The New Year has been accompanied by record food inflation, especially in India where it crossed 18% this week!
I think a fundamental reason for this may be rising income disparity coupled with the unbranded nature of food. Let me explain my simple (over-simplistic?) thinking.
The proportion of rich and middle class people is growing and increasing the income disparity. This is much higher in certain parts of the country. For example, in Gurgaon, we appear to have a very high proportion of people working good white collar jobs (e.g. in IT and BPO companies or multinationals), or blue collar jobs in well-paying companies like Maruti Suzuki. If I were a groceries vendor in Gurgaon many years ago, I might have some well-heeled clients but a lot of my customers would have not made much money. As a groceries vendor today I may have as many "rich" clients as poor ones and many of them would be super-rich by Indian standards.
Now the rich customers of grocery stores are looking for high produce quality and freshness, more variety (e.g. imported fruit), a better shopping ambiance etc. and do not mind paying much more for it. I think this leads store owners to increase prices - sometimes increasing the money they take home but sometimes just adding more services such as refrigeration, air conditioning, accepting credit cards or free home delivery... or scandalously painting the fruit vegetables with wax or, even worse, injecting the produce with growth hormones like oxytocin!
In the long run, one would expect certain stores to cater exclusively to the poorer people, but this process takes time. Today all grocery stores in Gurgaon appear to be increasingly focused on the rich.
Think about it - it is also quite unlikely in practice for two stores in the same neighborhood to be selling the same product at two different prices, especially when there are no strong retail brands in play that accentuate the difference in their offerings. Even when strong retail brands are in play (e.g. premium Whole Foods vs. basic Wal-Mart in the US), the difference between the most expensive and least expensive groceries you can easily buy may be much lower than, say, the most expensive and least expensive electronics you can easily buy. After all, the product brands are mostly the same regardless of retail store - and owned by Mother Nature. At the risk of comparing, ahem, apples to oranges, it seems to me that it is pertinent that you can buy a Bose radio for several times the price of an unbranded Asian one that both fulfil essentially the same function, while an apple at Whole Foods is not that much more expensive than an apple at Wal-Mart. (I read somewhere that currently Wal-Mart's grocery prices are 12 percent lower than those of traditional grocers, while Whole Foods' prices are about 14 percent higher.)
Now, I have not come across much talk about this mechanism of income disparity increasing food prices. If you know of any articles on the subject, please let me know. Also, I am no economist, so I will be happy to be corrected by someone who knows more of that subject than I do (if that population is not still in hiding).
And of course there is another reason why income disparity might drive food inflation - the rich consume more food and waste a lot, and they consume more meat and poultry that are inefficient users of agricultural output. This I think has been well studied. But while this may be a big driver globally of rising food prices (as would be the corn-based ethanol production), in India around me I can see more basic factors at work.
I think a fundamental reason for this may be rising income disparity coupled with the unbranded nature of food. Let me explain my simple (over-simplistic?) thinking.
The proportion of rich and middle class people is growing and increasing the income disparity. This is much higher in certain parts of the country. For example, in Gurgaon, we appear to have a very high proportion of people working good white collar jobs (e.g. in IT and BPO companies or multinationals), or blue collar jobs in well-paying companies like Maruti Suzuki. If I were a groceries vendor in Gurgaon many years ago, I might have some well-heeled clients but a lot of my customers would have not made much money. As a groceries vendor today I may have as many "rich" clients as poor ones and many of them would be super-rich by Indian standards.
Now the rich customers of grocery stores are looking for high produce quality and freshness, more variety (e.g. imported fruit), a better shopping ambiance etc. and do not mind paying much more for it. I think this leads store owners to increase prices - sometimes increasing the money they take home but sometimes just adding more services such as refrigeration, air conditioning, accepting credit cards or free home delivery... or scandalously painting the fruit vegetables with wax or, even worse, injecting the produce with growth hormones like oxytocin!
In the long run, one would expect certain stores to cater exclusively to the poorer people, but this process takes time. Today all grocery stores in Gurgaon appear to be increasingly focused on the rich.
Think about it - it is also quite unlikely in practice for two stores in the same neighborhood to be selling the same product at two different prices, especially when there are no strong retail brands in play that accentuate the difference in their offerings. Even when strong retail brands are in play (e.g. premium Whole Foods vs. basic Wal-Mart in the US), the difference between the most expensive and least expensive groceries you can easily buy may be much lower than, say, the most expensive and least expensive electronics you can easily buy. After all, the product brands are mostly the same regardless of retail store - and owned by Mother Nature. At the risk of comparing, ahem, apples to oranges, it seems to me that it is pertinent that you can buy a Bose radio for several times the price of an unbranded Asian one that both fulfil essentially the same function, while an apple at Whole Foods is not that much more expensive than an apple at Wal-Mart. (I read somewhere that currently Wal-Mart's grocery prices are 12 percent lower than those of traditional grocers, while Whole Foods' prices are about 14 percent higher.)
Now, I have not come across much talk about this mechanism of income disparity increasing food prices. If you know of any articles on the subject, please let me know. Also, I am no economist, so I will be happy to be corrected by someone who knows more of that subject than I do (if that population is not still in hiding).
And of course there is another reason why income disparity might drive food inflation - the rich consume more food and waste a lot, and they consume more meat and poultry that are inefficient users of agricultural output. This I think has been well studied. But while this may be a big driver globally of rising food prices (as would be the corn-based ethanol production), in India around me I can see more basic factors at work.