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LATEST NEWS UPDATES | Along the food chain by MK Venu

Along the food chain by MK Venu

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published Published on Jul 23, 2010   modified Modified on Jul 23, 2010

Politicians, from the ruling party and opposition alike, are grappling with the problem of how to effectively communicate with their constituencies on the issue of high food inflation. One had thought it would be easy for the opposition to mount a campaign on rising prices against the ruling coalition, but it appears that inflation and its impact on the political economy is far more complex today than it was 10 years ago. If you get an average GDP growth of 8 per cent plus, as has been the case since 2004, per capita income would double every 10 years. Rising incomes create new demand dynamics, and therefore we see higher prices of food, fuel and other commodities. Since foodgrain production has been more or less stagnant for many years, food prices tend to show greater volatility. This is plain economics.

However, the problem of inflation becomes more complex when you demographically slice the political economy and look at how incomes are rising among the various sections of the population. Since growth and productivity are happening much faster in industry and services, it is logical that incomes are rising faster among these sections. Incomes in the agriculture sector, especially in the small and medium farms, may not be rising as quickly as among those engaged in manufacturing activity or services.

Politicians are still trying to understand this new phenomenon. In the absence of reliable research — a lot of it is ideologically coloured — politicians tend to use their gut instinct and opt for direct income support to sections of the population which are poor and where incomes are not growing fast enough. The launch of the National Rural Employment Guarantee programme and the farm loan waivers were based on similar assumptions. Subsequently, another set of researchers showed that the inflation rate had gone up more in places where NREGA was well implemented! Now we are also being told that farm labour is generally becoming more expensive in many states like Punjab, Andhra Pradesh, Tamil Nadu and Haryana. For instance, an association of agriculturists in Vijayawada told me some time ago the average age of farmers in coastal Andhra Pradesh is now above 50. Younger people are rapidly moving out of agriculture, into other activities. There is shortage of good farm hands.

Consequently, there is talk of rising wage inflation across many states in India. In the more industrialised states like Tamil Nadu and Haryana, industrial workers are organising protests to demand better pay scales. A new form of trade unionism appears to be taking shape in the manufacturing sector. The BPO industry in Bangalore and other cities is also complaining about rising wage pressures.

In short, the economy in urban and rural India is undergoing rapid change and the political class is still trying to understand what is going on. The higher inflation rate is but a manifestation of some of these critical shifts happening in the economy. The phenomenon gets exacerbated further when the Centre and states do not manage the existing food distribution system to insulate the very vulnerable from rising food and fuel prices. Dr Rangarajan, chairman of Prime Minister’s Economic Advisory Council admitted at an Indian Express Idea Exchange that the government could have acted faster to release foodgrains from its buffer stocks into the open market some time ago when food inflation was touching 20 per cent. The bureaucracy wasted a lot of time debating at what price the FCI must release food stocks in the open market. Finally, a call was taken to sell it at the cost of procurement plus freight charges.

With reasonably good rains having arrived, the UPA is projecting the food inflation rate to come down to about 7 per cent in a few months. Manufactured items, with a 64 per cent weightage in the wholesale price index, are also expected to stay in the 6-7 per cent range by the year-end. With fuel price inflation at over 12 per cent, the overall inflation rate could come down to about 8 per cent by December.

Single-digit inflation rate will certainly give the UPA some psychological relief. However, the Centre must not become complacent in regard to some of the serious structural problems that have developed in our food economy. The key structural issue is the need to drastically enhance food production through improved agriculture yields and productivity. Prime Minister Manmohan Singh has admitted that India’s stagnant agriculture sector needs a second technology revolution. If this does not happen, shortage of food will persist on a more regular basis and a population with rising incomes will become net importers of food permanently. Some incipient signs of this can already be seen. One fact that is often overlooked is that the government has dropped the import duty on a large number of food and agriculture items to zero with the sole aim of combating food inflation in the short to medium term. Whether it is wheat, non-basmati rice, pulses, cotton, sugar or milk powder, the import duty on all these items have been near zero for quite a while now. Until food inflation settles down on a more permanent basis, the government will be loath to raise import duty on these items.

However, if import duty on mass consumption items are kept at zero the domestic farm sector ends up suffering negative duty protection vis-a-vis the US and European Union where massive farm subsidies — over $150 billion — are given to farmers as direct income support which helps them sell at 40-50 per cent lower than the cost price internationally. Can Indian farmers compete and scale up production in such a situation? If India wants to combat recurring food inflation by keeping import duty at zero and yet meet its long-term objective of enhancing agriculture production, the government will have to start giving massive direct income/ subsidy support to our farmers in the same way the EU and US had been doing in the past. We will have to go down the same path. It is the great paradox of agriculture economics that as yields and productivity rose dramatically in the West due to better practices, so did subsidy support to farmers which ensured that higher production did not result in the collapse of prices. In the years ahead, India too will have no option but to give massive income support to farmers to enhance domestic production. It will also have to give massive subsidy to the very poor consumers at the other end. The political economy of food will mandate such a complex arrangement.

 

The Indian Express, 23 July, 2010, http://www.indianexpress.com/news/along-the-food-chain/650638/0
 

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