South Asia Economic Focus 2011: Food Inflation

September 9, 2011

" The poverty and nutritional impact of food price spikes on the poor is significant since they spend a larger fraction of their income on food than relatively better off individuals. "

Kalpana Kochhar

World Bank's South Asia Chief Economist

A new reports states that while South Asian countries have weathered the Global Financial Crisis (GFC) relatively well, and have emerged from their economic slowdowns, inflation has accelerated above comfort levels since the end of 2010.

According to South Asia Economic Focus, A Review of Economic Developments in South Asian Countries: Food Inflation, food prices in the region were the biggest contributor to Consumer Price Index (CPI) inflation, although core inflation (calculated by excluding food and energy items) has also accelerated in most countries.

The malnutrition status of poor households in South Asia was already precarious before the increase in food prices. The food price increase has further exacerbated this vulnerability.

Inflation rates in South Asia have risen significantly from low levels reached after the collapse of international commodity prices and economic slowdowns associated with the GFC. Average food price inflation in the region reached double digits in the end of 2010, beginning of 2011.

Focusing on the impact of policies and exogenous shocks on food prices, South Asian countries vary in the extent to which global food prices are passed on to consumers depending on their openness to global markets and policies on subsidies and price caps. In some countries therefore, domestic conditions determine prices. Sharp, often geographically concentrated price spikes are mostly weather related. While they are to a large extent caused by insufficient infrastructure, red tape also restricts food markets in some countries from discharging their resource allocation function smoothly.

In India and to some extent Pakistan, public procurement of staple grains places restrictions on the private sector and reduces its ability to manage temporary, geographically limited supply disruptions. The restrictions are partly responsible for high food inflation over the short term. On a more structural level, they distort incentives, and have high fiscal costs. For example, in India, farmers in areas where the government procures most of the wheat and rice production in India have little incentive to respond to structural shifts in demand and product diversification due to increased exposure to risks.