The protein-fuelled hyperinflation of 2011-12

A crash in commodity prices due to a combination of factors, such as a slump in global food commodity prices, slower growth in minimum support prices (MSPS) and bumper harvests, have stoked farmer protests in several states. In May 2018, retail inflation rose to a four-month high of 4.87% on the back of rising oil prices and a weak rupee. Yet, these inflation numbers are a far cry from spiraling prices during 2009-12, especially food inflation. During the previous UPA government’s tenure, the country witnessed a sharp spike in food prices, hitting millions of low-income households. The Reserve Bank of India’s consistent inflation fight didn’t quite cool food inflation, which shot up 12% in November 2011. Analysing data, economists soon found that much of the rise in food prices were concentrated in a clutch of protein-based items. They then hit upon a break-out phenomenon that had fuelled hyperinflation: rapidly changing consumption patterns, skewed towards more proteins. Economists noticed several spells of spiraling food inflation: October 2009 and March 2010; April and July 2010; August and November 2010; and then December 2010 onwards. Prices of primary articles were defying usual trends by not falling back to their previous levels even with normal rains. Subir Gokarn, the then Reserve Bank of India’s (RBI) deputy governor and one of India’s well-regarded economists, decided to unpack the reasons. When Gokarn broke down food inflation numbers into categories, he found that while prices of most other articles were stabilising with abundant supply, inflation remained entrenched in protein-rich items, such as pulses, milk, eggs, fish and meat. As incomes rose on the back of high growth and public make-work programmes like NREGA, demand tended to shift more towards protein-rich items. The RBI called it “structural inflation”. High food prices impact the poor more because they, as a proportion of their household budget, tend to spend more on food. Another key reason for high food inflation had to do with how MSPS or crop prices were set. According to RBI estimates, a 1% increase in minimum support prices raises consumer inflation by around 15 basis points.

Between fiscals 2010 and 2014, minimum support prices across crops grew on average 12%, while the period between fiscals 2015 and 2018 has seen an increase of only 5%.

Alongside high minimum support prices , consumption demand emerged as the most potent factor driving up food price.

The 61st round (2004-05) of the National Sample Survey offers the most recent data available on how Indians spend on food. For economists like Gokarn, it provided a basis to analyse the relationship between household affluence and food expenditure.

Between 2004-05 and 2009-10, the real per capita income of Indians grew by about 39%. Gokarn then tried to determine the threshold level of income (or, in this case, monthly household expenditure) at which the composition of diet changes significantly.

This led to a dramatic finding about India’s food-price situation.