While much of the immediate policy focus has been on food price stabilization, especially for staple foods—wheat and rice-- the implications of the various short-term price stabilization policies for longer-term supply response, growth, economic efficiency and fiscal sustainability have not always been analyzed or thought through. South Asian countries have also intervened to put in place various safety net programs to protect the poor. This has been a combination of activating or expanding existing schemes and introducing new schemes. The efficiency and effectiveness of these schemes in terms of outcomes and consistency with fiscal sustainability in an environment of external shocks and very tight fiscal space also need much more thought, analysis and review.

The main objective of this paper is to provide input to the policy debate and analysis of how South Asia needs to position itself to respond effectively to the global food price crisis. To put this debate in proper context, the paper first provides a brief analysis of the nature of the global food price crisis focusing on the two staple food items--wheat and rice—that have occupied the primary attention of policy makers. It shows the strong positive link between the prices of food and energy, which emphasizes the need to look at them together. Section III of the paper then looks at the supply, demand and price situation in South Asia for these staple food items, explaining why prices have diverged so much between countries within the region and in comparison with global prices. In Section IV, the paper reviews the impact of the food and fuel price crisis in South Asian countries in terms income, macroeconomic balances, inflation and poverty. How the various countries have responded on the policy front is reviewed in Section V. Section VI looks at the longer-term issues and challenges, including the consistency of short-term actions with the longer-term agenda. Finally, Section VII provides some concluding observations.

# **II. Global Food Price Inflation**

Global food prices have been on an upward trend for a fairly long time, particularly since 2005 **_._** Prices accelerated starting in January 2007. Based on the Food and Agriculture Organization’s (FAO) World Food Price Index, international food prices in April 2008 were 60 percent higher than 12 months earlier. World food prices have in particular been driven by higher grain prices. Two staple food grain of special importance to South Asia are wheat and rice. The international price of wheat more than tripled between 2002 and March 2008 (figure 1). The wheat price was relatively stable until 2006, but surged in 2007 and early 2008, reaching a global peak in March 2008. The price has since then come down, but as of August 2008 it remained 70 percent higher than the average price in 2006. The price of rice increased nearly five-fold between 2002 and May 2008, when it reached a global peak. Rice price started rising since 2004, but the spike came in 2008 when the price more than doubled in five months between January and May. Rice price has also come down after May. Even so, as of August 2008, international rice price was 128 percent higher than the average in 2006. These large increases in prices of food grain have huge adverse implications for world poverty.

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