The much flaunted growth performance of the Indian economy is losing a good deal of its shine in the face of the unprecedented rise in the prices of food articles. The phenomenon cries out for an explanation, even if no solution to the problem may be readily available.

Per capita foodgrains production in India fell at the rate of 0.7 per cent during 1990-2007, reversing the self-sufficiency we had achieved on account of a per capita growth rate of 0.4 per cent during 1950-51 through 2005-06. In fact, during the years stretching from 1976-77 till 2005-06, there was little evidence of foodgrain imports in India. However, India had to revert back to foodgrains import in 2007. With large foreign exchange reserves, the fact of grain imports should not have caused much worry, had the world prices of cereals not doubled during 2000 through 2008. The high prices of imported grains give us a clue to the rising price of the food basket in Indian markets. However, the picture is incomplete unless we can figure out why, in the first place, world prices of foodgrains have been on the rise.

The solution to this puzzle is complicated, to say the least, and related to another component of the food basket, edible oils. Nutrition experts recommend a per capita consumption of 16 kilograms of edible oils, though the average prevailing in India appears to be only 12 kgs. Moreover, this figure too does not reflect the reality on account of severe inequalities in income distribution. The poor are known to be able to afford at best a maximum of 5 kg per capita. Skyrocketing edible oil prices, quite apart from foodgrain prices, should be taken into account in explaining the rise in the food basket price as a whole. However, as we shall argue, the rising prices of edible oils are major explanatory variables not only for food price inflation in general, but for the rise in foodgrains prices also.

To begin with, we need to note that India has hardly ever been self-sufficient in edible oil production. It imports as much as 40 per cent of its total edible oil requirement. Its import bill in 2007-08 was approximately Rs 12,000 crore, and this figure, with the rise in prices, is likely to increase beyond Rs 20,000 crore in 2008-09. The upsurge will largely result from the rise in the price of soyabean in Argentina by around 60 per cent, of rapeseed oil in Hamburg by 50 per cent, of crude palm oil in Indonesia by 80 per cent and that of sunflower oil by 130 per cent elsewhere in the world. These are not the only sources of vegetable oil, needless to say. But every other variety has shown gradual increases in world markets over the last few years and taken a quantum leap in recent months.

Interestingly enough, the rise in world prices of vegetable oil occurred in tandem with the rise of crude petroleum prices. To explain this joint movement, one needs to go back more than a hundred years to the late 19th century, when the German engineer, Rudolf Diesel, invented an internal combustion engine, which was able to run on peanut oil. Amongst the many advantages he claimed for the machine, the most attractive one consisted of the fact that farmers could produce their own oil to run pumpsets. However, in today’s environmentally conscious world, the supreme merit of Diesel’s invention lies in the fact that bio-diesel enjoys an advantage with regard to pollution, both over petroleum as well as standard diesel oil. Also, edible-oil-based fuel is reproducible, whereas world petroleum stocks will last at best for another fifty years or so.

Diesel’s idea received renewed support during recent years partly on account of a rise in petroleum prices. With dwindling reserves and demand rising from rapidly growing countries like China and India, one would have expected an escalation in the world price of crude petroleum in any case. The expectation has been fulfilled with a vengeance as it were, with crude prices hovering in the vicinity of $110 per barrel in the recent past.

Three facts, it would seem, are responsible for the phenomenal rise in petroleum prices. The first of these is related to strong demand relative to supply. The second is linked to the American economy’s trade deficit rising merrily for more than 30 years now. The United States of America is the largest debtor in the world. Since, by treaty, oil prices are quoted in US dollars, countries across the world have been happy to accept mounting American debt, the latter being a universally acceptable means of payment for petroleum. However, with too many dollars chasing other currencies, thanks to the US consumption pattern, the dollar has finally started showing signs of depreciation, even against erstwhile untouchables like the Indian rupee. The US dollar purchases less for oil-producers from other countries compared to the past. As a result, the international dollar price of crude was raised. The third and final reason for the petroleum price rise lies in the economic downturn the US is currently passing through. This cannot give rise to favourable expectations about the future value of the dollar. The three facts put together explain a rise in crude oil prices, which has far outstripped the rate of dollar depreciation.

Unfortunately for developing economies, the high price of petroleum, along with a concern for global warming, is finally generating a shift in richer nations away from conventional petroleum towards engine fuels based on soyabean oil, palm oil and other vegetable oils. (Besides, sugarcane too has found its use as a petroleum substitute, mainly in Brazil.) Thus, the world supply of edible oils is falling owing to a rise in petroleum prices as well as other reasons. On the other hand, the world demand for edible oils has not fallen. As a result, the international prices of crude vegetable oils have gone up along with petroleum prices, as noted earlier. Even though all sources of vegetable oil are not equally usable as machine fuel, the aggregate fall in the supply of vegetable oils has caused the prices of all types of edible oils to rise.

Coming back to India now, its dependence on massive imports of edible oils has placed it in a particularly vulnerable position, given that the import price has been steadily rising. To add to the misery of India and other nations in its position, farmers in richer countries who can afford the move have changed into bio-fuels producers, giving up the production of cereals, pulses or other traditional products. This has aggravated the price rise of cereals and other farm products in world markets on account of a supply crunch. In other words, as indicated earlier, a rise in edible oil prices has itself contributed to a rise in foodgrains prices, while edible oil prices have risen largely on account of petroleum price rises.

Quite apart from foodgrains and edible oil, vegetables too have registered a massive price increase. The rise in vegetable prices is shrouded in greater mystery. One is led here to conjectures at best. We are aware that foodgrains output has been outstripped by population growth. This could have happened in the case of vegetables also. Yet another explanation could lie in the possibility that with the prices of other items in the food basket rising, there has been some tendency for the demand for vegetables to rise, and this, given a fixed harvest size, could have caused a price rise too.

Rapid industrialization calls for adequate agricultural surplus. The food price scenario, however, dampens the euphoria surrounding India’s magnificent growth story. Our only hope lies in raising the productivity of the agricultural sector, an objective unlikely to be served by loan waivers alone. The state of affairs looks grim to say the least.