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Domestic Wheat Price Formation and Food Inflation in India


  • Dasgupta, Dipak
  • Dubey, R.N.
  • Sathish, R


Inflation, especially in food prices, has been persistently high in India during the past twenty four months. This has been a source of concern to policy-makers. Fortunately, food price increases are now starting to ease, after the major spike that occurred in the wake of the severe drought of 2009. However, there still remains concern that we: (a) need to better understand the factors that drive such spikes in key prices; and (b) design more effective policies to prevent such future price spikes. The main approach to understanding inflation and its drivers has typically rested, on the whole, in assessing aggregate macroeconomic (aggregate supply and demand) conditions, which then typically leads to consideration of macroeconomic and monetary) policies as the principal tool to deal with inflation surges. That may indeed be appropriate in most circumstances, but is often a blunt, sometimes costly instrument that can stifle growth, especially if price pressures arise from (temporary) supply constraints. Therefore, it may be important to complement an aggregate macroeconomic analysis of inflation with microeconomic analysis: to ascertain if inflation is being driven by specific price spikes in important food and non-food commodities, which has the potential to drive other commodity prices in a cost-push manner. This paper, on global wheat market developments, price transmission and impacts on Indian domestic markets, as well as an assessment of public policies to manage domestic prices, is part of a larger effort to improve our in-house (Department of Economic Affairs) research---to track, monitor and forecast fast-moving key macro-economic variables with potentially large consequences for public policy. We have begun to intensify our efforts. We are investing further systematically---to understand growth and inflation dynamics in the context of rising food inflationary pressures in India and worldwide. We are capturing more high frequency data, and applying quantitative modeling tools (as evident in our current Economic Survey). We take up wheat in this paper, because of recent rapid price rises globally, as well as domestically, and because it constitutes a major element of the overall wholesale and consumer food price inflation indices. Some aspects of the price formation and policy intervention processes in wheat are also likely to be structurally similar for other similar classes of important food items (such as rice), permitting broader insights. Our paper draws upon existing theoretical insights and modeling attempts in the literature; it is, nevertheless, useful to note three “biases” in our approach: (a) favoring analysis of short-term, high-frequency price formation (daily, monthly, or quarterly), versus alternative longer-term annual, structural models; (b) favoring simplified reduced form forecasting models that track high-frequency turning points well, over more elaborate models and tests of longerduration time-series data (which may tend to be more historical and backward-looking, and less useful for short-term forecasting); and (c) assessing current India-specific public interventions in greater detail, than in more general academic papers and models.

Suggested Citation

  • Dasgupta, Dipak & Dubey, R.N. & Sathish, R, 2011. "Domestic Wheat Price Formation and Food Inflation in India," MPRA Paper 31564, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:31564

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    References listed on IDEAS

    1. A. Banerji & J.V. Meenakshi, 2004. "Buyer Collusion and Efficiency of Government Intervention in Wheat Markets in Northern India: An Asymmetric Structural Auctions Analysis," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 86(1), pages 236-253.
    2. Robles, Miguel & Torero, Maximo & von Braun, Joachim, 2009. "When speculation matters:," Issue briefs 57, International Food Policy Research Institute (IFPRI).
    3. Mohsin S. Khan & Axel Schimmelpfennig, 2006. "Inflation in Pakistan: Money or Wheat?," SBP Research Bulletin, State Bank of Pakistan, Research Department, vol. 2, pages 213-234..
    4. Pietola, Kyösti & Liu, Xing & Robles, Miguel, 2010. "Price, inventories, and volatility in the global wheat market," IFPRI discussion papers 996, International Food Policy Research Institute (IFPRI).
    5. M. Hashem Pesaran & Yongcheol Shin & Richard J. Smith, 2001. "Bounds testing approaches to the analysis of level relationships," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(3), pages 289-326.
    6. Muhammad Aslam Chaudhry & Munir A. S. Choudhary, 2006. "Why the State Bank of Pakistan should not Adopt Inflation Targeting," SBP Research Bulletin, State Bank of Pakistan, Research Department, vol. 2, pages 195-209.
    7. Gregory, Allan W. & Hansen, Bruce E., 1996. "Residual-based tests for cointegration in models with regime shifts," Journal of Econometrics, Elsevier, vol. 70(1), pages 99-126, January.
    8. Gregory, Allan W. & Hansen, Bruce E., 1996. "Residual-based tests for cointegration in models with regime shifts," Journal of Econometrics, Elsevier, vol. 70(1), pages 99-126, January.
    9. Alex F. McCalla, 2009. "World Food Prices: Causes and Consequences," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 57(1), pages 23-34, March.
    10. Shaun K. Roache, 2010. "What Explains the Rise in Food Price Volatility?," IMF Working Papers 10/129, International Monetary Fund.
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    Cited by:

    1. Kozicka, Marta & Kalkuhl, Matthias & Saini, Shweta & Brockhaus, Jan, 2014. "Modeling Indian Wheat and Rice Sector Policies," 2014 Annual Meeting, July 27-29, 2014, Minneapolis, Minnesota 169808, Agricultural and Applied Economics Association.
    2. Sen Gupta, Abhijit & Bhattacharya, Rudrani & Rao, Narhari, 2014. "Understanding Food Inflation in India," MPRA Paper 58319, University Library of Munich, Germany.
    3. Bathla, Seema, 2012. "Volatility in Agriculture Commodity Prices in India: Impact and Macroeconomic and Sector-Specific Policy Responses," 123rd Seminar, February 23-24, 2012, Dublin, Ireland 122543, European Association of Agricultural Economists.
    4. N. R. Bhanumurthy & Pami Dua & Lokendra Kumawat, 2012. "Weather Shocks, Spot and Futures Agricultural Commodity Prices- An Analysis for India," Working papers 219, Centre for Development Economics, Delhi School of Economics.
    5. Shutes, Lindsay & Ganesh-Kumar, Anand & Meijerink, Gerdien W., 2012. "Fluctuating staple prices and household poverty in India," MPRA Paper 40982, University Library of Munich, Germany.

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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