalate further.

The Government should allow the private sector to import and store the primary agricultural commodities at zero import duty. This will help ease the prices to a large extent.

The Government also needs to unload the inventory it has in its storage locations. This will have an immediate impact on the prices.

It is very important for the Government to try and control the inflation or at least try and ensure that these circumstances do not arise again in the future. There are several ways of curbing food inflation. It is only that the Government needs to be more proactive rather then being reactive.

Another important point to note is that a majority of Indians still don’t invest in equity markets. They prefer going for fixed deposits which are currently yielding only around 8-10% annually. On the other hand, inflation for an average household is easily around 12-15% (even education, health and housing cost are going up).

Save More Tomorrow” is a registered trade mark.

strategies are appropriate at younger ages 1) because young peoplehave more of their wealth in ‘bond-like’ human capital and can afford to take more financial risk, and 2)Because younger people have more flexibility to work more to make up for any shortfall created by losses in financial assets.

Conclusion

If things have not been taken care of nothing substantial can been done in order to overcome challenges of rising prices. Hoping that minimal food wastage, high crop productivity and increase in irrigated land would help to deflate the food prices. It is also said that if the INR 58,000 crore of food crop is not wasted on an annual basis, India’s deficits could be wiped out in less then a decade without any other measures being taken.

The study ensures that the future trend of food prices will be spiraling in near future to daunt the common people to cut back their spending on un-necessary items and concentrate on developing a strategy to save and to find new sources of income, early as viable. Regardless of the challenges faced throughout your life, a secure nest egg will do wonders for helping you cope the future price rise.