Food Price Volatility and Its Implications for Food Security in India
Source: Flickr, Chris Brown

A recently published book by the Center for Development Research (ZEF) and the International Food Policy Research Institute (IFPRI), investigates Food Price Volatility and its Implications for Food Security and Policy. The book specifically investigates the causal relationships between the drivers of price volatility and extreme price events and their implications on food and nutrition security around the world.  The book also investigates the experiences and implications of national and international policies aimed at preventing and mitigating food price volatility. The book is broadly spilt into five sections that cover research into food price volatility in international markets and research on commodity and financial market linkages, investigate national and regional responses to food price volatility as well as the micro-economics of price risk, volatility and price shocks.

This book is extremely relevant to India as the livelihoods of many in India are directly impacted by food price volatility.  India is home to a third of the world’s poor as well as the largest number of malnourished people with the average Indian household spending around 45 per cent of their expenditure on food. Chapter one provides an overview of many of the themes covered in the book and highlights how food prices in most areas of the world and especially in India are a politically sensitive issue (e.g., increases in onion prices have changed election outcomes). As such, successive Indian governments generally respond rapidly to rising food prices. However, the chapter also highlights that facilitating trade liberalization in agricultural commodities across the world, especially in India and China as they have large grain stocks, has the potential of helping stabilize global food supply and improving global food security. This is because the larger the world market, the lower the price variations needed to balance demand and supply.

Chapter three focuses on the drivers of international food price spikes and volatility. The chapter identifies a number of root causes that have driven recent price shocks including oil price shocks, extreme weather events exacerbated by global warming and the high and increasing demand for food crops in emerging markets, in particular India and China. This is relevant to India considering that it imports most of its oil (on which its food system and wider economy is dependant), it is susceptible to global weather shocks and has a growing population with changing eating habits. The chapter also illustrates how domestic food export restrictions and bans by countries including India, Thailand, China and Russia in response to rising global food prices have exacerbated global price rises. The chapter suggests that while these domestic interventions are effective in preventing steep domestic price rises, they drive global food prices higher.

Chapter five investigates the impact of increasing food prices on poverty levels. The chapter illustrates that the poor in India are particularly susceptible to food price rises compared to most other countries. Focusing on the effect of food price changes on individuals and households, the chapter shows how increases in food prices in most countries force a greater number of net-buyers of food into poverty than the number of net-sellers of food that are lifted out of poverty. A study noted there illustrates how a 100 percent increase in food prices in India causes a 25.8 percent increase in poverty rates in India compared to 13 percent globally. Through reviewing global policy responses to reducing food price increases chapter six argues that effective global responses are largely missing and suggests several proposals. These responses would be especially beneficial to countries such as India that experience high rates of food inflation.

Chapter thirteen investigates in which instances food price volatility in world grain markets is transmitted to local markets in developing countries. Evidence from this study finds that food price volatility is linked to the importance of trade in that commodity to the country in question. Considering that imports and exports of cereals are relatively small compared to domestic production in India, the transmission of global food price volatility to domestic markets is generally estimated to be minor and the chapter’s findings support this in the case of rice in India. However, the study records an anomaly for the price of wheat in India, finding that international price volatility is transmitted to domestic markets despite the fact that its international wheat trade is equivalent to just 2 percent of domestic production.

Chapter fourteen, India’s Food Security Policies in the Wake of Global Food Price Volatility, investigates the impact of recent global food price volatility during the price spike in 2007-2008 and 2011 on food security in India.  The chapter provides an overview of how the Indian government regulates food price volatility. On the one hand, the government actively supports cereal production by providing price support mechanisms for paddy and wheat using minimum support price and by input subsidies which has helped support large increases in domestic cereal production over the past decade. The government also supports consumers by ensuring that prices of wheat and rice remain low and stable through its public distribution system.

During the global price increases in 2007/2008 and 2011 the Indian government imposed export restrictionw on wheat and a complete ban on common rice exports. As a result of these measures, India was able to contain its domestic cereal inflation to about 6 per cent in 2007–2008. Similarly, India managed to avoid the more severe price spikes of 2010–2011. The chapter also illustrates that India managed to avoid the troughs in global markets. This indicates that the government’s actions were successful in containing global price volatility. The chapter does illustrate that in the long-run as export restrictions were relaxed, international and domestic price indices converge.  

The chapter draws three key lessons from the food crisis for India. Namely, that price incentives are important for Indian farmers, and that raising the minimum support prices raised overall cereal production which have allowed it to supply large amounts of cereals to its domestic markets in years of volatility, and also allowed it to increase exports (in years when export bans were not implemented). Second, India is not insulated from global events and that export bans offer only a temporary respite for domestic food prices as they converge in the long run. Third, agriculture could be a large source of foreign exchange for the country as the large increases in production over the past decade has allowed it to increase exports significantly. Over the past 3 years, India exported a total of approximately 62 million metric tonnes of cereals, equivalent to around 30 billion dollars. In conclusion, the chapter highlights that despite these macro-level successes in stabilizing prices the situation at the micro-level continues to look bleak as India continues to experience high levels of malnutrition and stunting. As such, the chapter argues that India needs to continue pursuing current policy reforms such as the National Food Security Act, which focuses on the right to food, and on fostering further productivity increases.

The book can be accessed here.

By Bas Paris

Photo credit:Flickr, Chris Brown