Dasgupta, Dipak and Dubey, R.N. and Sathish, R (2011): Domestic Wheat Price Formation and Food Inflation in India. Published in: Working Paper Series, MOF, India No. Working Paper No. 2, 2011 (15. May 2011): pp. 1-58.
Download (1MB) | Preview
Inflation, especially in food prices, has been persistently high in India during the past twenty four months. This has been a source of concern to policy-makers. Fortunately, food price increases are now starting to ease, after the major spike that occurred in the wake of the severe drought of 2009. However, there still remains concern that we: (a) need to better understand the factors that drive such spikes in key prices; and (b) design more effective policies to prevent such future price spikes. The main approach to understanding inflation and its drivers has typically rested, on the whole, in assessing aggregate macroeconomic (aggregate supply and demand) conditions, which then typically leads to consideration of macroeconomic and monetary) policies as the principal tool to deal with inflation surges. That may indeed be appropriate in most circumstances, but is often a blunt, sometimes costly instrument that can stifle growth, especially if price pressures arise from (temporary) supply constraints. Therefore, it may be important to complement an aggregate macroeconomic analysis of inflation with microeconomic analysis: to ascertain if inflation is being driven by specific price spikes in important food and non-food commodities, which has the potential to drive other commodity prices in a cost-push manner. This paper, on global wheat market developments, price transmission and impacts on Indian domestic markets, as well as an assessment of public policies to manage domestic prices, is part of a larger effort to improve our in-house (Department of Economic Affairs) research---to track, monitor and forecast fast-moving key macro-economic variables with potentially large consequences for public policy. We have begun to intensify our efforts. We are investing further systematically---to understand growth and inflation dynamics in the context of rising food inflationary pressures in India and worldwide. We are capturing more high frequency data, and applying quantitative modeling tools (as evident in our current Economic Survey). We take up wheat in this paper, because of recent rapid price rises globally, as well as domestically, and because it constitutes a major element of the overall wholesale and consumer food price inflation indices. Some aspects of the price formation and policy intervention processes in wheat are also likely to be structurally similar for other similar classes of important food items (such as rice), permitting broader insights. Our paper draws upon existing theoretical insights and modeling attempts in the literature; it is, nevertheless, useful to note three “biases” in our approach: (a) favoring analysis of short-term, high-frequency price formation (daily, monthly, or quarterly), versus alternative longer-term annual, structural models; (b) favoring simplified reduced form forecasting models that track high-frequency turning points well, over more elaborate models and tests of longerduration time-series data (which may tend to be more historical and backward-looking, and less useful for short-term forecasting); and (c) assessing current India-specific public interventions in greater detail, than in more general academic papers and models.
|Item Type:||MPRA Paper|
|Original Title:||Domestic Wheat Price Formation and Food Inflation in India|
|Subjects:||E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level; Inflation; Deflation
G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets
E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E37 - Forecasting and Simulation: Models and Applications
|Depositing User:||Dipak Dasgupta|
|Date Deposited:||15. Jun 2011 07:10|
|Last Modified:||12. Feb 2013 15:13|
Basu, Kaushik, 2011. India’s Foodgrain Policy: An Economic Theory Perspective. Economic & Political Weekly, January 29. Vol XLVI, No. 5. Pp 37-45.
Banerji, A. and J.V. Meenakshi, 2004. Buyer Collusion and Efficiency of Government Intervention in Wheat Markets in Northern India: An Asymmetric Structural Auctions Analysis. American Journal of Agricultural Economics 86 (1), February: pp 236-253.
Department of Food & Public Distribution, 2011. Note on Distribution of Foodgrains under Public Distribution System and Other Welfare Schemes, Ministry of Consumer Affairs and Food & Public Distribution, Government of India.
Dreze, Jean, 2008. The task of making the PDS work, The Hindu.
Economic Research Service, 2008. Model Implementation: Price Determination for Corn and Wheat, USDA, TB- 1878.
Economic Survey 2011, Ministry of Finance, Government of India.
Economic Research Service, 2007. Spatial Model of India’s Wheat and Rice Sectors, Indian Wheat and Rice Sector Policies and the Implications for Reform, USDA ERR-41.
Engel, R.F and Granger, C.W. J, 1987. Cointegration and Error Correction Representation, Estimation and Testing, Econometrica, 55(2) pp 251-276.
Food Price Watch, 2011. February, World Bank.
Frenkel, J. 2008. An Explanation of Soaring Commodity Prices, VoxEU.org: 25 March.
Gregory, A.W and B.E Hansen, 1996. Test for cointegration in model with regime and trend shifts, Oxford Bulletin of Economics and Statistics, 58: 555-560.
Gulati A., P. Sharma and S. Kehkon, 1996. The Food Corporation of India: Successes and Failures in Indian
Foodgrain Marketing, IRS-India Working Paper No. 18, Centre for Institutional Reform and the Informal Sector.
IFPRI, 2009. Miguel Robles, Maximo Torero and Joachim von Braun. When Speculation Matters, IFPRI Issue Brief 57, February.
Jha, S. and P. V. Srinivasan, 2006. India - Reforming Farm Support Policies for Grains, IGIDR.
Khan, Mohsin and Axel Schimmelpfennig, 2006. Inflation in Pakistan: Money or Wheat?, March, IMF Working Paper, WP/06/60.
Kaul, Sanjay, 2007. The PDS and Foodgrains-based Welfare Schemes in India: An Assessment. World Food Program (WFP) papers.54
Kaul, Sanjay, 2009. Are Our Agricultural Markets Competitive? Case for Reforms, National Collateral Management Services Limited.
Khera, Reetika, 2009. Right to Food Act: Beyond Cheap Promises, Economic & Political Weekly, July 18, Vol. XLIV No. 29. Pp. 40-44.
Laurenceson, J and J.Chai, 2003. Financial Reform and Economic Development in China, Cheltenham U.K., Edward Elgar.
Ministry of Consumer Affairs, Food & Public Distribution, 2008. Report of the Expert Committee to Study the Impact of Futures Trading on Agricultural Commodity Prices, Government of India.
McCalla, Alex, 2009. World Food Prices: Causes and Consequences. CAES Fellow’s Address, Quebec.
Pesaran, M.H and Y.Shin, 1995. Autoregressive distributed lag modeling approach to cointegration analysis, DAE Working Paper Series, No.9514 Department of Economics: University of Cambridge.
Pesaran, M. H, Y.Shin and R. J. Smith, 2001. Bounds testing approaches to the analysis of level relationships, Journal of Applied Econometrics, 16, pp 289-326.
Pesaran, M. H and B.Pesaran, 1997. Working with Microfit 4.0: Interactive Econometric Analysis, Oxford, Oxford University Press.
Persaud Suresh and Stacey Rosen, 2003. India’s Consumer and Producer Price Policies: Implications for Food Security, Food Security Assessment/GFA-14/February, Economic Research Service, USDA.
Pietola, Kyosti, Xing Liu and Miguel Robles, 2010. Price, Inventories and Volatility in the Gklobal Wheat Market, IFPRI Discussion Paper 00996, June, Markets, Trade and Institutions Division.
Rabbani, Golam, Ahasanul Haque and Abdul Khalek, 2009. Dynamic Model for Price of Wheat in Bangladesh. European Journal of Social Sciences, Vol 10., No. 2.
Roache, Shaun, 2010. What Explains the Rise in Food Price Volatility? May, IMF Working Paper WP/10/129.
Rantala, Sanna-Helena, Jukka Kola and Jyrki Niemi, 2010. Factors Affecting the World Cereal Prices---an econometric study, IANA Symposium, Boston, June.
Ramaswami, Bharat, 2002. Efficiency and Equity of Food Market Interventions, Economic & Political Weekly, March 23, pp. 1129-1135.
Swaminathan, Madhura, 2009. Neo-Liberal Policy and Food Security in India: Impact on the Public Distribution System. Conference Paper for international conference on ''The Crisis of Neo-liberalism in India: Challenges and Alternatives'' organised by Tata Institute of Social Sciences (TISS), Mumbai and International Development Economics Associates (IDEAs), 13 -15, March 2009.
Tuteja, Usha, 2008. Needed Long-Run Vision for Food Management in India, Agricultural Situation in India, pp 317-324.
Von Braun, Joachim and Maxim Torero, 2010. Alternative Mechanisms to reduce food price volatility and price spikes. Mimeo. IFPRI.
Von Braun, Joachim, Olivier von Ledebur and Maximo Torero, 2010. Futures markets---grain price volatility and global food security, IPC Seminar on Agricultural Price Volatility: Prospects, Challenges and Possible Solutions, May 26-27.