Welfare Impacts of Rising Food Prices: Evidence from India
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India has been experiencing rising food prices during the last five years. In this paper we explore how inflationary food prices impact India’s consumer welfare and poverty ratios, by calculating the compensating variation as a welfare measure. We account for changes in consumption patterns, i.e. substitution effects among food items, by including own and cross price elasticities obtained through the estimation of a demand system, i.e. QUAIDS. Our results show that consumers substitute high value commodities, e.g. milk, livestock products and fruits in case of rising prices. Moreover, a 10 per cent price increase on average causes a welfare loss of 5 to 6 per cent of monthly income in rural areas and 3 to 4 per cent welfare loss in urban areas. As a result, there is a drop below the poverty line of an additional 4.69 per cent and 2.19 per cent of households in rural and urban regions respectively.