Inflation galloped to 42 months high of 7.83 per cent mainly on account of higher prices
for food articles like rice, milk, tea, vegetables and some manufactured products. The annual rate of inflation based on whole sale price index (WPI) has been rising despite fiscal and monitory measures taken by the government recently. While the government has banned export of certain commodity like non-basmati rice and pulses and reduced custom duties on various other items to rein in the inflation, the Reserve Bank of India (RBI) has raised the Cash Reserve Ratio (CRR) to suck access liquidity from the market.

These measures, however, much to the chagrin of the Government have not been able to control the unabated prices of food articles and the Hon’ble Prime Minister recently admitted that high food prices were making it difficult to manage inflation. Amongst essential items, cereal prices jumped seven per cent, vegetables were up 16 per cent while price of both milk and spices spurted eight per cent and dairy products were up nine per cent.

As expected, the retail inflation is turning out to be higher than the more widely followed inflation based on wholesale price index and, worryingly for the government, in the rural India as well. The point to point inflation rate based on consumer price index for agricultural labourers (CPI-AL) and rural labourers (CPI-RL) spurt to 7.9 per cent and 7.63 per cent respectively in March 2008. The gap between the rural retail price indices and the WPI is a normal phenomena. However, since calendar year 2007, CPI for agricultural labourers has been increasing at a much faster rate than WPI. The food group has weightage of 67 per cent in the CPI-AL index, compared to a weight of 27 per cent in the WPI index including primary food articles and manufactured food products. The latest data released by National Sample Survey Organisation (NSSO) on household expenditure shows that the most consumed food items by Indian household are rice, wheat, onion, potato, milk, arhar and edible oil. In the WPI, milk carries a weight of 4.37 per cent. The experts attribute this upward pressure on food prices to supply side-constraints and hardening of prices in the international markets. Prices have surged significantly in the past one year by 50-60 per cent across the world making imports expensive. Taking recourse to import of expensive food articles amounts to importing inflation.

In a study conducted by Associated Chambers of Commerce and Industry in India (ASSOCHAM) it has been observed that inflation is taking several essential food items like coffee, pulses, wheat, continents and spices, fruits and vegetables, eggs, fish, meat and milk out of the common man’s reach. The prices of these commodities have gone up considerably. The price of milk increased over seven per cent in the recent past, despite the country being the largest milk producer in the world. Increase in input, utility and services cost are the reasons that led to the rise in prices of milk. According to Mr. Dhoot, ASSOCHAM, the increase in cost of milk production and raw material had compelled to raise the procurement price. He said that the main factor for the rise in prices, is the low powder stock with dairies which are used for recombining into liquid milk in the lean season. Another reason for rise in the prices is rapid increase in the consumption of milk and its by-products amongst the household. He, however, was of the view that with the impeding government intervention, there will be little scope for manipulators to shoot up the prices of essential commodities like milk as these would be contained with markets becoming more stable.

Rise in food prices in India is essentially a result of supply shortfalls. With demand unchanged, lower supply leads to lower availability and concomitant price increases. In times when supplies are fine, food prices do not contribute to inflation. Other than food prices, inflation can pick up due to higher prices of oil as well as manufactured items. However, from a common man’s perspective, higher food prices makes him more conscious about inflation since he starts feeling the pinch almost on daily basis. This is precisely where the current bout of inflation has acquired demaging dimension. The euphoria over nine per cent GDP growth has made many overlook the supply situation with rising inflation, the worst affected will be the average consumers. With high food prices hitting hard at home, the situation won’t much better outside with purchasable also becoming dearer.

Government has taken a number of measures to contain the prices. India has like China and Russia taken the easy option of restricting food exports, setting limits on food prices or both. It includes curbing on non-basmati exports, extending ban on pulses for one more year and liberalizing import of edible oil and maize to some extent.

In India, growth and price usually tend to move together. Either they rise in tandem or remain moderate. The high inflation is going to have a serious impact on GDP growth. Global investment bank, Lehman Brothers have cut India GDP growth forecast for FY 08-09 from 8.3 per cent to 7.6 per cent down from 8.7 per cent forecasted earlier. In Lehman’s view, more policy measures to contain inflation are in store and will come at the cost of GDP growth, which is already facing headwinds from weakening foreign demand and tight monetary conditions.

Fortunately, the position in respect of milk and products continues to be favourable. There is no adverse impact of the rising prices. There is no denying the fact that the procurement price by both cooperative and private sector had to increase due to increase in the cost of production specially due to increase in the price of oil cakes and other ingredients going in the manufacture of compounded feed. However, such price increase in the production of milk and consequent increase in the procurement price has been absorbed by the processing plants and the milk unions and not passed on to the consumers. It is essential to distinguish between procurement and consumer price while estimating WPI. Indian Dairy Association (IDA) hopes that this situation of stabilized prices would continue for months to come and there is no need for Government of India to take any drastic step like imposing ban on the export of skim milk powder (SMP), casein or other milk products. In order to discourage export of milk products, GOI has already withdrawn export incentives and benefits to SMP, Casein and any other milk products under VKGUY Scheme and focus market scheme with effect from 17th April, 2008. It has also withdrawn benefit of DEPB on export of SMP, Casein and any other milk products. IDA has advised GOI to levy duty on export of groundnut cakes to increase availability for livestock feed. In order to alley the fear in the mind of consumer IDA has issued a press notification, a copy of which is placed with this note.

The milk production in India has shown a high growth rate during the last few decades. It may be recalled that the total milk production in India was no more than 20 million tonnes during 1950-51. The annual growth rate during the period 1950-51 to 1960-61 was 1.64 per cent and during the period 1960-61 to 1973-74 it was 1.15 per cent only. Thanks to the Operation Flood projects implemented by National Dairy Development Board, the Indian dairy sector has emerged as a major contributor to the agricultural growth. It had a growth rate of 4.5 per cent per annum during the period 1973-74 to 1980-81, and 5.48 per cent during 1980-81 to 1990-91 but 4.11 per cent only during 1991 to 2000-01. With the completion of Operation Flood projects the pace of investment in dairy sector slowed down. The allocation for dairy development by the central and state governments, diminished specially in the 9th and 10th Five Year Plans. The assistance from GOI under centrally sponsored scheme “Intensive Dairy Development Project” has gone to non-viable areas. While delicensing and the subsequent design to do away with the concept of milkshed were expected to boost private sector investment in dairying but it did not happen significantly. Furthermore, it appears to have made no concentrated efforts in investing on technological development of value added and innovative milk product. Consequently in the 10th five year plan, the growth rate of milk has been only 3 per cent per annum. Increasing production alone would rein in the inflation in milk and products. India has to handle supply side to contain the infltion demon.

The Working Group on Animal Husbandry & Dairying for the 11th Five Year Plan (2007-2012) set up by the Planning Commission has suggested increase in the investment in the dairy sector especially in the areas earlier not covered by the Operation Flood Projects and fixed a goal to achieve a growth rate of atleast 5 per cent per annum. The Working Group had suggested an outlay of Rs. 8000 crores including a budgetary outlay of Rs. 3200 crores, the balance being provided through institutional finance. Unfortunately much lower outlays have been approved which would not be enough to achieve the growth target of 5 per cent increase in milk production.

NDDB has prepared a National Dairy Plan (NDP) with an outlay of Rs. 17000 crores. The NDP strives to introduce accountability in the activities which can make a critical contribution to increasing productivity and has a focussed approach to achieve the ambitious annual, incremental addition of milk and substantially expand the infrastructure for procurement, processing, marketing and quality assurance. It is unfortunate that the NDP has not received the required support from the GOI to become a part of 11th Five Year Plan as suggested by the Working Group.

The International Dairy Federation has projected a favourable World Dairy Situation during 2007-08. Major growth is expected in Asia specially in India and China. The latest United States Department of Agriculture (USDA) annual review of the World Dairy Situation remains positive. It expects demand to stay “atleast stable” given that the world economy is expected to grow by 3.5 per cent and supply to continue to the restricted by draught in Australia and high feed prices elsewhere. SMP prices are in a “Correction Phase” and would settle at $ 3000 per tonne to $ 4000 per tonne. SMP exports in 2008 are forecast to decline by 2 per cent and the US is expected to export 275000 tonnes, 20000 tonnes, more than that in 2007. A focus strategy by India would be required to capture the world dairy markets instead of “Switch on - Switch off” export policies followed in the past.