The Economic Survey of India, 1997

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Prices and Distribution

1. The major highlight of the price behaviour in the current financial year was that (i) the overall annual inflation rate based on wholesale prices at the end of 2nd week of January, 1997 was 7.6 per cent, (ii) prices of agricultural products (primary articles) rose sharply by about 11.7 per cent, (iii) fuel and energy prices rose by about 17.4 per cent, (iv) the manufactured commodity group prices rose very modestly by about 3.6 per cent, and (v) terms of trade for agriculture improved by about 3.9 per cent.

Annual Inflation

2.  The current financial year started with an inflation rate of 4.8 per cent. It remained steady at this level of less than 5 per cent during the first quarter, April-June, 1996. The long overdue adjustment (by 18 per cent) in the administered prices of petroleum products in the first week of July, 1996 pushed the wholesale price index up from 306.4 to 310.4, and the inflation rate rose to 5.8 per cent in the first week of July, 1996. By mid-December, 1996, the inflation rate crossed the 7 per cent level reflecting an undercurrent of renewed inflationary pressures brought about primarily by a sharp escalation in prices of cereals, especially wheat. For much of this financial year, the price rise in the manufactured products group remained steady at about 4 per cent level, and dampened to some extent the effect of the rise in the prices of primary articles. The relative modest rise in the prices of manufactured products provides the basis for hoping that this latest inflationary undercurrent would abate by the end of the financial year if other macro variables such as money supply growth and fiscal deficit are held under prudent limits, and good agricultural production moderates inflation in primary articles.

3.  The uptrend in the inflation rate in the second half of 1996-97 so far has been still modest compared to the wholesale price movement in the preceding four years (Table 5.1). Consequently, the 52 - week average inflation rate in 1996-97 was still the lowest in the four years of post reform period, 1992-93 to 1996-97 as shown below.

  Annual Inflation (per cent)
End of year (Point-to-point) 52 weeks Average
1992-93 7.0 10.1
1993-94 10.8 8.4
1994-95 10.4 10.9
1995-96 4.4 7.6
1996-97 (January 11) 7.6 5.7

4.  The consumer price index for industrial workers, CPI (IW) is the most commonly used among the three consumer price indices (Box 5.1 and Table 5.1). The trend in the retail price movement as measured by CPI (IW), shows that the moderate uptrend seen in WPI is also reflected in the CPI (IW) as well in the second half of the current financial year (Table 5.1 and Fig 5.1). Large divergence in the inflation rates in the two price series observed in the first half of the year is explained by the larger weight (almost twice) of food items in the CPI (IW) relative to that in the WPI.
The rising trend in foodgrains prices pushed up the CPI(IW) much more than the WPI in the first half of the year.

5.  Primary articles having a weight of 32.3 in the wholesale price index, accounted for over half of the rise of the annual growth of 7.6 per cent in wholesale prices up to January 11, 1997, whereas the contribution of manufactured products with weight of 57.04 was limited to 26.6 per cent (Table 5.2 and Fig. 5.2). Among primary articles, the major share of the annual growth in inflation was contributed by food articles (45.8 per cent). There was sharp rise in the prices of cereals. Wheat price rose by as much as 32.8 per cent. Fruits and vegetables too recorded a steep rise of 37.9 per cent. Among manufactured products, the key products that recorded a higher annual rise than last year and contributed the major part in the annual growth of prices in the manufacturing sector were food products. Food products contributed more than one-third of the rise in the prices of manufactured products.

Financial year changes in WPI in 1996-97

6.  The current financial year beginning April, 1996 recorded a WPI inflation rate of 6.8 per cent up to January 11, 1997. The first quarter (April-June) of the current financial year saw a rather subdued rise of 2.3 per cent as against a rise of 3 per cent in the first quarter of the preceding year. However, the WPI rose by 1 percentage point in July, 1996 consequent to the adjustment of prices of petroleum products to make up for the deficit in the Oil Pool Accounts. Revision in the prices of coal (except power grade coal) and escalation in prices of cereals fostered a cumulative impact in the second quarter (July-September) resulting in the wholesale price index rising by 5.9 per cent compared to the rise of 4.5 per cent in the corresponding period last year. Coal prices were revised again in November. A further spurt in foodgrains prices especially, rice and wheat, pushed up the aggregate rise in WPI to 6.8 per cent at the end of the second week of January, 1997 (Table 5.3).

7.  The wholesale price movement observed since the beginning of the eighties (Table 5.4) reveals that: (i) the maximum escalation in prices occurs during the first and second quarter (April-Sept.); (ii) prices decelerate during the third quarter (Oct-Dec.) and become almost steady during the fourth quarter (January-March); and (iii) upward movement in the prices in the first half are generally offset by the slower downward movement in second half. However, there is deviation from the above pattern in the years of high inflation when significant price rises occur in each of the four quarters, thereby raising quarterly variation and rate of inflation, as witnessed during 1990-91, 1991-92, 1993-94 and 1994-95.

Primary Articles

8.  During the current financial year so far (April, 1996-Jan 11, 1997), the wholesale price of primary articles rose by 9.7 per cent, which was much higher than the rise of 3.6 per cent in the corresponding period of last year. The rise in the price of primary articles is attributed mainly to the sharp rise of 14.7 per cent in the prices of foodgrains, vegetables (36 per cent), condiments and spices (11.4 per cent) and tea (11 per cent). Amongst foodgrains, wheat recorded the highest rise of 28.3 per cent up to the second week of January, 1997. Non-food articles rose by 5.5 per cent (Table 5.3 and Table 5.5).

Manufactured Products

9.  Prices of manufactured products in the first quarter( April-June) of the current financial year registered a rise of 1.6 per cent, about half of the rise of 3.3 per cent recorded in the corresponding period last year. Although the rise in the second quarter was higher, the over-all rise in the first half of the current financial year (April-September) was 3.8 per cent compared to 4.8 per cent in the corresponding period last year. Prices in this group have remained almost stable thereafter and registered a modest rise of 3.9 per cent up to January 11, 1997 (Table 5.3 ). Escalation in the prices of almost all the subgroups, except food products and other miscellaneous manufacturing products, have been lower than last year. The index for food products rose by 11 per cent relative to the rise of 2.8 per cent last year (Table 5.5).

Seasonal Items

10.  Unlike last year, the prices of seasonal items have been under pressure since the beginning of the current financial year, and have registered a rise of 9.8 per cent between April, 1996 to January 11, 1997. Prices of seasonal items escalated by 5.1 per cent in the first quarter (April-June) which was much higher than the rise of 3.6 per cent in the corresponding period last year (Table 5.3). The seasonal impact was visible in the rising prices of foodgrains, especially rice, wheat and gram; eggs, fish and meat; condiments and spices among food articles; oilseeds and sugarcane among non-food articles; and khandsari and gur among food products. Export of rice and wheat, shortfall in production and procurement of wheat, and upward revision in Statutory Minimum Prices were some of the reasons for the rise in prices. Prices of foodgrains by the end of the second quarter (July-September) were higher by 10 per cent which was more than three times the rise registered last year. A sharp rise in the prices of raw cotton, groundnut seeds and mustard seeds caused an abrupt rise in the prices of the sub-group of non-food articles. Thus, during the first two quarters, the prices of seasonal items registered a rise of 8.7 per cent which was more than one and half times the rise in this period of last year.

11.  Prices of rice, wheat and gram continued to rise even after September, 1996. The Government's decision to step up open market sale of wheat to 6 lakh tonnes per month from December together with the import of 2 million tonnes to augment public stocks, began to ease the tight supply situation from late December. Deceleration in the prices of raw cotton and oilseeds because of the fresh arrivals, after harvest in October, 1996, brought some relief to prices of seasonal items in the third quarter (Table 5.3).

Raw Materials

12.  The raw materials group exhibited only a moderate rise of 4.9 per cent this year upto January 11, 1997 as against the rise of 1.6 per cent last year. In the third quarter (October-December), raw material prices actually declined by 2.7 per cent (Table 5.3).

Administered Items

13.  Administered items include mostly energy inputs - petroleum, electricity, coal and urea fertilizer. No rise was recorded in their prices during April-June 1996. But the upward revision by an average of 18 per cent in the prices of petroleum products, effected from July 3, 1996, and revisions in the prices of coal by 22.3 per cent have raised the contribution by this group to 26.4 per cent in the aggregate rise of 6.8 per cent in the price level by January 11, 1997 (Table 5.3 and Table 5.5).

Essential Commodities

14.  The wholesale prices of 30 essential commodities increased by 12.4 per cent up to January 11, 1997. During the first quarter (April-June), its index rose by 6.7 per cent, which was higher than the previous year’s rise of 4.9 per cent. Wheat and jowar among cereals; gram, moong and masur among pulses; atta; tea; edible oils; fish; and gur were the major contributors to this rise. By September, the prices of essential commodities rose by 10.8 per cent as against the rise of 7.5 per cent in the corresponding period of the previous year. Prices of rice, wheat and jowar among cereals and gram among pulses maintained the rising tempo. Prices of gur escalated to 44.6 per cent as against 25.8 per cent in April-June 1996. Due to the revision in the prices of petroleum products and coal, the prices of kerosene and soft coke also rose abruptly in the second quarter (July-September). In the third quarter, prices of edible oils decelerated, and by December, they attained stability, except in the case of coconut oil whose price rose sharply. Price of rice remained stable but that of wheat soared high by 27 per cent. Among cereals, the price of Jowar also maintained the rising tempo. Among pulses, the price of gram rose sharply over last year while price rise for masur was less than last year (Table 5.3 and Table 5.6).

Inflation based on Consumer Price movement

15.  Inflation based on Consumer Price Index for Industrial Workers (CPI-IW), data for which are available till November, 1996, declined from 9.8 per cent in April, 1996 to 8.7 percent in November, 1996 (Table 5.1). The price movement in CPI-IW indicates that during this financial year, upto November, 1996, the retail prices registered an increase of 9.4 per cent, which was a little lower than the rise in the corresponding period last year (Table 5.7). However, the pattern followed in the current financial year is different from last year. Lower increases than last year have been registered in the retail prices of food, clothing and bedding, but higher rise than last year have been recorded in the prices of the groups of pan, supari, fuel and light and the services (Table 5.7).

Measures taken to control inflation

16.  Like last financial year, monetary policy in the current financial year had the objective of containing inflation and to provide for easy access to credit to meet the requirement of industrial sector. To realise these objectives, it was announced that the growth of money supply would stay within the targeted growth of 15.5 - 16.00 per cent in 1996-97 and, attempts would be made to contain the fiscal deficit to 5 per cent of GDP. Further more, several other supply-side measures were taken to control inflation (Box 5.2).

Public Distribution System

17.  Public Distribution System (PDS), a key component of supply management of essential commodities, ensures availability of foodgrains-mainly rice, wheat, sugar, edible oils and kerosene - through a net work of outlets or fair price shops (FPSs), numbering about 4.37 lakhs. About 3.48 lakhs FPSs were operating in rural areas, and 0.89 lakh in urban areas. Each FPS is envisaged to serve a population of 2000. Besides, a Revamped Public Distribution Scheme (RPDS), which supplies additional items like tea, soap, pulses and iodized salt to households located in tribal, hill and arid areas having poor infrastructure, was operating in 1775 blocks. Under RPDS, foodgrains - rice and wheat - are allocated to States/UTs for RPDS blocks at prices lower by Rs. 50 per quintal than the issue price for normal PDS. The need for restructuring PDS has been debated for quite sometime. Towards the end of December, 1996 the government has announced new policy measures for streamlining the PDS (Box 5.3).

Foodgrains Allocation and Off-take in PDS

18.  Offtake of foodgrains has shown a sharp rise in 1996-97, in contrast to the three preceding years, reflecting a widening gap between the PDS price which was last revised in February, 1994 and, the current market price. Offtake of wheat was 66 per cent higher than last year ( for April-December period) as market prices soared by over 31 per cent during the period. Even in rice, the offtake was higher by 1.36 million tonnes during April-December, 1996. It appears that 1996-97 offtake of foodgrains may exceed the previous peak offtake of 19 million tonnes in 1991-92. Against a total procurement of 16.8 million tonnes in 1995-96, the offtake of 19 million tonnes meant that stocks, especially of wheat, would need to be replenished so as to maintain the minimum buffer stock level. For wheat, the stock had dropped marginally below the minimum norm from October, 1996 (Table 5.8 and Table 5.9).

19.  Wheat prices started rising from July, 1996 and by November rose by 30 per cent over the year. This was due to a production shortfall and lower procurement which caused distortions in its distribution and availability. The most important step taken by the Central Government to dampen the speculative price rise in wheat was to accelerate FCI’s open market sales to 6 lakh tonnes from December onwards. Simultaneously, the Government took recourse to importing wheat to augment the depleting FCI’s stocks.

Sugar and Edible Oils

20.  Levy sugar price supplied to PDS consumers at Rs. 9.05 per kg. had remained unchanged for three years since February, 1994 despite periodic revisions in the statutory minimum price of cane paid to sugarcane growers. Consequently, PDS supply of sugar was heavily subsidised and, in order to reduce part of the subsidy, the Government raised the
issue price of sugar for PDS to Rs. 10.50 per kg. in
February, 1997. Even then, the PDS retail price was still cheaper compared to the market price ranging between Rs. 15 to Rs. 16.50 per kg. Sugar supplies for PDS were maintained at an average level of 3.27 to 4.03 lakh tonnes per month during 1995-96. Allocations in November, 1996 were raised to 4.06 lakh tonnes of levy and 7.8 lakh tonnes of free sale sugar to meet festival season's requirements. Sugar production during 1995-96 was expected to record an all time peak of 164 lakh tonnes. The carryover stock (levy and non levy) at the start of the sugar year beginning October, 1996 was 80.78 lakh tonnes as against 54.95 lakh tonnes during the corresponding period last year. The Government arranged import of 2 lakh tonnes of edible oil (palmolein) at a concessional duty rate for distribution through the PDS. In the current financial year, about 8.77 lakh tonnes of edible oils have already been imported under OGL by the end of October.

Mid-Day Meal Scheme

21.  The mid-day meal scheme was launched by the Ministry of Human Resource Development from August, 1995, initially for the benefit of students enrolled in Primary Schools in 2368 RPDS/EAS blocks. It was proposed to be extended to 2006 Low Female Literacy (LFL) blocks during 1996-97 and to all primary schools in the country (828 blocks and 3,000 Nagar Palikas) during 1997-98. A quantity of 1.91 lakh tonnes of wheat and 4.19 lakh tonnes of rice was lifted by States/UTs under the scheme up to December in the current financial year. The foodgrains for the scheme are supplied free of cost to States/UTs. In addition, handling/transport charges are reimbursed to States by the Ministry of HRD (Department of Education) subject to a ceiling of Rs.25 per quintal. The FCI, however, charges economic cost of the foodgrains (rice and wheat) supplied by it to States/UTs under this scheme from the Ministry of HRD. The Ministry of HRD has placed a revolving fund of Rs.150 crores at the disposal of FCI for implementation of the scheme.

Open Market Sale of Foodgrains by FCI

22.  To dispose of some of its surplus stock of rice and wheat and to check the rise in their market prices, FCI sold 27 lakh tonnes of wheat and 2.25 lakh tonnes of rice in the current financial year upto the middle of January, 1997.

Foodgrains Procurement and Stocks

23.  Procurement of foodgrains is one of the central pillars of the food management policy. It serves the twin purpose of providing a remunerative price to the farmers, thereby avoiding chances of distress sale of foodgrains at prices below the support price fixed by the Government and also to enthuse them to increase production and ensuring a build up of public stocks of grains. Procurement operations are carried out by the FCI and State agencies in consultation with State Governments. Procurement prices are based on support prices announced by the Department of Agriculture & Co-operation.

24.  The Central Government maintains food stocks commensurate to the requirements of (i) the prescribed minimum buffer stock for food security, (ii) operational stock for monthly releases of foodgrains for supply through the PDS (each state is allocated a quota in the light of its past demand, offtake trends, relative needs and other related factors), and (iii) market intervention stock for release in the open market (to augment supply and help moderate the open market prices).

25.  Wheat procurement (during April-June, 1996) at 8.18 million tonnes was lower by over 4 million tonnes over last year's procurement of 12.33 million tonnes. The fall in the quantity of procurement of this magnitude was rather unexpected, given the earlier assessment of a normal 1995-96 wheat crop. It was only in late 1996, that a fresh assessment of crop output revealed that the 1995-96 wheat crop may have been lower by about 3 million tonnes over the preceding year's production of 65.5 million tonnes. Consequently, 1995-96 foodgrains output was scaled down to 185 million tonnes as against the earlier estimate of 191 million tonnes. In the current rice year 1996-97, 80.58 lakh tonnes of rice had been procured between October, 1996-January, 1997 as against 64.37 lakh tonnes during the corresponding period of the last year (Table 5.10). Current indications are that procurement of rice in 1996-97 (October, 1996 - September, 1997) may be a little better than last year’s 99.50 lakh tonnes.

26.  The comfortable stock position that characterised 1995-96 became somewhat difficult in the later part of 1996-97, especially for wheat. Wheat stock in July, 1996, at 13.9 million tonnes, was only marginally above the buffer stock norm but fell short of the latter in the beginning of October, 1996 (Table 5.9). To meet the situation, Government has already announced the import of upto two million tonnes of wheat and permitted roller flour mills to import wheat under OGL. Position of rice stock in the Central Pool continues to be comfortable and as on 1st October, 1996, about 9.34 million tonnes of rice was in stock as against 6 million tonnes buffer stock norm for that month. The rice surplus of over three million tonnes was, however, less than half the surplus on the corresponding date of the last year (Table 5.9 and 5.11).

Central Issue Prices for PDS/RPDS

27.  The Central Issue Prices (CIP) for the PDS have not been revised since 1st February, 1994 despite the year to year upward revisions effected in minimum support prices. CIP for PDS for wheat was Rs. 402 per quintal (Rs. 352 per quintal for RPDS) and for rice Rs. 537 per quintal for the common variety, Rs.617 per quintal for fine and Rs. 648 per quintal for super fine quality respectively (Table 5.12). For RPDS areas, CIP is Rs.50 per quintal less than the CIP for PDS areas. Constant CIP of rice and wheat has resulted in a higher food subsidy burden on the Government.

28.  The State Governments fix the 'retail end' prices for PDS and RPDS after taking into account the transportation cost and dealers’ commission, etc. Some States have fixed the ‘retail end’ prices for PDS and RPDS consumers even lower than the CIP (Table 5.13). The Government of Andhra Pradesh, Tamil Nadu and Orissa are operating a scheme for rice at Rs. 2 per kg., and Government of Gujarat is operating a scheme for wheat at Rs. 2 per kg. and the consequent additional subsidy is therefore borne by these States.

Food Subsidy

29.  Subsidy on foodgrains borne by the Central Government has risen over the years and was Rs.5,343 crores in 1995-96 (Revised Estimate) and has been estimated at Rs. 6,114 crores in 1996-97 (Revised Estimate). The consumer subsidy which was Rs.136.02 per quintal on rice and Rs.147.7 per quintal on wheat in 1995-96, has risen to Rs.191.96 per quintal in the case of rice and Rs.195.40 per quintal in the case of wheat in 1996-97. Table 5.14 lists the subsidy incurred on foodgrains since 1991-92.

Agriculture Price Support and Food Security Policy

30.  The objective of the Government's food security policy is to ensure availability of foodgrains to the public at an affordable price. The Public Distribution System has existed in the country since the Second World War. The support price for production, procurement and maintenance of public stocks of rice and wheat, are the principal operative instruments of the country’s food security and public distribution policy. The procurement of coarse grains has been negligible over the years because of high prices prevailing in the open market and, therefore, no stocks of coarse foodgrains are available in the Central Pool for distribution through the PDS.

31.  Wheat and rice are the two principal foodgrains used by the Central Government for market price stabilisation and for ensuring food security through the Public Distribution System. Rice is mainly procured for the Central Pool from a levy imposed on the rice millers/traders under the Essential Commodities Act, 1955 and the levy orders issued by the State Governments. The foodgrains stock maintained in the Central Pool by the Government is basically utilised for distribution to states for the PDS.

32.  In the years, when public stocks fall below the minimum buffer stock norms or when production shortfalls are anticipated, the Government takes recourse to imports for augmenting the buffer stocks. However, depending on the behaviour of the open market prices and the stock position in the Central Pool, the public stock of foodgrains is also utilised for market intervention as an instrument of supply management policy.

33.  Based on a study by a technical group, minimum buffer stocking levels were prescribed for rice and wheat to be maintained in the Central Pool as on 1st January, 1st April, 1st July and 1st October in a year during the Eighth Plan period. The stock position of foodgrains in Central Pool was very high during 1995-96. The excess stock of rice facilitated export of 1.5 million tonnes of rice from public stocks in addition to over 5 million tonnes of rice exports by private trade during the 18 month period beginning April, 1995. Wheat stocks too were in excess of buffer stock norms and resulted in liberal open market sales to the extent of over 6.3 million tonnes in 1995-96.

34.  The Minimum Support Prices (MSP) for major crops are recommended to the Government each year by the Commission for Agricultural Costs and Prices (CACP) on the basis of a detailed study of costs of production and other relevant factors. Cereals for which CACP recommends MSPs are paddy, wheat, jowar, bajra, maize, ragi. It also recommends prices for four pulses namely, gram, arhar, moong and urad; six oilseeds, namely, groundnut, sunflower, soyabean, rapeseed/mustard, safflower, toria and one tree crop namely copra. It also recommends MSPs for four non-food crops, i.e. cotton, jute, sugarcane and tobacco (Table 5.15).

Movement of Agricultural Prices Relative to Industrial Prices

35.  The movement in the indices for agricultural and manufactured products since early eighties indicates, that agricultural product prices have moved faster than the prices of manufactured products. This has resulted in the terms of trade moving in favour of the agricultural sector. This trend is clearly visible in the movement in the index of prices of agricultural products relative to the index of prices of manufactured products from 103.5 in 1989-90 to 117.2 in 1996-97 (Table 5.16). The current agricultural price policy has attempted to correct the earlier policy bias favouring industry through reduction of certain tariffs on manufactured products and by lifting some of the restrictions on agricultural trade, and thus improved the incentives regime for agricultural producers.


36.  The annual (point-to-point) inflation rate in the first half of the current financial year (April-September) ranged between a low of 4.2 per cent to a high of 6.6 per cent. The price rise of this magnitude could be regarded as modest given the hefty increase of 18 per cent in the administered prices of petroleum products in early July, 1996. Even in the next two months October-November 1996, the annual price rise was still below 7 per cent. However, there was a clear indication of inflationary pressures resurfacing due to the persistent rise in the prices of many of the agricultural commodities - mainly foodgrains - right from the middle of current financial year. By the end of December 1996, the annual inflation rate had crossed 7 per cent. The normal seasonal decline in the post-harvest period generally seen during November-December did not happen this year and hence the uptrend in prices was unabated in the third quarter of 1996-97. The containment of inflationary pressures in 1997-98 will require prudent fiscal and monetary policies and appropriate supply side policy measures to control price increases in primary articles.

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The Economic Survey Of India, 1997

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