Rising food prices can drive households into poverty by reducing the purchasing power of household income, and exacerbate the poverty of already poor households. Especially in rural areas, however, some poor or near poor households may be producers of food and may therefore be shielded from the full force of food price increases. Those with a marketable surplus (after accounting for own consumption) may even find their incomes rise as a result of food price increases. Ultimately, gauging the precise impact of food price increases on poverty, especially in rural areas, is an empirical issue.
The many nuances of the poverty impact of food price increases can be examined by analyzing consumer expenditure survey data from India. To simplify the analysis, consider a price increase on only one group of commodities: cereals (i.e., rice and wheat). Cereals encompass a large share in household expenditures in India, especially among their poor.
To assess the impact, four different scenarios are adopted to analyze the impact on poverty rates (measured using Indian official poverty lines) of the 10% increase in the price of cereals in both urban and rural areas:
First Scenario
All households are affected by the price increases in relation to their reported consumption of cereals. There is no allowance made for consumption from own production (let alone allows for sales of cereals). The simulated impact on poverty is captured by reducing the monthly total consumption expenditures (actual and imputed) of each household by an amount equal to 10% of the household’s total consumption expenditures on cereals.
Second Scenario
More realistic, the this scenario takes into account the fact that some households’ consumption of cereals is on account of home production. The price increases is assumed to have no effect on consumption from home production. To capture the poverty impacts under the scenario, the monthly total consumption expenditures of each household are reduced by 10% of the household’s expenditure on “purchased” cereals. Purchased expenditures are simply equal to total expenditures on cereals less consumption from home-produced cereals.
Third Scenario
The possibility that some households are net producers of cereals is taken into consideration (i.e., their production of cereals is larger than their consumption of cereals) and may, therefore, gain from an increase in the price of cereals. Unfortunately, the Indian survey does not provide information on the quantity of cereals produced or sold. However, the survey does provide information on the industry and occupation corresponding to the main economic activity of each household. Net producers of cereals are defined to be those households that are involved in cultivation of cereals and have cultivated land of 2 hectares or more. It is assumed that any household belonging to this group gains from the increase in price of cereals such that even if they were poor to begin with, they would be nonpoor as a result of the price increase. This assumption is made given that there is no information on the actual quantities of cereals produced and sold. For all other households, the monthly per capita expenditures are reduced by 10% of their consumption of purchased cereals.
Fourth Scenario
Wholesalers and retailers trading in cereals are treated similarly as cultivators of cereals with more than 2 hectares of land in the third scenario. That is, as with the latter group of households, the former are assumed to become nonpoor if they were poor to begin with.
Results
The overall results are quite sensitive in the rural sector to the assumptions on whether and which types of households may gain from the increase in cereals prices.
Based on the first scenario, a 10% increase in cereal prices in India causes an increase in rural and urban poverty. This is to be expected since by assumption any household that consumes cereals will see a decline in welfare. The same case is found for the second scenario, although the extent of the increase in poverty rates is lower as compared to the first scenario, especially in rural areas. Moving to the third and fourth scenarios, where we distinguish between households that are (presumably large) producers of cereals and traders of cereals, we find that poverty incidence in the rural sector decreases as a result of the increase in cereals prices. Poverty incidence in urban areas increases. But the extent of the increase is mitigated as compared to the first two scenarios.
While no doubt stylized, the scenarios considered above are useful in highlighting the fact that even the short run impact of food price increases in rural areas on poverty will be complex.