Food prices have been rising rapidly in the last few months. According to the Consumer Price Index (CPI), the inflation rate in food prices was only 1.4 percent in the September 2018. A year later in September 2019 the rate of increase in food prices has spiraled up to 14.3 percent with the old CPI and to 15 percent according to the new CPI. The big increase has been in the last quarter. In June 2019, the rate of inflation in food prices was still single digit at 8.2 percent.
Increasingly also the contribution to the overall rate of inflation is coming from food prices. In September 2018, the contribution was only 22 percent. Since then it has gone up to over 40 percent. Consequently, anti-inflationary policies will have to focus more on controlling the rise in food prices.
There is need also to emphasize that inflation in food prices has a very regressive impact. The share of consumption expenditure devoted to food by the lowest income quintile of the population is as high as 50 percent, while for the top quintile it is much lower at 29 percent.
The fundamental implication of higher food prices is that of rising poverty. Low income households will increasingly fall below the poverty line. There is, in fact, a big clustering of households close to the poverty line in Pakistan. Most of these households will now slip below the poverty line. A conservative estimate is that over 4 million more people will become poor in 2019-20. Consequently, the number of poor people in Pakistan could rise to 75 million.
The other major implication of the big increase in food prices and the resulting decline in calorie intake is the rise in the number of stunted children in the country and increase in the incidence of wasting among children. According to the Pakistan Demographic and Health Survey of 2017-18 the prevalence of stunting and wasting among children aged up to 5 years is already very high at 37 percent and 23 percent respectively.
There is need, therefore, for the Federal and Provincial Governments to give the highest priority to bring about relative stability in food prices. But before appropriate measures can be taken there is a need to understand clearly the causes of inflation in prices of different food items and then formulating appropriate policies and actions to eliminate these causes.
The roots of the problem are difficult to diagnose because the import content of food expenditure is somewhat lower than that of non-food expenditure. The fall in the value of the rupee is one of the main reasons why Pakistan is experiencing double-digit inflation currently. Therefore, the rate of inflation should be lower in the case of food prices. Instead, it is higher. What then are the domestic factors which are contributing to the inflation in food prices?
Two food items, viz., sugar and chicken, are produced within the country. However, the big surprise is the high rate of inflation in the prices of these items of 35 percent in the case of sugar and 64 percent in chicken. The support price for sugarcane to farmers has remained unchanged at Rs 180 to Rs 182 per 40 kg. As such, there is no major cost push element in sugar price. The export price of sugar is also relatively low and subsidy has been offered to facilitate export.
Therefore, there is no immediate or obvious explanation for the big increase in sugar prices of 35 percent. The only visible contribution is the rise of 9 percentage points in the sales tax on the product. As such, there is the likelihood of the emergence of a monopoly or cartel in the marketing of sugar in the country. Similarly, there is no obvious explanation for the 64 percent upsurge in the price of chicken. Both cases ought to have been subject to investigation by the Competition Commission of Pakistan.
The imported component of inflation is dominant in the case of three food items only, namely, vegetable ghee, pulses and tea. Prices of these items have gone up by 16 percent, 29 percent and 9 percent respectively. The rupee price of imported palm oil, the major input into the production of vegetable ghee, has gone up by only 4 percent. Yet the price of vegetable ghee has increased by 16 percent.
Another apparent mystery is the explosion literally in prices of vegetables. The price of onions has gone up by as much as 96 percent, that of potatoes by 30 percent and of fresh vegetables by 25 percent. The only vegetable where the price has remained relatively stable or fallen is tomatoes with a decline of 21 percent. Vegetables have, in fact, made a disproportionate contribution to the on-going inflation in the country. Their combined weight in the food price index is 9 percent but their combined contribution to the overall inflation in food prices is as high as 31 percent.
An in-depth examination of the trend in vegetable prices reveals the presence of a ‘cob-web’ in these prices. This is the year-to-year big fluctuation in prices. As of last September of 2018, prices of vegetables had been falling. The price of onions had declined by as much as 53 percent, that of potatoes by 20 percent and of fresh vegetables by 10 percent. Consequently, farmers apparently moved out of production of these vegetables. The resulting decline in supply is probably the major factor behind the big jump in prices of these items currently.
The primary mechanism for reducing the big fluctuation in vegetable prices is to offer support prices at the time when prices are likely to fall. This is the policy being followed in India. This will lead to elimination of the ‘cob-web’ in prices. A similar policy may also need to be followed in the case of some fruits.
The other area of concern is the increase of 12 percent in the price of the staple food, wheat flour (atta). The procurement price of wheat has remained unchanged at Rs 1300 per 40 kgs. However, the production of wheat in 2018-19 was lower by almost one million tons compared to the initially estimated level. There have also been some attempts to export wheat. The export price has averaged Rs 1524 per 40 kgs. Therefore, there is the risk of a shortage in the availability of wheat in the domestic market. The ECC has taken the appropriate decision to stop the export of wheat. A similar decision needs to be taken in the case of export of vegetables.
Other factors which have contributed generally to food prices are, first, the rise in transport costs due to increase especially in the price of HSD oil of 19 percent due to the devaluation. Second, the escalation in the gas tariff has led to a rise in fertilizer prices like that of urea by 25 percent.
What are the other policy measures and steps which need to be taken to stop the on-going high inflation in food prices? First, as an immediate relief step the transfer from the Benazir Income Support Program to poor families must be increased by at least 15 percent. Second, local price controls in fruit and vegetable retail markets have to be made much more effective. Economic Intelligence Units should be established in each province to monitor the supply and demand position of major commodities and suggest remedies in the case of emerging gaps.
Third, as highlighted earlier, the emergence of monopolies and cartels must be effectively regulated by the Competition Commission of Pakistan. Fourth, the Government must implement a plan of a big expansion in the number of outlets of the Utility Stores Corporation.
In conclusion, it is unfortunate that the people of Pakistan have been hit severely by ‘stagflation’ in the first year of the PTI government. The expectations of a big positive change following the change of government are changing to one of despair. The relevant agencies must begin to play a more effective role in controlling inflation, especially in food prices, and preventing further erosion of jobs in the country.
(The author is Professor Emeritus in BNU and former Federal Minister)
(This news/article originally appeared in Business Recorder on October 8th, 2019)