By B V Mehta
Let me begin with reviewing some latest development on food inflation. Experience of last one year, should help us to explore what’s in store over the next five years. All of us are well aware of how unabated food inflation is causing turbulence in the global market. From Australia to Zimbabwe, from Argentina to India, from Brazil to China – indeed, across continents and the whole world – inflation is on top of concerns for the market men and the policymakers alike.

Countries that have been traditional exporters of food are clamping down on export business. Food importing countries are pulling out all the stops to encourage inflows. Import-dependent poor countries are the worst hit by the growing crisis on the global food front and heavy drain on their exchange reserve due to crude oil prices hovering at $ 130-135 a barrel with no sign of relief. It is not as if the world has suddenly started to produce less food for all. It is simply that there now are new industrial uses for traditional food crops.

Also, agricultural commodities have now become of an asset class and attract investor interest. Supplies, on the other hand, have not caught up with robust rise in demand. Rising energy prices too have contributed to food inflation by raising production and transportation costs. Concerns over climate change and global warming are aggravating the anxiety over food supplies in future.

Don’t ask whether these developments are desirable. The debate will lead us no where. No single person or corporate or Government has any significant control over any of these developments. We have to be practical and have to respond to the situation. The complexity of the present situation is unprecedented.

You will all agree that extraordinary situations demand extraordinary responses. The Government of India has responded to the extenuating situation. To counter inflation, rising food prices, political pressure and creeping social unrest, it has done what was unthinkable until even a few months ago.

Crude vegetable oil imports have been allowed at zero duty. Tell me, who in this meeting could have imagined that India that used to levy import tariff of as high as 80 percent on crude palm oil a year ago, would allow CPO to come in duty-free? Or refined palmolein at a mere 7.5 percent duty? Yet, India has done it; and for good reasons.

The Government has to protect the interests of millions of poor consumers and to shield them from the harsh realities of the market. Also, in over enthusiasm some irrational decisions like banning future trading and export of edible oils were taken to show that Government is very keen to check the rising prices.

International prices of vegetable oils have gone up by over 100% in last one year; however, in India domestic prices have remained under check and increased only 30-40%, thanks to duty reduction from time to time, freezing of tariff and rupee appreciation.

The Indian government continues to ride on the horns of a dilemma – Growth versus Inflation. For the time being, the Government has voted in favour of inflation control.
My own sense is that inflation control will continue to be the focus of Indian government attention for some more time. Yet, no one need be under the impression that India will continue forever to be such an easily accessible market with low or no duty. There is reason to believe, the edible oil import tariff structure may be reviewed sometime in September-October when the next oilseeds crop is ready for harvest.

Indian Macro-economic Overview:
India's macro-economic fundamentals are strong. Currently, India is one of world's fastest growing significant economies. The current value of GDP is US$ One Trillion. In Purchasing Power Parity (PPP) terms, it is over $ 4 Trillion. For the last four years, India's GDP growth registered an annual average of close to 9.0 percent. For fiscal 2007-08 (April- March), the estimated growth rate is 8.8 percent.

Manufacturing sector and Services sector both continue to record nearly double-digit growth. Foreign trade has been expanding at 15 - 20 percent a year in dollar terms. Currently, foreign exchange reserves are over US$ 315 billion and growing rapidly. Indian rupee has become stronger and appreciated by over 15% in last one year. Stock market is booming and Sensex jumped from 9K to 18K in one year.

FDI flows (both inward and outward) have risen remarkably, albeit from a low base. Importantly, India is the world's third largest producer of food. There is optimism that economic growth can be sustained at close to 10 percent a year over next five years.

Indian Agricultural economy accounts for 20% National GDP. Farm growth has witnessed fluctuations depending on monsoon performance. Indian Government has aimed at 4% growth in agriculture sector in order to achieve 9-10% overall GDP growth in next 5 years.

Industry sector has grown over 9.5% per annum in last three years and is expected to grow over 10%.

Average Service sector GDP growth is 10% in last 4 years and is expected to grow at over 10% in next 3 to 5 years, thanks mainly to information technology sector.

Overall, GDP growth is targeted at 9 to 10% a year in next 5 years (2008-2012).

India's population is currently estimated at 1.15 billion; and is growing at 1.8 percent a year. Out of the 192 million families (average family size - 5.7 persons per family), an estimated 55-60 million families belong to the middle class. India’s population is relatively young. 52 percent of the population is less than the age of 25. In other words, in the coming decades, this young population will bring tremendous productive energies into the economy; be major consumers of goods and services; and generally represent forces of economic activity and growth. 4

A third of the country's total work force is employed in the Manufacturing and Services sectors. With robust growth of these two sectors, incomes in the hands of this one third of the population have been rising by 10 to 12% per annum. With higher disposable income, there is tremendous propensity to consume a large variety of goods and services. The existing per capita food consumption is low; and every rise in income, naturally, translates to higher demand for food products first, particularly in the middle income group.

It is necessary to underline the fact that India is no more insulated from global influences. Indian economy is steadily integrating with the global economy. Developments around the world do impact the Indian domestic market and vice a versa. With rising import dependence, India's influence over the world commodity market in general and food products market in particular, is set to become stronger in future.

Indian Vegetable Oil Sector:
India's vegetable oil sector is no exception. With imports representing over 40 percent of aggregate vegoil consumption of nearly 13.0 million tons, Indian domestic market is surely subject to global influences. At the same time, the size of India's imports – 5.5-6.0 million tons a year - will have a bearing on the world market dynamics.

Oilseed Sector:
Currently, India accounts for 7.4% of world oilseeds output; 6.1% of world oilmeal production; 3.9% of world oilmeal export; 5.8% of world vegoil production; 11.2% of world vegoil import; and 9.3% of the world edible oil consumption (Source: Oil World 2007).

India’s Growth Prospects:
India’s growth prospects and ravenous appetite for food including edible oil means that the world market cannot afford to ignore India's presence as a producer, consumer, importer or exporter.

Hot Issues for India:
With a rather low growth rate, Indian agriculture is slowly facing a distress situation. Migration of people from rural to urban areas in search of livelihood is a reality. Government's efforts to strengthen farm and related activities have not yielded the desired results. Tightening domestic supplies on the one hand and rapidly rising demand on the other, and import dependence have resulted in food related inflation. The rural poor people are the worst affected because of the low income growth and high food prices. Malnutrition and 5 under-nourishment, particularly among the low income groups, are a serious issue for the country.
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