Sample Materials of SSC CGL (Tier -3) Study Kit

Subject: Essay

Topic: World wide Price rise

A sharp increase in food prices over the past couple of years, intensifying in early 2008, has raised serious concerns about food and nutrition for many poor people in developing countries. The key affected areas are Asia, sub-Saharan Africa and Central America. There are also related concerns about inflation, and – in some countries – about civil unrest. The current situation is distinctive because it is not just a select few but nearly all major food and feed commodities that are seeing a ‘concurrence of the hike in world prices’. Real prices are higher than they have been since the 1974 price spike. When adjusted for inflation and the recent decline of the dollar, the food-price increases are smaller but still dramatic, carrying serious consequences for thepurchasing power of the poor .

Dramatic increases in international agricultural commodity prices began in 2006 and peaked in July 2008. An equally remarkable and rapid decline of those prices then ensued, accompanied by extreme volatility in those prices. The trend in food prices lagged the rapid increases in other commodity prices, with rice among the most expensive at the peak and rising as much as crude oil. High commodity prices quickly raised farm gate prices in developed countries. In developing countries, poor market integration and border barriers may have limited pass-through of these prices to the farm gate, but there was more rapid food price and general inflation than occurred in many developed countries. Countries were impacted to differing extents, and food riots occurred in the most affected cases. In response to the crisis, countries from India and Egypt to Vietnam and Indonesia banned exports of rice, a staple for half the world. World food prices rose to a record in December on higher sugar, grain and oilseed costs, the United Nations said. An index of 55 food commodities tracked by the Food and Agriculture Organization gained for a sixth month to 214.7 points, above the previous all-time high of 213.5 in June 2008, the Rome-based UN agency said in a monthly report.

Moreover, debate persists on the exogenous mechanisms driving these changes, which are often interrelated (e.g., worldwide economic boom and then global recession, speculation in commodities). The goal will be to identify factors likely to drive commodity prices in the future and to provide some understanding of the dynamics and persistence of the observed global price changes. There is an emerging and reasonable consensus among experts and academics about the range of causes. However, debate is ongoing about the relative contribution of these causes. There is certainly no one, single cause; rather, many factors are interacting in different, locally specific ways.

Causes vary between different places and over time, as has happened in previous commodity booms. Some are cyclical, some are structural and some are unique The cost of food climbed 25 percent from a year earlier in December, based on the FAO figures. The agency’s food-price indicator rose from 206 points in November. Record fuel prices, weather- related crop problems, increasing demand from the growing Indian and Chinese middle classes, and the push to grow corn for ethanol fuel all contributed to the crisis that year. Global food production will have to rise 70 percent by 2050 as the world population expands to 9.1 billion people from about 6.8 billion people in 2010, the FAO has said.

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Main factors responsible for the recent rises in food prices:–

• Weather disruptions, including serious droughts, have affected output in several key producing countries (Australia, Turkey, Ukraine and parts of North America) in the mid-2000s. This has led to two successive years of negative growth in world cereal production.

• Under-investment in rural infrastructure and agricultural innovation

• Increased demand due to use of food crops in biofuel production has resulted in reduced soybean and wheat cultivation.

• World production of cereals has slowed, causing a decline in stocks over the last decade. This has weakened the ability of the world food system to cope with shocks and created conditions in which short-term shocks cause large price increases (Wiggins, 2008).High cost of oil and energy is affecting transportation of agricultural inputs and outputs, mechanical cultivation, fertilisers and pesticides.

• Increasing and changing demand in China and India, due to economic growth, has led to increased consumer purchasing power and consequent shifts away from traditional staples and toward higher-value foods like meat and milk. However, some analysts believe that the effect of this on world prices has been exaggerated.

• Topsoil erosion: modern ploughing, overgrazing, fertiliser and pesticide use result in the steady depletion of worldwide topsoil. Water and winds carry away the soil, when it is not fixed by plant cover. An estimated 25 billion tons of topsoil are lost to erosion each year. The UN estimates that erosion has now seriously degraded about 40 per cent of the world’s agricultural land.

• Increasing urbanisation often means that more people are becoming purchasers rather than producers of food.

Food in Figures

• 93,000,000 Acres of corn planted by US farmers last year, up 19 per cent on 2006.

• 76% Amount of US corn used for animal feed.

• 8kg Amount of grain it takes to produce 1kg of beef.

• 20% Portion of US corn used to produce five billion gallons of ethanol in 2006-07.

• 50kg Quantity of meat consumed annually by the average Chinese person, up from 20kg in 1985.

• 10% Anticipated share of biofuels used for transport in the EU by 2020.

• $500m The UN World Food Programme’s shortfall this year, in attempting to feed 89 million needy people.

• 9.2bn The world’s predicted population by 2050. It’s 6.6bn now.

• 130% The rise in the cost of wheat in 12 months.

• 16 times The overall food consumption of the world’s richest 20 per cent compared with that of the poorest 20 per cent.

• 58% Jump in the price of pork in China in the past year.

• $900 the cost of one tonne of Thai premier rice, up 30 per cent in a month.

It has been argued that by 2030 there will be 600 million more chronically under-nourished people in the world due to continued pressure on prices, in part due to the conversion of maize away from food uses to ethanol production. Demand for agricultural commodities – food, feed, and fuel – is likely to continue to escalate. Climate change and rising energy demand could re-accelerate food prices in the future. Ad-hoc market and trade policies such as export bans and import subsidies add further volatility in the international food market. Higher food prices can have radically different effects across countries and population groups.

A recent IFPRI report provides a conceptual framework for understanding these impacts, which powerfully highlights the complexity of cause and effect. Broadly speaking, at the country level, net food exporters will benefit from improved terms of trade, although the benefits may be offset in situations where exports are being banned to protect consumers. Net food-importing nations, however, will struggle to meet domestic food demand.

An FAO report published in June 2008 highlights twenty two developing countries that are especially vulnerable due to a combination of high levels of chronic hunger (more than 30 per cent under-nourishment), and high dependence on imports of petroleum products (100 per cent in most countries) and, in many cases, also of major grains (rice, wheat and maize) for domestic consumption. Food-price increases are having serious consequences for the purchasing power of the poor. Affected groups include the rural landless, pastoralists, small-scale farmers and the urban poor. Despite the various causes of food crises, the hardships that individuals and communities face have striking similarities across disparate groups and settings.

These include:

• Inability to afford food, and related lack of adequate caloric intake

• Distress sales of productive assets

• Migration of household members in search of work

• Reduced household spending on healthcare, education and other necessities.

The rise in global commodity prices is fueling inflation everywhere particularly in developing countries where food and energy forms a major percentage of the inflation basket. This has forced countries like India and China to accelerate interest rate hikes to cool down inflation. Rising Food Prices has caused distress in a number of places leading to food riots in Africa and have been said to be a leading cause of the revolutions in the Middle East. Oil Prices continues to increase unabated as dollar decreases with US Money Printing. Commodities are touching new all time peaks as rising global demand, finite resources, money printing by developed countries fuel price hikes. Silver has been increasing in a parabolic manner with other commodities too showing heart-stopping jumps in prices. The rise in global wheat, rice prices has been at a record as well. Almost all commodities have seen sharp prices increase.

Specific policies are needed to deal with the changing causes and consequences of high food prices, to help the most vulnerable people in the short term, while working to stabilise food prices by increasing agricultural production in the long term. A detailed set of policy prescriptions has been laid out in the Comprehensive Framework for Action (CFA), developed by the High Level Task Force on the Global Food Crisis. The CFA highlights two major objectives – meeting immediate needs, and building longer-term resilience – with related outcomes and actions.

The problem of rising prices is one of the most important problems that India is facing now. Over the past several years rising prices have become a chronic malady in India’s national life. They have given rise to widespread distress,especially among people who are already living at the subsistence level and also among those in the fixed income group, viz., wage earners and the salaried classes. Because of persistent increases in the prices of the necessaries of life, the number of people living below the poverty line has been steadily increasing. The unprecedented rise in prices of almost all the important necesscities of life has posed a serious problem before us. Millions of people find it hard to earn one square meal a day, because prices of food grains, edible oils, sugar other food articles have been raising very rapidly. This has caused great unrest among common people. The annual average of whole sale prices index always owes an increasing trend. This alarming rate of increase in prices has thrown the countries economic out of gear and made common man’s life miserable millions in India to-day sleep without food at night. All their day’s work does not even promise them sufficient to eat and drink. Everybody is complaining of increasing prices day by day. Prices have become double in the last few years and there are many things which are now beyond the reach of common people. This phenomenal increase in prices is not the result of any simple factor. There are several factors which are responsible for it. Apart from industrialists, manufacturers and middle men, our government is also at fault. It is increasing taxes.

Price rise does occur in the process of economic development. But in India the rise of price has been much higher than what it should have been. It broadly means holding the inventories and selling it at higher price. It creates artificial scarcity in the economy inspite of increase in production and results in price rise. The rapid growth of population means more mouths to feed, more demand of clothing and basic necessities as compared to supply of goods and services which result in price rise. It means printing more currency notes and coins. In India deficit financing is done mainly to meet the budgetary deficit. It results in more supply of money in the economy but when increase in supply of money corresponds with less increase in the supply of goods and services (National output) there is rise in price of goods and services. Money supply includes currency notes and coins, demands and time deposits. Increase in money supply shows that people in an economy are ready to spend more money for buying goods and services.

The economists are of opinion that growing economy of the country has given rise to the rising prices. Such economy causes inflation. In inflation purchasing power runs ahead of purchasable goods. In other words, in a growing country, the supply of money increase at once but the supply of goods takes time to increase. Again the population has increased. This has further increased inflation. Because of growing population the current corruption is increasing. The factors which contribute to price rise can be broadly classified as external and internal. In the context of the situation as it has developed in India, we have heard it repeatedly many times that the rise in prices witnessed in the country is in part due to the impact of global inflation. Obviously, we can not do much about global inflation and the impact it has on the price situation in India. But we can certainly apply our minds to identifying and controlling or at least mitigating the rigours of the internal factors which may be aggravating the situation. The symptoms of the disease are clear enough. But before we start thinking of the remedies, we need to form a clear idea of its internal causes also. According to economists, the main culprit in this context is inflation. In layman’s language, it describes a situation in which too much money is chasing too few goods. We are repeatedly told that money supply in the country has been increasing. This means that the amount of money circulating in the market has been going up. Naturally enough if it exceeds the value of goods available in the market, the prices are bound to go up.

Rising prices encourage hoarding, profiteering, black –marketing and corruption. They discourage export. They cause devaluation of currency. Lastly, they seriously disrupt equitable distribution of wealth. The government’s recent decision to opening up retail sector to big multinational corporation going to create more problem because, these forces take full control of the market and whenever they want to make manipulate the market.  On the other hand, it badly affect the govts. performance and public anger. The Present Prime Minister and Finance Minister, without making a second thought try to open up all sectors even the retail sector which will badly affect the retail traders as well as the consumers.  On the farmer’s & direct consumers point of view, the govt. is doing nothing on this issue, just making a temporary noises, with no action.  At the late hours, the govt. need to look into all aspects in its policies to address the pressing farmers issue, otherwise the present problem of price rise and farmers suicide going to increase many fold.  It is an early wake up call.

India is a developing economy. Rise in prices is inevitable in a developing economy. The programmes of economic development generate larger employment and income. These increase the demand for consumer goods and services. There has been a sharp increase in prices of essential commodities in the past few years. This has been really a matter of great concern. Inflation is a rise in prices and wages caused by an increase in the money supply and demand for goods, and resulting in a fall in the value of money. Limited inflation contributes to economic growth. But for some time now, the level of inflation has gone far beyond acceptable limits. This has caused harassment to the common man. The standard of living of the common people is closely linked to the nation’s economic situation. Black-marketing and scarcity of essential commodities are both causes and effects of rising prices. Corrupt traders try to earn money by indulging in these practices. Corruption, in all its forms, fuels price rise.

The alarming rise of population is another factor for the rise in prices. India is the second most populated country in the world with a population of more than one billion. In spite of the considerable developments in all sectors since Independence, conditions of scarcity still prevail due to overpopulation. The majority of the people of India belong to the poorer sections. The Government should take measures to tackle the menace of price rise at the earliest. The consumers should be guided about their rights and privileges. They should be made aware of the corrupt practices. The public distribution system should be strengthened. Corrupt officials should be brought to books. Effective steps should be taken to increase production in all sectors. To reduce the demand and pressure on our limited resources, the rise in population should be checked.

Rise in prices gives rise to economic disparities. It widens the gap between the rich and the poor. Due to soaring prices, even food is getting beyond the reach of the poor. A democracy cannot flourish or function in such a condition. However some steps taken by the central government has given some relief to the common people. Implementation of Mahatma Gandhi National Rural Employment Guarantee Act is one of them. There is a testintony to the fact how rise in prices leave a great impact an the common man’s mind. In 1990s, the sudden and steep increase in the price of onions brought about the downfall of one State Government. A similar rise in the price of sugar brought down another.

Continuous price-hike may lead to anarchy - a complete failure of all government and official systems. Rising prices spare neither the rich nor the poor. Rising prices have given rise to widespread distress among the fixed income groups, viz., wage earners and the salaried classes. The Central and State Governments often blame each other for the rise in prices.

The drop in agriculture production during the last couple of years has resulted in the shortage and availability of food items, which hit the economically weaker sections of the society the most. Food prices are cyclical in nature. A sharp increase in food prices during the year 2009-10 period has been a cause of concern. A significant part of this inflation is due to supply-side bottlenecks in some of the essential commodities, precipitated by the delayed monsoon and drought conditions in some part of the country. India cannot be immune to global price situations especially when a significant proportion of the country’s requirement of oil is met through imports.

For food prices to stabilise or to be brought down, agriculture production would have to be given top priority. Incentives for the farmer, subsidies for fertiliser and seeds (it may be reviewed on year to year, crop to crop basis) and remunerative rates for farm produce may help to increase the yield. Availability of easy loans to help mechanise the farming may also help to increase food production. The middleman, who makes hay, while the farmer suffers, may either be removed or his role minimised. Prices of food items multiply many a time, when they leave the field and reach the common consumer through the street hawkers. Severe action against hoarders, who pile stocks, while the common man suffers must also be taken. Forward trading in food items must be banned. If these steps are taken sincerely by the Central and State Governments, the common man may be spared the pangs of rising prices.

The problem is very dangerous. It needs measures – short and long term, to be adopted. These measures include as appeal mixed up with threat to the sellers, raids on go downs and other hoards of grain, the seizing of black, the cut of Rs 400 crores in central expenditure, the increase in bank rates to 5 %, the opining of fair price shops, the rationing of provisions, the imports of food-grains from some foreign counties, the curbing of unproductive expenditure by the Government, the readjustment in the scale of pay and the emphasis on small plants. The short term measure will help the government to hold the price-line.

The long term measures will help the government to withdraw the huge amount of money pumped into circulation during the last year. To sum up, some of internal causes which precipitate price increases are excess money supply, faulty planning, unrealistic import and export policies, imbalance in production, rapacity among traders and excessive increase in population. Given the necessary will and determination, none of these presents an insuperable problem.

The causes of increase in money supply are well known, viz., large scale deficit financing over the years, increase in bank-credit, the cost of food procurement and subside etc. Surely India does not lack talent which can find the answers of these problems.

Experience tells us the only impulse to which a majority of the business people in India respond is fear. Appeals to their patriotic instincts fall on deaf ears because they seem to have no such instinct. The only way in which they can be made to behave is strict enforcement of the laws on the statuebook to keep the prices of essential commodities under check and harsh measures against hoarding and profiteering.

They may not be able to understand the language of reason but they will certainly appreciate determined action. Simultaneously, steps will have to be taken to increase production, particularly of such items of mass consumption as may be in short supply. Another step that is urgently called for in this context is the streamlining and strengthening of the public distribution system. Last but not least, it has to be remembered that all these measures can be successful only to the extent we can control population growth so that it is not allowed to make nonsense of all planning. Given the necessary will and determination and with the active co-operation of people at large, the problem of rising prices can certainly be solved.

Therefore, The govt. should try to crate such a mechanism at the earliest to liberate the farmers from the clutches of middleman.  The existing commodity exchange only benefits these traders and not the farmers which need to be noted.  There is no proper check in FCI and other godowns to prevent black marketing.  By stocking through these godowns, the manipulators creating artificial price rise and then it encouraged black marketing.  The high inflation can be fully controlled if the govt. and the concerned authorities make proper check on the market and raid various godowns across the country. 

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