CII Economy Matters, September-October 2013

ECONOMY MATTERS
Volume 01

September-October 2013

10
12

14

6

8

2

4

16

18

Food Inflation in India

No. 9

FOREWORD
Underlying risks in the global economy have not abated and there is still good reason to be
worried about the future growth prospects of large economies. This was the clear message
from IMF's second bi-annual outlook released in October 2013. Taking cognizance of the
risks, the multilateral agency pared its global growth forecast by 0.3 per cent to 2.9 per cent
for the current year. The slower-than-expected growth this year is mainly attributable to
the sluggish growth in the emerging economies. However, notwithstanding the dim
prospects of emerging economies, they still continue to account for the bulk of global
growth. Growth in the advanced economies has turned around to some extent, but the
durability of the recovery process remains a concern, noted IMF. In this regard, the
resolution of the debt crisis in US, in the nick of time, came as a huge relief.
Coming to the domestic front, the resurgence of current account deficit (CAD) to 4.9 per
cent of GDP during April-June 2013 quarter from 3.6 per cent in the last quarter clearly
indicates that the economy continues to remain vulnerable to the external environment.
However, going forward, the positive turn in exports evidenced during the past two
months along with early signs of revival in the US economy would bring down CAD. A
favourable policy environment such as lowering the cost of credit for exporters and
providing priority sector status for export finance to improve cost competitiveness in
international markets would help to further improve exports. Other indicators of economic
health like industrial production continued to exhibit stress. In order to lift industrial
growth, we urge the government to take immediate action to bring demand back into the
economy. Easing monetary policy alone is not sufficient. This must be supplemented with
government action to revive investment and stimulate demand. There is a crying need to
expedite project clearances, implement the national manufacturing policy, indicate
timelines for implementation of industrial and freight corridors and provide a competitive
market for the coal and mining sectors.
High food inflation has been one of the key drivers of overall WPI inflation since the last
many years. High food inflation, in turn, has been primarily driven by supply-side shocks.
The shocks arose from a shortfall in food-grain and non-food grain commodities
(vegetables, fruits, protein-based foods - pulses, milk, eggs, meat and fish). Sharp increases
in international prices of fuels and commodity too were a trigger. The concerns over food
inflation are driven by the fact that an average household in India still spends almost half of
its expenditure on food, with the poor spending as much as 60 per cent. With the National
Food Security Act on the anvil, it will be ever more important to rein in food inflation. There
are several policy prescriptions suggested in order to contain high food prices like
liberalising agricultural markets, developing advanced supply chains and, developing
integrated agri-intelligence hubs amongst other measures.

Chandrajit Banerjee
Director-General, CII

1

SEPTEMBER-OCTOBER 2013

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ECONOMY MATTERS

2

CONTENT

Inside This Issue
Executive Summary .................................................................04
Overview of the World Economic .....................................05
Outlook Projections

Global Trends

Cover Story

06

IMF Predicts a Grim Outlook for the
Global Economy

Domestic Trends

High food inflation is the worst
form of hidden tax often inflicted
on poor people. Supply-side
shocks have led to high food
inflation in the last few years. The
shocks arose from a shortfall in
food-grain and non-food grain
commodities (vegetables, fruits,
protein-based foods - pulses, milk,
eggs, meat and fish). We discuss
the various aspects of food
inflation to explore its hows and
whys coupled with recommended
policy prescription to tame it in
this month's Special Article.

09

Current Account Deficit, IIP, Inflation
CII-BOS

Taxation

16

Base Erosion and Profit Shifting

Sector in Focus

18

Food Processing

Special Article

23


Special Feature

35

Impact of Government Moves on
Fertilizer Industry

Economy Monitor ................................................................... 39

3


EXECUTIVE SUMMARY
economy. Driven by factors such as growing per capita
income, large availability of raw materials, changing
lifestyles, and conducive government policies, the sector
has shown robust growth performance in the recent
years. The FP sector in India, however, has yet to go a long
way in realizing its full potential, which in turn will also help
in ensuring remunerative prices to farmers and affordable
prices to consumers, thereby resulting in a win-win
situation to both. Given the huge unexploited potential of
agriculture in the country and rapidly growing per capita
income leading to ever expanding demand for agriculture
and processed food products, not only is India capable of
fulfilling its own food demand, it has vast potential to
become top five food exporter over the next two decades.
This in turn, will also make the Indian food business an
exciting investment destination for global players. The
need of the hour is to trigger the process of
transformation in the sector towards realizing its full
potential in meeting the growing demand and thus in the
process creating income, employment and, export
earnings for the country.

Global Trends
Highlighting the underlying global risks still prevailing on
the horizon, International Monetary Fund (IMF) in its
second bi-annual outlook released in the first week of
October 2013, pared its global growth forecast by 0.3 per
cent to 2.9 per cent. The slower-than-expected growth in
the current year is mainly attributable to the sluggish
growth in the emerging economies. Growth rates in
emerging markets and developing economies are now
down some 3 percentage points from 2010 levels, with
Brazil, China, and India accounting for about two-thirds of
the decline. The largest economy in the group, China is
expected to now grow by 7.6 per cent in the current year
as compared to 7.8 per cent in the July forecast. This
slowdown will reverberate across developing Asia, where
growth is expected to remain between 6.25 and 6.5 per
cent in 2013-14. In sum, the latest round of forecasts from
IMF clearly indicates that the glimmer of hope seen in its
April review seems to have faded somewhat.

Domestic Trends

Special Article

The latest data for the Indian economy released for the
first-quarter of 2013-14 shows that the current account
deficit (CAD) widened to 4.9 per cent of GDP from 3.6 per
cent in the previous quarter. Widening of CAD in the first
quarter was due to a sharp increase in gold imports. On
BoP basis, there was a slight drawdown in foreign
exchange reserves of US$0.3 billion in the first quarter as
against an accretion of US$0.5 billion in same period of
last year. Going forward, however CAD is expected to
exhibit an improvement due to several policy measures
announced in the last few months, like curb on gold
imports coupled with moderating imports due to
slowdown in domestic demand. In other domestic
developments during the month, index of industrial
production (IIP) decelerated to 0.6 per cent in August
2013 as compared to 2.8 per cent in the previous month
and 2.0 per cent in the same period last year. Contraction
in manufacturing output during the month was the key
driver behind the deceleration in overall industrial output.
WPI inflation on the other hand, accelerated to 7-month
of 6.5 per cent in September 2013 as compared to 6.1 per
cent in the previous month mainly because of higher
vegetable prices. Low growth and high inflation has given
rise to a stagflationary type of environment in the
economy currently.

India has been facing high and persistent inflation in the
last five years except in the intervening year of 2009-10.
High growth during this period facilitated a steep rise in
incomes, which in turn pushed up the purchasing power of
the population. WPI inflation averaged 7.5 per cent in the
five year period, which is way higher than the RBI's
comfort threshold of 5 per cent. One of the main drivers of
inflation during this period has been the high food prices.
Total food inflation (primary and manufacturing) has
averaged 10.3 per cent during the period under
consideration. To be sure, in the current fiscal, even
though overall WPI inflation has averaged 5.3 per cent in
the first five months (April-August), food inflation has
remained high at 9 per cent. Further, food inflation has
remained above the psychological 10 per cent mark in 26
months out of 60 months in the last five years, while it has
remained above 9 per cent mark for more than two-thirds
of the period. This clearly highlights the fact that food
inflation in the past few years has remained not only high,
but persistent as well. The concerns over food inflation
are driven by the fact that an average household in India
still spends almost half of its expenditure on food, with the
poor spending as much as 60 per cent. Such price spikes
adversely impacts the household budget allocation for
food and non-food items.

Sector in Focus: Food Processing
Food processing (FP) is an emerging sector of the Indian

ECONOMY MATTERS

4

GDP FORECAST

Overview of the IMF World Economic Outlook Projections

Year over Year (%)
GDP at market prices

Difference from July
2013 WEO Update

Projections
2011

2012

2013

2014

2013

2014

World Ouput

3.9

3.2

2.9

3.6

-0.3

-0.2

Advanced Economies

1.7

1.5

1.2

2.0

0.0

0.0

United States

1.8

2.8

1.6

2.6

-0.1

-0.2

Euro Area

1.5

-0.6

-0.4

1.0

0.1

0.0

- Germany

3.4

0.9

0.5

1.4

0.2

0.1

- France

2.0

0.0

0.2

1.0

0.3

0.1

- Italy

0.4

-2.4

-1.8

0.7

0.0

0.0

- Spain

0.1

-1.6

-1.3

0.2

0.3

0.1

-0.6

2.0

2.0

1.2

-0.1

0.1

United Kingdom

1.1

0.2

1.4

1.9

0.5

0.4

Canada

2.5

1.7

1.6

2.2

-0.1

-0.1

Emerging & Developing Economies

6.2

4.9

4.5

5.1

-0.5

-0.4

Russia

4.3

3.4

1.5

3.0

-1.0

-0.3

China

9.3

7.7

7.6

7.3

-0.2

-0.4

India*

6.3

3.2

3.8

5.1

-1.8

-1.1

ASEAN-5

4.5

6.2

5.0

5.4

-0.6

-0.3

Brazil

2.7

0.9

2.5

2.5

0.0

-0.7

South Africa

3.5

2.5

2.0

2.9

0.0

0.0

Japan

Source: IMF, WEO Update, October 2013
Note: * For India, data and forecasts are on a fiscal year basis. At factor costs, GDP forecasts stand at 4.25 per cent and
5 per cent in FY14 & FY15 respectively

5


GLOBAL TRENDS

IMF Predicts a Grim Outlook for the
Global Economy

second half of 2012. It should pick up to 3.6 per cent in
2014, but that is still weaker than the IMF's previous
forecast of 3.8 per cent. The slower-than-expected
growth in the current year is mainly attributable to
sluggish growth in emerging economies. The differing
growth dynamics between the major economies are
projected to come with subdued inflation pressure, for
two reasons. First, the pickup in activity in the advanced
economies will not be sufficient to mitigate the large
output gaps. Secondly, the commodity prices have
fallen amid improved supply and lower demand growth
from key emerging market economies, notably China.

H

ighlighting the underlying global risks still
prevailing on the horizon, International Monetary
Fund (IMF) in its second bi-annual outlook released in
the first week of October 2013, pared its global growth
forecast by 0.3 per cent to 2.9 per cent. As per the IMF,
global growth averaged just 2.5 per cent during the firsthalf of 2013, which is about the same pace as in the

IMF Scales Down Global Growth Forecasts (Growth, %)
7.8

7.6
5.6
3.8

3.1

2.9
1.6

1.7

-0.6
July'13

Oct'13

World

Source: IMF Outlook, October 2013

ECONOMY MATTERS

July'13

Oct'13

July'13

US

-0.4
Oct'13 July'13

Euro Area

Oct'13

China

Note: India's forecasts are for fiscal year and at market prices

6

July'13

Oct'13

India

IMF's new assessment of medium-term prospects in
large emerging economies - China, India, Brazil and
South-Africa is the most sobering one. Having been
optimistic from 2010 onward that emerging Asia could
grow faster than its pre-2008 trend, IMF is now sceptical
about its growth prospects. Notwithstanding the dim
prospects of the emerging economies, they continue to
account for the bulk of global growth. According to the
Fund, the blame lies not with the policies of the US or
Europe, but delays in structural reforms that differ from
country to country.

Emerging market and developing economy growth
rates are now down some 3 percentage points from
2010 levels, with Brazil, China, and India accounting for
about two-thirds of the decline. According to IMF
forecasts, the group is expected to grow by 0.5 per cent
points lower at 4.5 per cent in the current year, while
next year the growth is expected to stand at 5.1 per
cent. The largest economy in the group, China is
expected to now grow by 7.6 per cent in the current
year as compared to 7.8 per cent in the July forecast.
This slowdown will reverberate across developing Asia,
where growth is expected to remain between 6.25 and
6.5 per cent in 2013-14. The forecasts assume that
Chinese authorities do not enact major stimulus and
accept somewhat lower growth, consistent with the
transition to a more balanced and sustainable growth
path. India's economy will grow by 3.8 per cent this
fiscal year (April-March) as per the IMF, lower than the
rate at which Sub-Saharan Africa's economy will expand
(5 per cent). To be sure, the numbers are based on GDP
estimates at market prices which IMF prefers. At factor
cost, the fund expects India's growth to come at 4.25
per cent in the current fiscal and about 5 per cent in the
next fiscal.

Growth in the advanced economies has turned around
to some extent, but as per the IMF, the durability of the
recovery process is a concern. The fund expects that the
impulse to global growth would come mainly from the
US, where activity will move into higher gear as fiscal
consolidation eases and monetary conditions stay
supportive. GDP growth of US at 1.6 per cent in the
current year is expected to be lower by 0.1 per cent than
the July forecast, while next year it is expected to come
at 2.6 per cent. In the Euro Area, business confidence
indicators suggest that activity is close to stabilizing in
the periphery and already recovering in the core
economies. Consequently, IMF raised its forecast for
the 17-country Euro Area to a contraction of 0.4 per cent
this year compared with a 0.6 per cent decline in July
forecast. It now expects an expansion of 1 per cent next
year instead of 0.9 per cent three months ago. While
Italy and Spain are expected to shrink this year, Spain's
forecast contraction of 1.3 per cent is an improvement
from a 1.6 per cent prediction three months ago. As per
the IMF, the region's financial industry still remains
fragile and next year's planned assessment of the
banks' balance sheets by the European Central Bank
"provides a critical opportunity to put the system on a
sounder footing.

In sum, the latest round of forecasts from IMF clearly
indicates that the glimmer of hope they saw in their
April review seems to have somewhat faded as new
challenges have emerged on the horizon. The belowpar performance by the emerging economies led by
China is mainly responsible for this. The Fund in no
uncertain words clearly indicated that global growth is
still weak, its underlying dynamics are changing, and the
risks to the forecast remain to the downside.

passed the measure on a 81-18 vote, and the Republicancontrolled House followed suit 285 to 144, clearing the
way for President Obama to sign it into law. The deal,
however, offers only a temporary fix and does not
resolve the fundamental issues of spending and deficits
that divide Republicans and Democrats. It funds the
government only until January 15th 2014 and raises the
debt ceiling until February 7th 2014.

Last Minute Deal Averts a
Major Default by the US
Capping weeks of political brinkmanship that had
unnerved global markets, the US Senate and House of
Representatives each passed the spending measure
after Republicans dropped efforts to link the debt
legislation to changes in President Barack Obama's
signature healthcare law, hours before the October 17th
deadline. The Democratic-led Senate overwhelmingly

Technically, the US$16.69 trillion debt ceiling was hit on
19th May, 2013. The US Treasury has been using
extraordinary measures to keep going. If Congress

7


a major feature of 'Obamacare' (officially Patient
Protection and Affordable Care Act).

hadn't raise the so-called "debt ceiling", then the
Treasury estimated that it can only stretch out the
money until 17th October. At which point, it could run out
of money to pay the interest on US government debt,
and the US would technically be in default if it missed an
interest payment. However, in a last minute deal
reached hours before the 17th October 2013 deadline was
expiring, both the houses passed the legislation to avoid
a damaging default on government debt, in order to pull
back the economy from the brink of a historic debt
default that could have threatened financial calamity.

o Meanwhile, the 'Senate' (Democrat-majority)
opposed all moves of the 'House' to delay
Obamacare by a year.
The US is not new to the government shutdown, though
it is not frequent. The first government shutdown
happened in 1976. Since then, there have been 17
occasions when there was no agreement on the funding
of government spending. The last time was 17 years ago
during the Clinton administration, which also saw the
House and Senate divided over spending priorities. The
current shutdown would have a fairly big impact on the
economy. Economists estimate that a two-week
shutdown could cut US GDP growth by 0.3 percentage
points and one that lasts three-to-four weeks could cut
growth by as much as 1.4 percentage points.

Earlier in the month, the two houses of the US Congress the Democrat-led "Senate" and the Republican majority
"House of Representatives" had failed to agree over
extending funding for the government's non-essential
expenditures before the October 1 deadline, resulting in
US government shutdown for more than two weeks.
Before the start of the new Budget year 2013-14, the
Congress was required to pass appropriation bills to
fund the 'discretionary' spending programmes.
However, political disagreement saw failure to pass the
required bills. The two houses of the Congress could not
agree on the following terms of funding extensions:

The US Government consequently ordered a shutdown
of its various non-essential services. Consequently,
around 800,000 employees of the Federal Government
(out of total 2.1 million) went on unpaid leave. The
'discretionary' or 'non-essential services' were affected.
However, essential services like, military, federal police,
air traffic control, postal services continued unaffected.

o The US 'House of Representatives' (Republicanmajority) wanted a one-year delay in the activation of

Other Global Developments During the Month
-

China's economy grew by 7.8 per cent in the third quarter, picking up from 7.5 percent in the second quarter
and compared with 7.7 percent in the first. The latest expansion was the strongest since 7.9 percent in the
fourth quarter of 2012. Growth was fuelled by firmer foreign and domestic demand that lifted factory
production and retail sales.

-

Higher food prices pushed up China's consumer inflation to 3.1 per cent in September, up from 2.6 per cent in
August as the government tried to keep to keep an economic recovery on track.

-

Headline inflation in UK stood at 2.7 per cent in September 2013, unchanged from August 2013. Core inflation,
however, was higher at 2.2 per cent during the reporting month, as against 2.0 per cent in the previous two
months.

-

Business sentiment in Japan rose to its highest level in almost six years in the September quarter, the closelywatched Bank of Japan's Tankan survey showed. The headline index of sentiment among big manufacturers
rose to plus 12 in the three months to September from plus 4 in the June quarter.

-

In a bid to cut Japan's mounting domestic debt, Prime Minister, Shinzo Abe, announced the decision to raise
sales tax by 3 percentage points to 8 per cent from April of next year, the first increase since 1997. To cushion
the blow, he unveiled a package to be compiled in early December, which a Cabinet Office statement showed
will include public works spending and tax breaks encouraging companies to boost capital spending and
wages.

ECONOMY MATTERS

8

DOMESTIC TRENDS

Rise in Gold Imports Widens Current Account
Deficit in 1QFY14

US$14.5 billion, which translates into 3.2 per cent of GDP.
On BoP basis, there was a slight drawdown in foreign
exchange reserves of US$0.3 billion in the first quarter as
against an accretion of US$0.5 billion in same period of
last year. Going forward, CAD is expected to exhibit an
improvement due to several policy measures
announced in the last few months, like curb on gold
imports coupled with moderating imports due to
slowdown in domestic demand. As per the Ministry of
Commerce and Industry, exports in the second quarter
(July-September 2013) grew by 5.1 per cent while
imports fell by 1.8 per cent. This resulted in narrowing of
the trade deficit to US$29.9 billion as compared to
US$50.2 billion in the first quarter.

T

he latest data released for the first-quarter of 201314 shows that the current account deficit (CAD)
widened to 4.9 per cent of GDP from 3.6 per cent in the
previous quarter. Widening of CAD in the first quarter
was due to a sharp increase in gold imports. As per RBI,
by excluding the increase in gold imports of US$7.3
billion in first quarter of 2013-14 over the corresponding
quarter of the preceding year, CAD would work out to

Current Account Deficit Reaches Alarming Levels
35

8.0

6.7

7.0

30
5.4

25
20

3.6

4.0

22.6

18.1

17.1

21.8

Source : RBI

3.0
2.0
1.0

5
0

5.0
4.0

32.6

15
10

6.0
4.9

0.0
1QFY13

2QFY13

3QFY13

4QFY13

1QFY14

CAD (as a % of GDP) RHS

CAD (US$ billion)

9


quarter of 2012-13, primarily led by a steep rise in gold
imports in the first two months of the quarter. Within
the invisible category, while net services exports
improved (i.e. US$16.9 billion in first quarter of 2013-14
as compared to US$15.0 billion in first quarter of 2012-13)
transfers (US$ 16.7 billion) and income (-US$4.8 billion)
were broadly flat as compared to same period last year.
As a result of wider trade deficit and slow recovery in the
transfers and income component of the invisible
segment, CAD widened in the reporting quarter.

Merchandise trade deficit (BoP basis) widened further
to US$50.5 billion in first quarter of 2013-14 from US$43.8
billion a year ago. Component wise, merchandise
exports declined by 1.5 per cent on y-o-y basis to
USD$73.9 billion in the first quarter as compared to
US$75.0 billion in the same period of last fiscal. The
muted exports sector performance primarily reflects
the subdued global growth prospects. In contrast,
merchandise imports recorded an increase of 4.7 per
cent at US$124.4 billion in the reporting quarter as
against a decline of 3.9 per cent at US$118.9 billion in first

Current Account Deficit Widens in 1QFY14
(US$ billion)

Q1FY13

Q4FY13

Q1FY14

Trade Balance

-43.8

-45.6

-50.5

- Exports

75.0

84.8

73.9

- Imports

118.9

130.4

124.4

26.8

27.5

28.7

- Services

15.0

17.0

16.9

- Transfers

16.7

15.7

16.7

- Income

-4.9

-5.2

-4.8

Current Account Balance

-17.1

-18.2

-21.8

Current Account Balance as a % of GDP

-4.0

-3.6

-4.9

Invisibles

Source : RBI

dwindled to net outflow of US$245 million, while net
overseas borrowing by banks increased by 57.5 per cent
to US$4.7 billion in first quarter of 2013-14. Outflow of
portfolio investment occurred essentially from the third
week of May 2013 after the US Fed indicated the
possible tapering of quantitative easing.

In the capital account, foreign investment improved to
US$3 billion in the first quarter of the current fiscal as
against US$1.9 billion in the same quarter last year. The
improvement was entirely on account of strong FDI
flows. Net foreign direct investment surged sharply by a
huge 71 per cent on an annual basis to US$6.5 billion in
the reporting quarter. Portfolio investments meanwhile

Capital Account Remains Unchanged
(US$ billion)

Q1FY13

Q4FY13

Q1FY14

- Direct Investment

3.8

5.7

6.5

- Portfolio Investment

-1.9

11.3

-0.2

Loans

6.0

9.2

3.6

Banking Capital

9.4

-3.6

10.3

Other Capital

-0.7

-2.1

0.3

Capital Account

16.5

20.5

20.5

0.5

2.7

-0.3

Overall BoP
Source: RBI

ECONOMY MATTERS

10

Outlook
The resurgence of current account deficit to 4.9 per cent of GDP during April-June 2013 quarter from 3.6 per cent in
the last quarter is essentially on account of the burgeoning trade deficit and indicates that the economy continues
to remain vulnerable to external environment. However, going forward, with the positive turn in exports evidenced
during the second quarter along with early signs of revival of the US economy and strengthening of the economies
of both Japan and China, CAD during the current fiscal is expected to come down.

Industrial Growth Decelerates in August 2013
Springing a negative surprise, index of industrial
production decelerated to 0.6 per cent in August 2013 as
compared to 2.8 per cent in the previous month and 2.0
per cent in the same period last year. The main driver
behind the subdued growth during the month was the
de-growth witnessed in the manufacturing sector.
However, the moderation of industrial output in August
was surprising as the eight infrastructure industries
(which constitutes close to 38 per cent of the total

index) had posted a 7-month high growth rate of 3.7 per
cent during the month on the back of good
performance by power, cement, steel and fertiliser
sectors. The sequential momentum declined too as the
seasonally-adjusted month-on-month series slid into
the negative territory in August 2013. On a cumulative
basis, for the first four months of the fiscal, IIP growth
stood at a paltry 0.1 per cent.

IIP Growth Moderates in August 2013
SA m-o-m%

y-o-y%
10

5

Aug/13

Jun/13

Apr/13

Feb/13

Dec/12

Oct/12

Aug/12

Jun/12

-5

Apr/12

0

Source : CSO

On the sectoral front, manufacturing output declined by
0.1 per cent in August 2013 after registering a relatively
robust growth of 3.2 per cent in the previous month. As
per the industry classification, of the 22 industries, 14
showed positive growth, mainly led by electrical
machinery and wearing apparel, while negative growth
was seen in sectors such as radio, TV & communication
equipment and furniture. Rebound of manufacturing
sector output is very critical for aiding the pickup in

overall industrial growth. In this respect it's important
for the RBI to cut interest rates at the earliest and for
government to ensure the fast track implementation of
National Manufacturing Policy amongst implementing
other measures. Meanwhile, regulatory and
environmental issues continued to plague the mining
sector, as it contracted by 0.2 per cent in August 2013.
Electricity sector remained on a strong footing as it
grew by 7.2 per cent during the month as compared with
5.2 per cent in the previous month.

11


On the use based front, after growing in double-digits in
July 2013, capital goods once again slipped into the
negative territory in August 2013. The sector's output
contracted by 2 per cent as compared to 15.6 per cent
growth in the previous month. The sector's poor
performance in the month is worrisome as its output
declined on the back of a low base of last year. Notably,
industrial production output excluding capital goods
sector stood at 1.0 per cent during the month. Consumer
goods continue to remain in negative territory for the
fourth consecutive month, primarily on account of

consumer durables. Overall consumer goods sector
showed de-growth to the tune of 0.8 per cent in August
2013 as compared to -0.5 per cent in the previous month.
The continued poor performance by consumer durables
since last the last three quarters, wherein it remained in
the negative territory, is a matter of concern as it is
widely regarded as a proxy for consumption growth.
Non-durables on the other hand remained in the positive
territory, albeit showing a moderation in output in
August 2013 as compared to the previous month.

Sectoral Growth
Apr-Aug
Weight

Aug-12

Jun-13

July13

Aug-13

FY13

FY14

1000.0

2.0

-1.8

2.8

0.6

0.2

0.1

Manufacturing

755.3

2.4

-1.7

3.2

-0.1

0.0

-0.1

Mining

141.6

-0.3

-4.3

-2.5

-0.2

-1.7

-3.4

Electricity

103.2

1.9

0.0

5.2

7.2

4.8

4.5

456.8

3.0

-1.5

1.5

1.5

2.8

0.5

88.3

-4.4

-5.8

15.6

-2.0

-14.4

0.8

Intermediates

156.9

2.7

1.3

3.1

3.6

1.0

2.3

Consumer Goods

298.1

3.6

-1.9

-0.5

-0.8

3.2

-1.6

- Durables

84.6

1.0

-10.4

-8.9

-7.6

5.1

-11.0

- Non durables

213.5

6.0

5.7

7.0

5.0

1.6

6.6

General

Use-Based
Basic
Capital

Source : CSO

Outlook
The lower-than-expected industrial growth in the month of August 2013 is worrying as it follows healthy
performance by the core sector output. Contraction in manufacturing output during the month was the key driver
behind the deceleration in overall industrial output. In this regard, CII, while fully appreciating the RBI's compulsions
to keep inflation under check, urges RBI to start reducing the interest rates to revive demand. However, easing
monetary policy alone is not sufficient. It would need to be complemented with policy measures on the part of
government in the form of easing the procedural reforms by ensuring faster clearances of industrial projects. The
Cabinet Committee on Investment (CCI) which was constituted by the government to achieve the latter has not
shown the desired results so far.

ECONOMY MATTERS

12

Inflation Continues to Remain a Worry
WPI inflation accelerated to 7-month of 6.5 per cent in
September 2013 as compared to 6.1 per cent in the
previous month mainly because of higher vegetable
prices. This is the fourth straight month that wholesale
inflation has remained above the Reserve Bank of India's
comfort zone of 5 per cent. Indicating the upward
sequential momentum, the seasonally-adjusted monthon-month series climbed to 1.2 per cent during the
month. The July reading was also revised up to 5.85 per
cent versus prior estimate of 5.79 per cent, mainly on an

upward revision in primary articles inflation to 9.7 per
cent from 9.0 per cent previously. Manufactured
products inflation, however, has been revised down to
2.6 per cent from 2.8 per cent previously. To be sure,
consumer prices based inflation (CPI) too quickened to
9.84 per cent from 9.52 per cent during the month.
Rising food prices have continued to remain the key
driver behind the jump in both WPI and CPI inflation in
the last few months. We analyse this component in
detail in this month's Special Article.

Both WPI & CPI Inflation Remain High
%
12

10.9

10
8

9.9
7.3
6.5

6

WPI y-o-y

Sep/13

Aug/13

Jul/13

Jun/13

May/13

Apr/13

Mar/13

Feb/13

4

CPI (Combined) y-o-y

Source : Office of Economic Advisor & CII calculations

Primary inflation increased to 13.5 per cent in August
2013 as compared to 11.7 per cent in the previous month.
This was mainly attributable to the spike in food inflation
to 18.4 per cent as against 18.2 per cent in August-2013.
The major increase in the food inflation came on account
of a rise in inflation in vegetables to 89.4 per cent as
compared to previous month's reading of 77.8 per cent.
More specifically, a massive 323 per cent rise in onion
inflation drove bulk of the rise in vegetable inflation
during the month. Meanwhile, the structural inflation in
protein rich-items particularly eggs, meat and fish
slipped to 13.4 per cent as against 18.9 per cent in the
previous month. Non-food inflation increased to 5.2 per
cent as against 1.1 per cent in the previous month. Within
non-food articles, the inflation in fibres jumped to 19.9
per cent as against previous month's reading of 10.5 per
cent while it continued to remain very low in case of
oilseeds.

very favourable base effect. This has been mainly
contributed by an increase in non-administered fuel
component during the month. Inflation in petrol has
tripled to 9.6 per cent as against 3.2 per cent in August2013, while inflation in diesel remained high at more than
20 per cent. Going forward, we expect fuel inflation to
moderate due to stabilisation witnessed in global crude
prices and the Rupee.
Manufacturing inflation marginally increased to 2.0 per
cent in August as compared to 1.9 per cent last month.
Non-food manufacturing which is widely regarded as
the proxy for demand-side pressures in the economy
too increased marginally to 2.1 per cent during the
reporting month as compared to 1.9 per cent last month.
In contrast, manufacturing food inflation which consists
of processed food products remained relatively
subdued at 1.6 per cent as compared to 1.7 per cent in the
previous month. Inflation under this head has fallen
sharply in the last few months from 7.3 per cent at the
start of the fiscal to below 2 per cent currently. This is

Fuel inflation moderated to 10.1 per cent in August 2013
as against 11.3 per cent in the previous month amidst a

13


reflective of the low pricing power of the producers as
despite a steep in raw material prices (which primarily

consist of food articles); they are not able to pass the
price rise to the end-consumers.

Sectoral Components of Inflation
April-Sept
Weight

Sept-12

July13

Aug-13

Sept-13

FY13

FY14

General

100.0

8.1

5.9

6.1

6.5

7.6

5.3

Primary

20.1

9.2

9.7

11.7

13.5

10.3

8.2

- Food

14.3

8.1

12.3

18.2

18.4

10.4

11.0

- Non-Food

4.3

10.4

5.7

1.1

5.2

8.8

5.3

- Minerals

1.5

13.9

0.5

-7.2

0.0

12.3

-3.5

14.9

12.0

11.4

11.3

10.1

10.5

9.2

1.1

6.7

1.2

3.2

9.6

10.5

-0.9

4.7

8.9

26.3

27.6

20.1

5.0

23.8

65.0

6.5

2.6

1.9

2.0

5.6

2.9

- Food

10.0

10.3

4.3

1.7

1.6

6.9

5.2

- Non-food

55.0

5.7

2.3

1.9

2.1

5.4

2.4

Fuel
- Petrol
- High Speed Diesel
Manufacturing

Source : Office of Economic Advisor

Outlook
The continued rise in both WPI and CPI inflation has complicated the task of RBI as it meets this month-end to
announce its second quarter monetary policy review. However one needs to remember that the bulk of the rise in
inflation is attributable to jump in primary food inflation which is generally transient in nature and is expected to
cool-off in the next few months, given the positive impact of a good monsoon this year. Under this backdrop, we
would urge RBI to cut rates in the policy review, as the economy is in urgent need of fresh stimulus in the form of
lower lending rates.

CII Business Confidence Index Falls Sharply in Q2FY14
In an indication of continuing slowdown in the second
quarter of current fiscal, CII Business Confidence Index
(CII-BCI) fell by 5.5 points to its lowest ever value to 45.7
for the July-September 2013 quarter from 51.2 in the
previous quarter. The dip below the psychological 50level mark does not augur well for the Indian industry as
it mirrors the underlying weakness in the economy and
has dashed any hopes of growth having bottomed out.
The 84th Business Outlook Survey is based on the
responses from 190 companies.

improvement expected in the growth of agriculture
output in the current year, achieving a GDP growth of
around 5.5 per cent should be possible, if reforms efforts
are sustained by the government and RBI eases the
monetary stance going forward.
Indicating that the economy is moving towards a
situation of stagflation, respondents said that inflation
has emerged as a major area of concern. A majority (47
per cent) of the respondents maintained that WPI
inflation is expected to lie above 7 per cent for the
current fiscal. However, by leveraging on a good
monsoon, there is an ample scope for lowering the
inflationary expectations by easing the distribution
chain of food items.

Most of the survey respondents (40 per cent) expected
GDP growth to decelerate below 5 per cent in the
current fiscal. However, a large proportion of 38 per
cent of the respondents expect GDP growth to range
between 5.0-5.5 per cent for the year. With a significant

ECONOMY MATTERS

The survey reveals that majority of respondents (57.3

14

CII's 84th Business Outlook Survey is based on sample
survey of firms covering all industry sectors, including
micro, small, medium and large enterprises from
different regions. The survey also enumerated
responses across industry groups both in public and
private sectors engaged in manufacturing and services
sector.

per cent) expected capacity utilization to be below 75
per cent in the second quarter, while 69.1 per cent
expected their company's spending on capacity
expansion to have either declined or remained unchanged in the comparable period. Majority of the
respondents (53.9 per cent) in the CII survey expected
current account deficit to lie in a range of 4.0-5.0 per cent
of GDP, while 32.6 per cent expected it to exceed 5 per
cent of GDP in the current fiscal. Not surprisingly,
therefore, majority of the respondents (57 per cent)
expected the rupee to lie above 62 per US$ by endMarch 2014.

CII-BCI is calculated as a weighted average of the Current
Situation Index (CSI) and the Expectation Index (EI),
with greater weight given to EI as compared to CSI.
These indices are based on questions pertaining to
performance of the economy and respondent's firm.
Respondents are asked to rate the current and expected
performance on a scale of 0 to 100. A score above 50
indicates positive confidence while a score above 75
would indicate strong positive confidence. On the
contrary, a score of less than 50 indicates a weak
confidence index.

In the survey, high current account deficit, expectations
of tapering of QE by US Federal Reserve leading to
capital outflows and weak domestic sentiments were
cited as major contributors for the weakening of the
rupee.

CII Business Confidence Index
66.2

66.7

62.5
53.6

Q3*
FY11

Q4
FY11

Q1
FY12

Q2
FY12

48.6

Q3
FY12

55.0

52.9

Q4
FY12

Q1
FY13

51.3

Q2
FY13

49.9

51.3

Q3
FY13

Q4
FY13

51.2
45.7

Q1
FY14

Q2
FY14

Know Your Facts: Marginal Standing Facility (MSF)
Reserve Bank of India reduced the Marginal Standing facility (MSF) rate by 50 bps to 9 per cent on October 7, 2013.
This follows the reduction in MSF by 75 bps earlier in September 2013. Though traditionally the spread between
Repo and MSF was fixed at 100 bps, the same now stands at 150 bps. MSF was brought in under the new operating
procedure of monetary policy supplementing the repo and reverse repo rates. Earlier, RBI tried to keep the main
money market rates under its LAF corridor of Reverse Repo and repo. This now shifted to Reverse Repo and MSF as
corridors with Repo rate in the corridor. Banks are free to borrow any amount under the repo rate as long as they
maintain the Statutory Liquidity Ratio (SLR). But in case any bank needs extra funds, it can get the same under the
MSF, however at a higher rate. As a part of its liquidity tightening measures announced in July 2013, RBI had hiked
the MSF by 200 bps to 10.25 per cent, without touching the key repo rate. Under normal times, banks usually borrow
at the repo rate, but in this period, since RBI capped borrowing under repo at 0.5 per cent of NDTL, banks had no
option but to borrow under the MSF. Hence, the recent decision of the Central Bank to ease the MSF rate is a bid to
smoothen the liquidity requirements for the banks as the Rupee has now appreciated from its all-time lows.
Additionally, with the credit deposit (CD) ratio rising to its all time high of 78.3 on 20th September 2013, there was a
crying need to lower money market rates and ease liquidity, which was precisely what the RBI did.

15


TAXATION
Guest Article

Base Erosion and Profit Shifting
By Rohinton Sidhwa, Partner and Swati Goyal, Manager, Deloitte Haskins & Sells

have a responsibility towards their shareholders to
legally reduce the taxes, the same however do not
alleviate government's fear around:
n
Distorted

competition and issues with fairness:
Businesses which operate cross border and are able
to reduce tax expense on account of such planning,
are likely to have competitive advantages over
enterprises that operate mostly at domestic level.

G

one are the days when taxpayers were worried
about double taxation of cross-border income and
would make representations to authorities to draw a
legislative framework that would prevent such
'injustice'. The tables seem to have turned and the
governments today are vexed about 'double nontaxation'. Google "UK tax avoidance" and you would
know what we mean.

n
Modern

tax administration's dependence on
voluntary compliance: If the perception that
multinationals are dodging taxes continues, it would
encourage the opinion that taxes are only paid by the
naïve and would undermine the practice of voluntary
compliance by other taxpayers.

Multinationals these days are being accused of lowering
their tax bill by shifting their revenues to low tax
jurisdictions like Bermuda, Ireland etc. The structures
that are set up or the schemes that are employed are
perfectly legitimate, therefore the reference to 'tax
avoidance' and not 'tax evasion'. Critics may allege
'immorality'; however there is nothing illegal about tax
avoidance, as it involves working well within the
framework of tax laws. Hence, the problem.

n
Detrimental

for developing countries: Tax revenue
is critical to foster long-term development in such
countries.

From the UK's Parliament's Public Accounts Committee
report criticizing the UK tax avoidance practices of giant
global firms to US President Obama stating incomeshifting behavior by multinationals as a serious concern,
the issue is grabbing not only media attention, but has
also reached political levels. G20 leaders and BRIC
countries are expressing concern, and so is the

A leading internet company's Chairman defended his
company's tax strategies arguing that the corporates

ECONOMY MATTERS

16

Organization for Economic Co-operation and
Development (OECD). In light thereof, the OECD
released its initial report in February 2013 to present
aspects relating to Base Erosion and Profit Shifting
(BEPS). Another report was released in July 2013 which
presents a more comprehensive 'action plan' to address
the issue of BEPS by identifying the actions needed,
setting deadlines to implement these actions and
identifying the resources needed and the methodology
to implement the actions.

overcome this concern, as BEPS may be technically
legal, it is not intended by domestic policy.
The recent Action Plan Report issued by the OECD sets
out 15 areas for further work, some quite specific viz.:
n
addressing

ecommerce situations and examining
circumstances where significant digital presence
exists in a country without the corresponding
taxable presence;

n
amending

the OECD model convention to eliminate
undue tax advantages arising from hybrid
instruments and entities;

One would often come across terms such as 'tax
havens', 'low-tax jurisdiction', 'double Irish with a Dutch
sandwich strategy' when dealing with BEPS. Simply put,
BEPS refers to shifting of profits by corporates in ways
that erodes the taxable base to locations where they are
subject to a more favorable tax treatment - i.e. moving
revenues to where they are taxed at lower rates and
expenses to where they are relieved at higher rates.

n
phishing loopholes in CFC rules,
n
making

recommendations to limit base erosion via
interest deductions;

n
amending

transfer pricing guidelines to prevent
profit shifting by relocating intangibles or
contractually transferring risks and capital within the
group etc.

As mentioned above, multinationals are not breaking
the rules. The issue is with the design of the current tax
regulations and the arms' length standards, and not the
conduct of multinational companies. Recent years have
witnessed globalization and liberalization at a pace
unprecedented. Free movement of capital and labor,
shift of manufacturing bases from high-cost to low-cost
locations, removal of trade barriers, technological and
telecom developments, and increasing importance of
risk management and IPR have resulted in a shift from
country-specific operating models to global models.
BEPS strategically takes advantage of the gaps in tax
rules or tax arrangements between different countries
such that it results in:

while others more generic, like:
n
revisiting

disclosure requirements by taxpayers - of
their tax planning schemes as well as within the
transfer pricing documentation;

n
making

the dispute resolution mechanism more
effective;

n
establishing

methodologies to collect and analyze
data on BEPS etc.

Though changes may be expected to be brought about
to the OECD Model Tax Convention and new guidelines
are expected to be introduced, the same may not be
directly effective since bilateral tax treaties will need to
be amended. If undertaken on a treaty-by-treaty basis,
the sheer number of treaties in effect may make the
process very lengthy. The OECD therefore suggests
developing a multilateral instrument which can be
signed by various countries and the tax treaties of such
signatory countries would stand amended accordingly.

n
minimizing

tax in a foreign operating or source
country by shifting gross profits via trading
structures or reducing net profit by maximizing
deductions for the payer;

nor no tax withholding at source;
low
nor no tax for the recipient; and
low

The OECD has also outlined the deadlines for carrying
out these actions, depending upon the nature thereof
and the likely effort involved. Once the detailed work is
carried out (last deadline set for December 2015), its
effectiveness would really depend upon acceptance,
adoption and implementation by various countries.

n of the low-taxed profits at the ultimate parent
no tax

level.
Therefore, it is difficult for a particular country to
address this issue single-handedly. The OECD Reports
suggest tax reforms in the form of a comprehensive
internationally coordinated solution to successfully

( Views expressed in the article are those of the authors and not necessarily of CII.)

17


SECTOR IN FOCUS

Food Processing

Food Processing Sector - Status and
Characteristics
India is at an inflection point of food consumption with
the domestic demand likely to grow at 4 per cent per
annum in the next 15-20 years. This growth could be even
higher across high value food items like animal products,
fruits & vegetables, and processed food. Vast
opportunities, thus, exist for the food processing sector
in India that needs to be tapped with right set of policies
aimed at unlocking the supply potential of the sector.

F

ood processing (FP) is an emerging sector of the
Indian economy. Driven by factors such as growing
per capita income, large availability of raw materials,
changing lifestyles, and conducive government policies,
the sector has shown robust growth performance in the
recent years. Connecting agriculture to manufacturing,
this sector plays a critical role in value addition to the
agriculture produce and creating income, employment
and exports earnings in the process. The sector also
contributes in reducing the waste of agricultural
produce, enhancing the shelf life of agricultural
products, and stimulating the nutritive capacity of food
items. The FP sector in India, however, has yet to go a
long way in realizing its full potential, which in turn will
also help in ensuring remunerative prices to farmers and
affordable prices to consumers, thereby resulting in a
win-win situation to both. Providing food security to
large and growing population and managing food
inflation are other critical components attached with
the healthy performance of the sector.

ECONOMY MATTERS

The growth and contribution of food processing sector
has been encouraging in recent years, thus setting the
tone for an improved performance of the sector going
forward. As compared to the average overall GDP
growth of 8 per cent during 2007-08 to 2011-12, FP sector
has expanded by an average of 8.6 per cent per annum
during the period. Its growth stayed far ahead of
manufacturing and agricultural GDP, indicating the
rising prominence of the sector in overall economy.
Around 65 per cent production of FP sector comes from
the organized segment. Unorganized segment, on the
other hand, contributes significantly in term of
employment generation with 3/4th of the total persons
engaged in the industry (64.6 lakh persons) belonging to

18

this segment alone. Organized FP industry in India
registered an average growth of 11 per cent per annum
during 2007-08 to 2011-12, much higher than 4 per cent
registered by unorganized segment. Showing FP's

vulnerability to economic slowdown and high inflation,
the sector's growth as per the IIP (Index of Industrial
Production) stood at mere 2.6 per cent in the last fiscal.

Average GDP Growth (%) during 2007-08 to 2011-12
8.6

8.0

7.7

3.8

GDP

GDP Agri

GDP Manuf.

GDP-FP

Source: Ministry of Food Processing Industry

Average Share of FP(%) in Broad GDP Aggregates during 2007-08 to 2011-12
10.4
8.9

3.7
1.4

Agriculture

Manufacturing

Industry

Overall GDP

Source: Ministry of Food Processing Industry

Share of Registered and Unregistered FP

IIP growth (y-o-y%)
15.4

Un Regd FP
35.4%

8.6

Regd FP
64.6%

8.2

7.0

3.0

2.9

2.6
1.3

2010-11

2011-12

FPI (72.8)

Source: Source: Ministry of Food Processing Industry

Manf (755.3)

2012-13

General (1000)

Note: Numbers in brackets indicate the weights

19


1.1

Exports of FP sector have been growing at an annual
growth of 20.4 per cent for five years ending 2012-13.
With US$36 billion of exports in 2012-13, the sector
contributed 12 per cent to India's total exports.
However, export basket of the sector is concentrated in
just a few products. Guargum constitutes the largest
share (10.9 per cent), followed by rice Basmati (9.9 per
cent), Marine products (9.6 per cent), Meat &
preparations (9.1 per cent), Oil meals (8.1 per cent),
Spices (7.8 per cent), Non-Basmati rice (7.3 per cent),
and Wheat (5.4 per cent).

access stems from three reasons - lack of adequate farm
gate infrastructure (such as storage centres and primary
processing centres), fragmented land holdings which
makes it difficult for companies to source enough
produce of consistent quality, and restrictive policies
that limit farm gate access. The lack of adequate
infrastructure for processing, cold storage, etc limit the
benefits of organized play from reaching the
consumers.

Showing growing business interest, investment in FP
sector grew by an average rate of 21.7 per cent per
annum between 2006-07 to 2010-11. The sector accounts
for around 5 per cent of the total bank credit
outstanding to all industries. The FDI inflow in the
sector, which is permissible for all the processed food
products up to 100 per cent on automatic route except
for items reserved for Micro and Small Enterprises
(MSEs), has grown nearly 6 times from a figure of US$70
million in 2007-08 to US$401.5 million in 2012-13.

India has made good progress in exports, going from Rs
90,000 crore in 2006 to Rs 1.35 lakh crore in 2012.
However, import dependency on critical items such as
pulses and edible oils remains high. This is despite the
fact that India is the third largest producer of food after
China and USA and has a sizeable presence in several
crops that are relevant to both the export market and
the industry. It is also close to some of the largest food
importing regions, eg., the Middle East, China, and South
East Asia. Low yield and poor infrastructure limit
competitiveness, particularly from farm gate to markets
and ports. Exports have suffered due to the lack of
active support and sponsorship. Poor infrastructure for
primary processing, packing, grading, and inadequate
cold chain storage have further held back Indian
exports.

Unfulfilled export potential

Issues Facing the Food Processing
Sector
Unrealized potential in food processing
Food processing industry GDP in India accounts for 10
per cent of agricultural GDP. The size of food processing
industry in India in 2010 was just Rs 66,000 crore (at
2004-05 prices), which much below the potential.
Under-performance of the sector can primarily be
attributed to factors like low demand created for
processed food and poor investment in infrastructure.

Slowing down of yield improvement
While the overall yield in agriculture continues to
improve, there has been no scalable success story of
substantial yield improvement. The few successes have
been small, sporadic, and led by the private sector. In
fact, yield increase has actually slowed down across
crops over the past few decades, which is a cause for
concern since yields for these crops have still not
attained their optimum.

Low presence in high value categories
The level of participation of private players in the food
and agriculture sector has been low in India. Despite
shifting consumer preferences, the sector is hardly
present in high value categories. Overall industry
participation in the sector remains low, with few large
companies and limited participation from international
players. Very few instances of corporate participation
have shown their ability to create win-win solutions for
all stakeholders by transforming value chains, improving
yield and reducing wastage. These successful pilots have
failed to achieve scale. The lack of scale is primarily due
to structural barriers in farm gate access and the lack of
infrastructure to link the benefits of the value addition
to the consumers. Systematic difficulties in farm gate

ECONOMY MATTERS

There are several possible reasons for this lackluster
yield performance. First, the quality of research in this
area has been inadequate. Second, insufficient
technology has been used. Third, extension services to
the farmers are not entirely effective. These have
translated into a lack of adoption of best practices
method among the farmers, which in turn has adversely
affected yields. For example, a recent Planning
Commission report estimated that of the one million
extension workers required, India has an extension
workforce of just 1000,00 (10 per cent).
The other main cause is the use of outdated practices
and inputs. A large number of Indian farmers still depend

20

on the monsoon season for irrigation. Only 35 to 40 per
cent of cultivated land in India is irrigated and there is
minimal penetration of new water saving technologies
like drip irrigation. Outdated chemicals continue to be
used for fertilizer and pesticides. A paucity of
investment in seed technology affects the supply of
good quality seeds.

as an agriculture and high value food powerhouse: A
new vision for 2030", published in April 2013.

1. Accelerate sustainable yield improvement
In order to improve the yield on sustainable basis, two
new initiatives are necessary. First, instituting a
"National Agricultural Technology Mission" and for
thatIndia needs a focused programme to create high
yielding, disease resistant varieties of seeds across
crops, well marketed farmer education and distribution
programmme to encourage them to adopt high quality
seeds; promote relevant mechanism and modern
irrigation practices; catalyze the development of
modern technology; align farming techniques to best
practices and encourage private participation in
ensuring world class farming practices. Second,
instituting a "National Agricultural Sustainability
Mission" - Objective of this mission should be to dissolve
the supply side barriers and provide farmers with
seamless linkages to scientific inputs and best practices
to realize the true potential of agriculture.

Low farmer-industry interactions
Farmer-industry interactions in India continue to be low
due to restrictive policies and general hesitance of the
companies to engage with the farmers.

Strengthening the Food Processing
Sector
In order to transform the food processing sector to
meet its true potential and also achieve the vision of
converting India into a global food and agricultural
powerhouse, we present the summary of 5 points
agenda suggested by CII-McKinsey report titled "India

Yield Increases (%) Across Crops have Slowed Down
39

30
27

26

24

15
12

11
9
2

Wheat

Rice

Soyabean
1990-99

Potato

Maize

2000-10

Source: CII-McKinsey Report (2013)

government should promote organized agri-input
retail, which can deliver suitable technologies and farm
inputs to the farmers. Third, the government may also
consider enabling other land aggregating measures
such as long term leases for select crops, which will help
in promoting long term investment. Fourth, the
government could encourage corporate farming in
select high value agriculture areas, particularly for
exports.

2. Promote win-win farmer-industry interaction
There are various emerging models of successful
interactions. The first is funding the growth of Farmer
Producer Organisation and Farmer Producer
Companies that allow small farmers to use collective
strength and increase their competiveness by offering
them easier access to credit and technology, reducing
cost of distribution and providing greater marketing
power and negotiations capacity. Second, the

21


For promoting farmer industry interactions, there is also
need for instituting a favorable policy regime that
improves agricultural marketing mechanism. An overall
policy regime should enable farmers to decide to whom
and where they can sell their produce.

the development of the pan India infrastructure. The
new authority will create a national blueprint for viable
agricultural infrastructure that will reduce operating
costs for agricultural and foods products and then either
build it themselves, or oversee the creation of this
infrastructure through the appropriate contracting and
Special Purpose Vehicle (SPV) model.

3. Scale up food processing exports
To promote large scale production of food items,
demand (domestic as well as exports) potential needs to
be harnessed by creating new segments of branded
food. This can be done by promotions, campaigns and
advertisements to illustrate how consumers could
benefit.

Additionally, "Mega Demand Servicing and Export
Hubs" could be created that will allow companies to
procure, store, process, and export from a single
location. Such hubs will help put in place the necessary
forward and backward linkages, along with the storage
infrastructure and provide for end-to-end facilities
across the value chain.

To promote exports, the government could launch a
"National Agricultural and Food Export Mission" in
select categories. The Mission, set up by the
government in association with private players, could
enable (a) identifying the right products and markets;
(b) investing in market creation; (c) updating evacuation
and access infrastructure such as cold chains and ports;
(d) adhering to internationally acclaimed benchmarks
for quality standards.

5. Nurture the next generation of agri-business
technocrats and entrepreneurs
In this regard, it is necessary to scale up agricultural
extension services through private participation and
new infrastructure creation. Initiatives such as
introducing PPP in extension services, encouraging
private sector to participate in farmer training, and
creating dedicated institutes providing vocational
training in extension services would greatly help.

Attracting 'private capital and world class expertise"
would also be critical. Global food majors can be
attracted to India though targeted campaigns, such as
road shows, and by creating a conducive investment
environment.

There is also a need for creating a network of four to five
new world class food and agricultural universities and
research laboratories to stimulate agriculture research,
and they can be branded as the "Indian Institute of
Agriculture and Technology".

4. Invest selectively in infrastructure with private
participation

Further, setting up agri-business focused angel and
venture capital funds as a PPP initiative between central
and state governments and private capital providers will
go a long way in creating a generation of agri entrepreneurs who will lead the next wave of growth.

Among other critical measures, there is a need for
creating a "National Farm Gate to Market Infrastructure
Authority" (similar to the National Highway Authority of
India) that will have the authority and be accountable for

Conclusion
Given the huge unexploited potential of agriculture in the country and rapidly growing per capita income leading
to ever expanding demand for agriculture and processed food products, not only is India capable of fulfilling its
own food demand, it has vast potential to become top five food exporters over the next two decades. This in turn,
will also make the Indian food business an exciting investment destination for global players. The need of the hour
is to trigger the process of transformation in the sector towards realizing its full potential in meeting the growing
demand and thus in the process creating income, employment and, export earnings for the country.

ECONOMY MATTERS

22

SPECIAL ARTICLE


This persistence in food inflation is a matter of concern
for the policy makers as it affects the common man most
profusely. In this article, we analyse the various aspects
of food inflation- trying to answer the how's and why's
coupled with the required policy prescription to tame
the same.

I

ndia has been facing high and persistent inflation in
the last five years except in the intervening year of
2009-10. High growth during this period facilitated a
steep rise in incomes, which in turn pushed up the
purchasing power of the population. The surge in
demand triggered inflationary pressures, particularly in
sectors where supply lagged behind. WPI inflation
averaged 7.5 per cent in the five year period, which is
way higher than the RBI's comfort threshold of 5 per
cent. One of the main drivers of inflation during this
period has been the high food prices. Total food inflation
(primary and manufacturing, henceforth referred to as
food inflation in the article) has averaged 10.3 per cent
during the period under consideration. To be sure, in the
current fiscal, even though overall WPI inflation has
averaged 5.3 per cent in the first five months (AprilAugust), food inflation has remained high at 9 per cent.

Trends in Food Inflation
Food inflation in India started spiralling-up since mid2009 onwards, reaching a peak in February 2010. The
spill-over effects were visible in other sectors too and
2010-11 witnessed overall inflation rate crossing the
psychological threshold of 10 per cent for five months in
a row. Further, food inflation has remained above the
psychological 10 per cent mark in 26 months out of 60
months in the last five years, while it has remained above
9 per cent mark for more than two-thirds of the period.
Moreover, food inflation has remained higher than
overall WPI inflation for most periods during the last five
years, except for only two intervening periods from April
08- October 08 and February 11- February 12.This clearly
highlights the fact that food inflation in the past few
years has remained not only high, but persistent as well.

23


Trends in Overall and Food Inflation (y-o-y%)

22
18
14
10
6

Wholesale Price Index: Avg

Jun-13
Aug-13

Feb-13
Apr-13

Oct-12

Dec-12

Jun-12
Aug-12

Feb-12
Apr-12

Oct-11

Dec-11

Jun-11
Aug-11

Feb-11
Apr-11

Oct-10

Dec-10

Jun-10
Aug-10

Feb-10
Apr-10

Oct-09

Dec-09

Jun-09
Aug-09

Feb-09
Apr-09

Oct-08

Dec-08

Apr-08

-2

Jun-08
Aug-08

2

Total Food (Prim + Manu)

Source: Office of Economic Advisor and CII calculations

Food component is present in both primary articles and
manufactured products. Together, primary food articles
and manufactured food products account for about 24
per cent weight in overall WPI. As we can see from the
below graph, the main drivers of food inflation in the last
five years have been mainly primary food articles. The

inflation rate has been high in manufactured food
products too (see table), but given their relatively low
contribution to overall food inflation, we dwell on only
inflation in primary food articles in our analysis. Amongst
food articles, inflation in food grains (cereals & pulses),
fruits & vegetables, milk and eggs, meat & fish has been
at the forefront.

Drivers of Food Inflation
100%
Others
Salt

80%

Tea & Coffee Processing (TC)
Oil Cakes

60%

Edible Oils
40%

Sugar, Khandsari and Gur
Bakery Products

20%

Grain Mill Products
Canned, Preserved & Processed Food

0%

Dairy Products
2008-09

2009-10

2010-11

2011-12

-20%


ECONOMY MATTERS

24

2012-13

Apr-Aug
FY14

Condiments & Spices

Break-Up of Food Inflation

Weight

Average
inflation
(2008-09 to
2012-13)

Average
Inflation
April-August
FY14

Primary Food Articles

14.33

11.4

11.0

Food Grains

4.09

9.7

12.6

Fruits & Vegetables

3.84

9.8

13.9

Milk

3.24

12.8

4.1

Egg, Meat & Fish

2.41

16.2

12.9

Condiments & Spices

0.57

9.1

13.6

Others

0.18

13.5

-0.2

Manufacturing Food Products

9.97

8.2

5.4

Dairy Products

0.57

8.7

0.4

Canned, Preserved & Processed Food

0.36

6.6

7.6

Grain Mill Products

1.34

4.6

11.7

Bakery Products

0.44

4.3

6.9

Sugar, Khandsari and Gur

2.09

16.7

4.0

Edible Oils

3.04

5.2

-0.7

Oil Cakes

0.49

11.8

13.1

Tea & Coffee Processing (TC)

0.71

8.6

15.1

Salt

0.05

5.8

1.8

Others

0.88

8.9

8.0

Total Food (Primary + Manufacturing)

24.31

10.3

9.0

Source: Office of Economic Advisor

(i). Cereals: Inflation in food grains has remained high in
the last five years and also in the current fiscal. The two
sub-categories of food grains are cereals and pulses.
Inflation in cereals has averaged 9.4 per cent in the last
five years and stood at a high of 16.3 per cent in the first
five months of the current fiscal. One of the main
reasons behind this is the rapid increase in procurement
price for cereals, above the rise in the cost of production.
Over the last five years, the procurement price of cereals
has increased over cost of production by almost 15-60
per cent for a cumulative differential of around 150 per
cent over a five-year period. Amongst the various subcategories of cereals, rice and wheat have been the main

drivers of inflation, with inflation in rice averaging a high
of 19.5 per cent and wheat at 12.1 per cent in the current
year so far. High inflation in these two key staples affects
the common man most profusely.
Inflation rate in coarse cereals such as bajra, ragi has
remained high too, but given its relatively low weight in
cereals inflation, its impact on overall inflation has
remained subdued. As per the recently released first
advance estimates for the kharif 2013 season, rice and
coarse cereals output has been pegged higher as
compared to last year's estimates. This is expected to
dampen inflation in these categories going forward.

25


Drivers of Inflation in Cereals

Inflation in Cereals at a Glance (y-o-y%)

100%

Ragi

80%
60%

Weight

Barley
Maize

Average
Inflation
April-August
FY14

9.4

16.3

- Rice

1.79

9.7

19.5

1.12

7.9

12.1

Bajra

- Bajra

0.10

13.0

20.3

Rice

0%

- Wheat

Wheat

20%

- Jowar

0.12

10.4

4.9

12.5

13.1

0.02

8.9

1.4

- Ragi

FY
14

0.22

- Barley

Ap
r-A
ug

20
11
-1
2
20
12
-1
3

20
10
-11

- Maize
20
08
-0
9
20
09
-1
0

-20%

3.37

Jowar
40%

Cereals

Average
inflation
(2008-09 to
2012-13)

0.02

18.4

49.1


(ii). Pulses: Inflation in pulses in the current year has
remained in the negative territory, while the average
inflation in last five years stood at 11.0 per cent. Amongst
cereals, gram has been the main contributor in the last
three years, while arhar was the key contributor in 200809 and 2009-10. Given its higher weight in overall pulses,
deflation in gram in the current year has pushed overall
pulses inflation also in the negative territory, even as

inflation in its other categories has remained high. In
pulses, the average production touched a low in 1990s
and has improved recently in 2000s. Even in 2000s, the
annual growth in pulses is highly volatile and does not
show consistent growth. According to the first advance
estimates, pulse production is estimated at 6.01 million
tonnes in the current kharif season, representing an
increase of 1.6 per cent over the last year.

Drivers of Inflation in Pulses

Inflation in Pulses at a Glance (y-o-y%)

100%
80%

Weight

Average
inflation
(2008-09 to
2012-13)

Average
Inflation
April-August
FY14

60%

-Urad

0.72

11.0

-1.4

40%

-Masur

- Gram

0.33

13.5

-11.9

20%

-Moong

- Arhar

0.14

11.4

10.1

-Arhar

- Moong

0.08

15.0

14.8

-Gram

- Masur

0.06

7.8

14.3

- Urad

0.10

9.0

2.6

0%
-20%

Pulses

-40%
-60%

8
200

-09

3
0
1
2
0-1
2-1
9-1
1-1
201
201
201
200

4
Y1
gF
-Au
r
Ap


(iii). Vegetables: Notably, in the current fiscal,
vegetables have been the main drivers of food inflation,
averaging a high of 26.9 per cent- which is way higher
than its last five year's average of 9.2 per cent. In the last
four years, onions have been the main contributor to
overall vegetables inflation, while the contribution of
brinjal has increased in the last two years. In the current
year, inflation in onions (145 per cent), ginger (244 per
ECONOMY MATTERS

cent), tapioca (85 per cent), and brinjal (41.7 per cent)
have recorded the maximum jump, coupled with wide
fluctuations and increasing margins between wholesale
and retail prices. It's pertinent to note here that most of
the jumps in vegetable prices in the current fiscal have
come in the last two months (July & August), accounted
by the spurt in stockists demand ahead of the festival
season.

26

Inflation in Vegetables at a Glance (y-o-y%)

Drivers of Inflation in Vegetables
100%

Weight

Average
inflation
(2008-09 to
2012-13)

1.74

9.2

26.9

Cabbage

80%
60%
40%

Okra

Vegetables

20%

Average
Inflation
April-August
FY14

- Potatoes

Apr-Aug FY14

2012-13

2011-12

2010-11

2009-10

2008-09

-40%

16.9

-6.6

0.02

6.7

1.2

- Onions

Brinjal

-20%

0.20

- Sweet Potatoes

0%

0.18

8.0

145.0

- Tapioca

0.07

17.6

84.9

- Ginger

0.05

12.0

243.7

- Brinjal

Ginger

0.30

7.6

41.7

- Okra


0.13

14.2

-17.6

- Cabbage

Tapioca

0.19

13.2

-8.6

Note: Tomato, Green Peas & Cauliflower have been excluded as data was not available for all periods

(iv). Fruits: Inflation in fruits in the last five years has
averaged 10.7 per cent, while in the first five months of
the current fiscal, it has remained subdued at 1.0 per
cent. Amongst fruits, the main drivers of inflation have

been mainly banana and cashewnut. With rising
affluence, people tend to consume more of nutritious
food articles such as fruits. In the current year, inflation
in bananas has increased sharply followed by coconut
and guava.

Drivers of Inflation in Fruits

Inflation in Fruits at a Glance (y-o-y%)

100%

Weight

Average
inflation
(2008-09 to
2012-13)

2.11

10.7

Sapota

80%

Lemon

60%

Average
Inflation
April-August
FY14

11.9

13.5

- Oranges

0.13

15.7

-10.3

-20%

Papaya

- Cashewnuts

0.16

12.8

5.1

-40%

Coconut

- Coconut

0.24

7.5

18.9

Cashewnuts

- Papaya

0.09

6.6

18.3

- Pineapple

0.05

15.1

8.8

Apr-Aug FY14

0.34

Pineapple

2012-13

- Banana

0%

2011-12

Pineapple

2010-11

20%

2009-10

Guava

2008-09

40%

Fruits

Ornages

1.0

0.04

0.8

33.7

0.07

3.0

-21.0

- Sapota


- Guava
- Lemon

0.04

14.0

-2.2

Note: Mango, Apples, Litchi & Grapes have been excluded as data was not available for all periods

27


(v). Milk, Eggs, Meat & Fish (MEM&F): This coterie has
shown high inflation in the last five years and in the
current year too, inflation has averaged 12.9 per cent. In
the last five years, inland and marine fish have
contributed the most to the overall MEM&F inflation.
Incomes have risen in India thanks to its high growth

phase since 2003. The higher incomes in turn have led
people to demand and consume more nutritious protein
based food items like milk, eggs and meat products. As
supplies of these items have not risen in line with
demand, the end result has been persistent inflation in
these food items.

Drivers of Inflation in EM&F

Inflation in MEM&F at a Glance (y-o-y%)

Weight

Average
inflation
(2008-09 to
2012-13)

2.41

16.2

12.9

0.19

10.4

5.7

100%
Pork
80%
60%

Egg, Meat and Fish (EM)

Poultry Chicken

- Egg

40%

- Inland Fish

Apr-Aug FY14

2012-13

2011-12

2010-11

2008-09

2009-10

Mutton

25.6

23.5

0.72

17.7

7.1

- Mutton

0%

0.57

- Marine Fish

Beef & Buffalo Meat

20%

-20%

Average
Inflation
April-August
FY14

0.35

12.2

11.7

- Beef & Buffalo Meat

11.6

-0.1

0.41

8.6

15.8

- Pork

Marine Fish

0.12

- Poultry Chicken

0.06

9.4

4.6

3.24

12.8

4.1

Milk


Both demand and supply-side factors are responsible for
driving up the food inflation. Supply of the primary food
articles have remained more-or-less stagnant due to
declining productivity and yield levels. In order to ease
the supply constraints, it is important to increase
investments and productivity across the entire
agriculture sector. This would entail improving
agriculture productivity and yields through adoption of

ECONOMY MATTERS

modern farm technology along with reducing the
dependence on rainfall.
Next, we present view points of sector experts on the
reasons behind the recent spurt in food inflation
coupled with policy prescriptions to bring down the
same. In the first piece, Mr S. Sivakumar, Chairman, CII
National Council on Agriculture and Chief Executive ABD, ITC Ltd presents his views followed by Dr. Ashok
Gulati & Ms. Shweta Saini and Dr. C.S.C. Sekhar.

28

CII View Point
The Building Blocks Towards Food Price Stability

Mr S. Sivakumar
Chairman, CII National Council on Agriculture
Chief Executive - ABD, ITC Limited
Q1.

What are the emerging trends in the current food
inflation scenario and why do you think it is a
cause of concern for India?

fact that an average household in India still spends
almost half of its expenditure on food, with the
poor spending as much as 60 per cent. Such price
spikes adversely impacts the household budget
allocation for food and non-food items. The
challenge gets compounded with India being
home to a large number of poor people, who
cannot hedge against food inflation. India's food
security is threatened by frequent fluctuations in
prices. With the National Food Security Act on the
anvil, it will be ever more important to rein in food
inflation.

Ans: The Indian economy has been witnessing rising
food inflation since mid-2009 with some signs of
relief during mid-2011 to early 2012. While India was
successful in containing domestic price spikes
when global prices were reining high in 2007 2008, the situation worsened since mid-2009.
Inflation in food articles averaged 10 per cent
during 2008-09 to December 2012.
A closer look at inflationary trends reveals that
food inflation in mid-2009 was primarily driven by
cereals (particularly wheat), pulses, and high value
manufactured products. However, current food
inflation is largely driven by vegetables (77.8 per
cent increase in wholesale price index in August
2013 over August 2012) fruits, rice, egg, meat and
fish. Wholesale price indices of all these
commodities except fruits increased manifold
since August 2011. In the vegetable category,
spiraling prices of onion (at 244.6 per cent dearer)
has been a major cause of concern not only for
consumers but also for the government. Prices of
other key vegetables like tomatoes, ginger and
eggplant have also skyrocketed in the recent past
coupled with wide fluctuations and increasing
margins between wholesale and retail prices.
These are commodities, which form an integral
part of the common man's diet and demand for the
same is rising.

Q2. What according to you are the key drivers of the
current food inflation situation?
Ans: While several reasons have been cited for
triggering food inflation, demand outpacing
supply is definitely a key cause. In the case of
certain crops, particularly vegetables, adverse
weather conditions resulting in crop damage, and
supply chain issues (broken chains, increasing cost
of transportation) have contributed to rising
prices. It has also been observed that rising
Minimum Support Prices for certain key crops have
fuelled price inflation. With the introduction of the
Mahatma Gandhi National Rural Employment
Guarantee Act, agricultural wages have risen as a
result of labour shortage, contributing to rising
costs of production. These are largely supply side
issues.
On the demand side, enhanced levels of income
and changing lifestyles and aspirations continue to
spur the demand for food items, especially high
value commodities such as fruits, vegetables, milk

The concerns over food inflation are driven by the

29


and milk products, egg, fish, meat, both fresh and
processed. Per capita consumption of many of
these commodities is way below that of other
countries and hence given a low base, the scope
for expanding per capita consumption is quite
large. This is likely to create substantial demand
pressures. Given this scenario, it will become
crucial to ensure that supply meets rising demand
for food.

transformation in India and although the results
are a mixed bag, there is scope for further
progress. Developing efficient supply chains that
ensure smooth availability of quality produce is
critical for strengthening retail operations.
Efficient agri-businesses will merit investments in
supply chains right from the farming stage to
procurement, storage and marketing and in effect
streamline the otherwise long supply chains in
India crowded by undesirable intermediation. It is
indeed ironical that despite high food prices,
farmers have not benefitted as huge margins
between the farm-gate and retail prices have been
lost in intermediation. Entry of big businesses
(domestic or multinational) will ensure scalability
and the right margins for the farmer, which creates
a win-win situation. It would be important to
enable a balanced and pragmatic policy
framework that attracts private sector
investments in agri-value chains in India. The issue
of post-harvest losses that account for 30-50 per
cent of the produce, particularly of perishable
products can be addressed to a large extent
through advanced and competitive value chains.

Q3. What are the key measures important to contain
food inflation in India?
Ans: Several recommendations have been put forth
towards addressing the challenge of food price
inflation. Efforts to liberalise agricultural markets
and trade have yielded positive results in certain
cases. However implementation of relevant policy
as well as institutional reforms would go a long
way in stemming rising food inflation. The need of
the hour is to address the structural factors that
impact food inflation and ease bottlenecks in
supply chains. I would summarize the key
measures as the building blocks towards food
price stability which are as follows:
Liberalise Agricultural Markets: The merits and
demerits of liberalising agricultural markets with
respect to amending the APMC Act and allowing
farmers the freedom to sell outside the market
yards has been a subject of discussion in various
fora. Implementation of the model APMC Act
which allows farmers the freedom to market their
produce and the scope to establish direct linkages
with private buyers will undoubtedly enhance
farmer incomes and also ensure availability of food
at affordable prices. The ease of doing business
will incentivise private players to invest in
backward linkages with farmers, which are critical
for development of on-farm activities and services.
States will also have to play a progressive role in
ensuring that the amended Act is implemented in
the true spirit and the bottlenecks with regard to
private sector participation are streamlined. Taxes
and fees need to be calibrated to the kind of
services that are being provided to the buyer and
seller and not levied on an ad-hoc basis.

Develop Integrated Agri-Intelligence Hubs: Going
forward, it will be critical to develop agri
intelligence hubs that capture and disseminate
price signals in advance, and critical market
information to enable the government take
appropriate measures (in terms of opening up
imports or controlling exports) to avoid price
spikes. Information about weather conditions can
also help farmers plan crop management so that
losses can be avoided. These hubs can provide onfarm extension services and market linkages to
farmers to help them improve farm productivity
and earn higher returns. The private sector has
been involved in a big way in providing some of
these critical services, through unique
interventions like the ITC e-Choupal, Choupal
Sagar, Tata Kisan Kendras and others. There is an
opportunity to integrate these services and create
an integrated hub for delivery of agri-extension
services.
Q4. Do you see the Food Processing sector playing an
important role in containing price spikes?

Develop Advanced Supply Chains: The format of
agriculture retailing has undergone a

ECONOMY MATTERS

30

Ans: Incentives to scale up food processing will be an
effective means of curbing food inflation by
helping overcome seasonality issues, post-harvest
losses and boosting value addition in primary
produce. Despite India being a leading producer of
several high value agricultural commodities,
processing levels are quite low compared to other
countries and this provides an opportunity to scale
up processing to meet the growing demand for
high value commodities. This will require
investment in the right pre and post-harvest
technology that ensures food safety and quality.
Rationalizing taxes and custom duties levied on
the food processing sector will go a long way in
attracting large scale private investments in
technology, value chains and capacity building of
farmers and people involved in food processing
activities. Food processing can help generate
higher incomes for farmers through value addition
opportunities going beyond the market for fresh.

Q5. Lastly, what is your opinion about public private
partnerships in the context of food inflation?
Ans: While the government will continue to play a
pivotal role through enabling policies and
institutions towards achieving higher and
sustainable agricultural growth, the private sector
can make a meaningful contribution through the
delivery of best practices. Agriculture which has so
far largely been subsidy driven, needs to be more
investment led (both public and private),
particularly in areas like agri R&D, technology,
infrastructure and markets. These investments will
generate larger benefits in terms of ensuring
enhanced availability and moving towards food
price stability. Public private partnership will
continue to be important and in the current
context of food inflation, it will be ever more
important to strengthen the existing partnerships
and venture further.

31


Taming Food Inflation

Dr. Ashok Gulati

Ms. Shweta Saini

Chairman
Commission for Agricultural Costs and Prices

Consultant
ICRIER

High food inflation is the worst form of hidden tax often
inflicted on poor people. The reason: an average
household in India still spends almost half of its
expenditure on food, and poor spend about 60 percent
on food. No wonder, runaway food prices bite them
badly adversely impacting their nutrition and hunger
levels.

food products) in August 2013 over August 2012 suggest
a rate of 12 per cent, with food articles price index going
up by 18 percent and food products by only 1.7 per cent.
Within food articles, cereals are up by 14 per cent, led by
rice at 20 per cent, fruits and vegetables up by 42 per
cent, vegetables alone by 78 per cent led by onions at
244 per cent, and eggs, meat and fish by 19 per cent.

Composition, Trends and Spread

Diagnostics

Food inflation comprises of two components: food
articles and food products. Food articles (such as
cereals, pulses, fruits and vegetables, milk, eggs, meat
and fish, etc) largely contain fresh and unprocessed (or
rudimentary first stage processed) food items, having a
weight of 14.33 per cent in the WPI of all commodities.
Food products are basically processed food items
ranging from milled grain products (atta, maida, suji,
etc), sugar, khadsari, gur, edible oils, milk products, etc.
They have a weight of 9.97 per cent in overall WPI of all
commodities. Together, food articles and food
products, therefore account for about 24 per cent
weight in overall WPI.

This trend and spread of food inflation, sudden
acceleration from 2008-09, and higher in vitamins and
protein products, raises a fundamental question of
diagnostics. What led to this situation that we are in
now? Is it the supply shocks? Not at all. The production of
almost all food items has been growing much faster than
population growth. But the fact that their prices have
risen much faster only reflects that their demand is
pacing faster than supplies. And the demand has been
accelerating partly from higher GDP growth during
2008-09 to 2012-13, but primarily from loose fiscal policy.
India's fiscal deficit suddenly more than doubled in a
single year in 2008-09 over 2007-08, and since then has
remained at unacceptably high levels. It is worth
recalling that this was result of an orchestrated global
fiscal stimulus that was given by G8 plus 5 countries in
the aftermath of global financial crisis in 2008. It suited
the ruling government as it came just before the last
elections. Remember loan waiver of about Rs 72,000
crores, massive expansion of MNREGA, massive fuel,
fertilizer and food subsidies, and so on, on top of the
generous Sixth Pay Commission.Unfortunately, there is
no free lunch in the economy. It has come back to haunt
the policy makers, wherein now high food inflation has

Temporally, since 2000-01, food inflation has been under
reasonable control from 2000-01 to 2007-08 with an
average rate of 3.7 per cent, with a peak in 2006-07 at 7.9
per cent and trough in 2000-01 at 0.4 per cent. It is
commendable to see when the world food prices
erupted in 2007-08, Indian food inflation was still 5.6 per
cent. But things changed drastically thereafter. The
average food inflation during 2008-09 to 2012-13 is 10.2
per cent, which is continuing unabated in 2013-14 too.
The latest numbers on food inflation (food articles plus

ECONOMY MATTERS

32

cent (Centre and states combined fiscal deficit is above 8
percent). Obviously, the damage that has been done on
the fiscal front over the last five years cannot be
corrected in a single year, and certainly not in an election
year. It will take at least 3-4 years before it can be
brought down to acceptable levels. Till then we may
have to live with higher rates of food inflation.
Nevertheless, certain structural reforms can help bring
down the food prices. Massive overhaul of APMC Act,
open policy to welcome organized retail in food,
incentivizing them to invest at the back end to build
efficient food value chains, higher priority to food
processing, liquidating the massive hoarding of grains
by the government, rationalizing and drastically pruning
the fuel, fertilizer and food subsidies, moving towards
cash transfers in case of food and fertilizer subsides, are
some of the policy measures that can bring down food
inflation. Will the policy makers have the courage to do
this in an election year? Only time will tell.

become a grave threat to growth itself.
Similarly the Global fiscal stimulus (by US of about
USD$600 billion, by China of about US$586 billion and by
EU of 200 billion Euros) had created huge liquidity raising
all commodity prices globally. The high global prices of
food also then percolated to the Indian economy
through imports and exports.
Interestingly, one more reason in the Indian context has
been the cost push factor coming from rising farm
wages, which have been rising at 18 percent per annum
since 2008-09. This rising cost feeds into high
procurement prices, which then fan out in the entire
economy.

Policy Solutions
So, what's the way out now? First and foremost, fiscal
deficit by the Centre needs to be brought down to 3 per
cent of GDP from its current levels of more than 5 per

( Views are personal)

33


High MSPs Driving Inflation in Cereals

Dr. C.S.C Sekhar
Associate Professor
Institute of Economic Growth, Delhi
Persistent food inflation has been a worry for Indian
policymakers in the recent times. As per the CSO
estimates, the food and beverages inflation rate based
on CPI, stood at 11 per cent in August 2013. The
corresponding figures for cereals and vegetables are 14
per cent and 26 per cent respectively. This short note
attempts to identify the composition and possible
underlying factors of this inflation.

increases have been 15 per cent, 6 per cent and 5 per
cent respectively. These increases have led to large
procurement in food grains, resulting in more than 30
per cent of the production being procured in the last few
years. Correspondingly, the market availability of
cereals declined, leading to sharp rise in prices. It is the
reduced supply in the market place and not any shortfall
in production that has resulted in the price rise. There
has been a bumper production of cereals in the last
seven years, except 2009, which was a drought year. The
international prices (of cereals) have also been declining
in real terms in general since 2009 and more so for more
than a year now as per the FAO statistics. Therefore, the
domestic policies, and not the production shortfalls nor
external factors, appear to have played the major role in
price rise of cereals.

The pattern of inflation in India seems to vary quite a bit
over time. Few years ago, pulses, milk & milk products,
sugar and fruits & vegetables were mainly responsible
for food inflation. It was argued that rising incomes were
mainly responsible for this kind of inflationary pressure
as all these commodities, except pulses, have higher
income elasticities than staple foods. However, this
seems to have changed in the recent times. The pattern
over the last two years suggests that cereals, particularly
rice and wheat, appear to contribute more to the current
inflationary pressures, alongwith eggs, meat & fish and
vegetables. There is a steady improvement in the price
situation of milk/milk products, pulses and sugar/sugar
products.

The role of domestic policy also becomes clear when we
look at the pulses sector. The focus on increasing pulses
production in the country through various policy
initiatives such as National Food Security Mission
(NFSM) since 2008, combined with a liberal and stable
import policy, appears to have stabilized the pulse
prices. As regards vegetables & fruits, and meat, eggs &
fish, which are perishable in nature, it is the
infrastructure bottlenecks that play a major role. The
role of transportation facilities, uninterrupted power
supply and cold storage facilities become critical for
these perishable commodities.

The situation as regards the two staple cereals -rice and
wheat -is alarming. The average rate of inflation in 2013
(January-August) based on WPI is 17 per cent for cereals
(wheat and rice) -19 per cent for rice and 16 per cent for
wheat. The grain mill products consisting of atta, maida
and sooji is also showing substantial increase. Domestic
policies appear to play a major role in this price rise.

Therefore, it is important to make judicious use of price
and procurement policies so as not to throttle the
markets. Also, it is imperative to develop critical
infrastructure such as rural markets, roads, cold
storages and power.

The minimum support price (MSP) for rice has been
increased by 8 per cent, 15 per cent and 5 per cent in the
last three years. In case of wheat the corresponding

(Views are personal)

ECONOMY MATTERS

34

SPECIAL FEATURE

Impact of Government Moves on Fertilizer Industry

Essential Commodities Act empowers the Government
to regulate distribution of fertilizers. Currently 50 per
cent of urea production and 20 per cent of P&K
production/import is under ECA i.e. Government can
instruct producer/importer to supply product to place
specified by Department of Fertilizers. At state level,
normally Agriculture Production Commissioner used to
be the nodal officer to coordinate and oversee fertilizer
related issues.

Mr. P.K. Ghose
(Executive Director, and CFO, Tata Chemicals)1

Subsidy Related Policies

F

With the intention to make available fertilizers at
affordable rates every nook and corner of country,
different policies have been notified to enable
manufacturer/importer to sell fertilizers at much lower
rate than their cost of production/import. The difference
between cost of production/import and market price is
borne by Government of India in the form of subsidy.
Currently the following policies are allowing companies
to claim subsidy on fertilizes

ertilizer industry is one of the most tightly
controlled and monitored by Government agencies
through different policies directives, rules and
regulations. Even after 20 years from the start of
liberalisation process initiated by Government of India, it
has not yet made much impact on the fertilizer industry.

Administration
Department of Fertilizers under Ministry of Fertilizers &
Chemicals is the administrative ministry for fertilizer
subsidy related policies and also looks after distribution
and control. Fertilizer Control Order, 1985 defines rules
and regulations regarding quality, size, and composition
etc. of different grades of fertilizers sold in India.
1

a) Nutrient Based Subsidy (NBS) Policy for P&K
Fertilizers - From 1st April, 2010, Government of India
introduced Nutrient Based Subsidy Policy for P&K
fertilizers. This policy allowed free MRP and uniform
subsidy rate for one nutrient in all the products

Views expressed in the article are those of the author and necessarily of CII.

35


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CII Economy Matters, September-October 2013

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