The Govt Buys Food Like Crazy, And Wonders Why Inflation Is High

5 comments Written on May 6th, 2014 by
Categories: Inflation

How bad can government buying of food get? I plotted CPI inflation since 2002 along with Food Corporation of India (FCI) Stocks compared to the buffers they must maintain.

Note: CPI inflation is based on the RBI “back-casted” data which they had built from current CPI data (which only goes back to 2011) and translating it back using another CPI measure called the CPI-IW.

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Updated: @karthiks gave me an idea - of showing this graph as essentially the difference between actual buffer stock and requirements (the “excess”) versus CPI Inflation:

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As you can see, inflation has built up after there’s sustained buying of foodgrains by the government way above the buffer requirement.

In 2000 we don’t have the backcasted data, but CPI inflation went to as low as 3% and then, on the back of the crazy buying, went to above 6% as we can see in the early part of this graph.

Between 2003 and 2006, we saw very little buffer stock changes, so the government wasn’t a big buyer, and inflation remained benign.

The massive buying from 2009 to 2012 coincided with inflation remaining persistently above 8% and going as high as 12%.

In recent times, the buffer stocks have been coming down, and (surprise!) inflation has been coming under control as well.

With the Food Security Act, Buffer norms will be increased. How much? By about 60%, which means between 300 and 480 lakh tonnes. For the most part, we’ve maintained even more than that!

Is high inflation really surprising that when the government is a bigger buyer every year - and it seems at prices that are increasing at more than 12%!

If the past is any indication, the government will not respect the buffer levels. They’ll just buy like crazy when they want to, with no respect to the inflationary impact of the exercise. What will the next government do?

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About the Author:
http://www.capitalmind.in
The man behind Capital Mind. Deepak is a co-founder at MarketVision, a financial knowledge company. Deepak also provides data research and consulting services, and now lives in Bangalore. Connect with him at deepakshenoy@capitalmind.in.

5 comments “The Govt Buys Food Like Crazy, And Wonders Why Inflation Is High”

Govt buys food stocks when it wants to win elections or gain or please allys in the food belts . Increase in MSPs is much more important for the govt than actually feeding the vulnerable people !

Its all short sighted vote bank politics !

You must map state elections with stocking if you get indl data .

lol does someone at the govt actually know this?
I am sure they do but if yes then why would anyone in their sanest mind continue to add fuel in the fire…?

Sometimes It just feels weird to think that the govt actually thinks..

I understood from your article that government has more “buffer” than it needs. But your article does not mention how much government purchase every year. We need that graph to understand things better.
If you do not have that information then you might have to figure out how much government distributes from that buffer every year.
In short, we need how much % of production goes into government’s buffer every year. Since this information is not mentioned in the article, the conclusion might be wrong.
I agree to one point, MSP may cause inflation. It seems obvious provided that government is ready to buy enough to support the price. If it is buying less than 10% of production then it is more of signaling to market than anything else.

Good point. I don’t have production stats right now. The Government is a significant buyer of stock, and its distribution is not relevant here. Because if buffers are going up, it is buying more than it is distibuting. If buffers are retained above the levels, and much much more, then it means that the government is buying more than it needs…

Deepakji, I hope you send your analysis back to FCI babus, RBI & FM like machineries, and if requires upto PMO. They must be knowing it, but no harm in letting stakeholders know, help them connect dots and giving a piece of our mind.