households) benefit from rice price increase. But even among farmers those with landholdings less than 1.5 acres tend to be hurt. The adverse effect is highest for households headed by agricultural or non-agricultural day workers, and lowest among households headed by salaried workers. With a 5 percent increase in nominal wages, average income declines by 3 percent for the population and 7.7 percent for the bottom quintile. Regarding poverty impact, using the 2005 HIES survey, the rice price hike is estimated to increase the poverty headcount rate by 5 percentage points in the absence of any wage increase and by 3 percentage points assuming a 5 percent nominal wage increase, compared to what the poverty rate would have been in the absence of the price shock.<sup>6</sup> The simulation also suggests an increase in income inequality since the poorest of the poor absorb a greater share of the burden of price increase in view of their larger share of expenditure on staple food in the consumption basket In Sri Lanka, according to the World Bank’s Poverty Assessment, a large share of the population is clustered around the poverty line, implying that relatively small changes in per capita consumption can lead to relatively large changes in poverty rates. Simulations based on the 2006-07 HIES indicate that the 83 percent increase in rice prices between June 2007 and May 2008 would lead to a 5 percentage points increase in the poverty head count. Moreover, adverse effects on calories consumption per day, which is already low, would be expected.

As we saw earlier, of the South Asian countries India experienced lower food price increases than others. Nevertheless, the prices of wheat and rice increased faster than normally between 2006-2008. Given that only about a fourth of all households are net sellers of these cereals, a majority of households would be adversely affected by these price increases. Among farmers also not all benefit: a majority of marginal and small farmers appear to be hurt by price increases, with benefits of increases remaining largely limited to large farmers. Among non-farm households, rural poor households lose the most (a 10% decline in total consumption), followed by rural non-poor and urban poor households.

# **V. South Asia’s Response to the Food Crisis: Short-term Responses**

Given the adverse implications of the food price increases for the poor and the political transition, it is understandable why South Asian policy makers were willing to take any policy step that would help stabilize domestic prices without worrying too much about the potential long-term effects. Hence, much of the immediate actions were focused on stabilizing prices and not on supply response or other dimensions of policy management, including the fiscal impact. The types of policy actions taken in each of the countries are conveniently summarized in Table 7. These fall in four broad categories: trade policy

> 6 These estimates do not imply that poverty headcount rate in 2008 would be 5 or 3 percentage points higher than that in 2005. Such an interpretation would be incorrect since that would ignore the poverty reduction that would have occurred between 2005 and 2008 due to strong and stable economic growth. Rather, the poverty impact estimated here is a comparison with what would have been the case had there been no rice price shock in 2008

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