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Resource centre on India's rural distress
 
 

Changing crop pattern must to rein in prices


Food inflation will defy government policies to remain in high single-digit levels in the long run, unless there is a change in an overwhelming bias among farmers towards staples such as wheat and rice, say economists and policymakers.

A steady growth in population and rapidly rising income levels are adding to inflationary pressure at a time when agricultural productivity is showing a decline. A major reason is that the agriculture sector is not sufficiently diversified.

“Our approach to agriculture has to change,” says Pronab Sen, principal advisor to the Planning Commission. “Our production strategies are very focused on staples.... We could see food inflation at around 8% levels going forward,” he says.

High food prices, a sensitive issue in India where nearly 40% of the population is poor, is the main driver of inflation in the economy. While the WPI inflation fell to 8.5% in August in response to increases in key policy rates by RBI, food inflation remained sticky at around 11.5%.

The focus on cereals, partly a result of policies that ensure a minimum market price for the produce, seems to be preventing diversification of farm sector. Production of dairy products, meat, fruit and vegetables has failed to keep pace with the increases in population and purchasing power, resulting in lower per capita food consumption.

The situation requires a change in cropping patterns as well as better facilities to store and transport perishable items.

While it is easier to store cereals — this is another reason for their popularity — the country lacks storage facilities for perishables. Even storage of cereals is not being handled effectively. The economic cost of procurement for rice and wheat has gone up by 40.2% and 35.96%, respectively since 2005-06.

This has a direct impact on the market prices. While this is understandable, a failure in distribution of food grains defies all explanation.

“The problems in agriculture are indeed structural,” says Mridul Saggar, chief economist at Kotak institutional securities. He says the cost side pressures are high and income distribution is getting skewed. This, in effect, has divided consumers into two groups with vastly different purchasing powers.


There has been an uninterrupted rise in food prices since 2005, despite accommodative price policies. Supply side constraints, which allow hoarding and black-marketing, is another reason for high food prices. Disruptions in supply also allow retailers to exercise more pricing power. The last three weeks witnessed higher inflation due to localized disruptions due to rains and floods.

“Minor blips in food supplies tend to cause an over-reaction in the markets,” says Sunil Sinha, head of research and senior economist at rating agency Crisil.—Rishi Shah

“Inflationary momentum exists in the economy,” he says, adding supply shocks in agriculture, similar to the one we had last year, had been handled in the past by leaving more produce for private consumption.

While market players expect a fall in food inflation soon due to good monsoons and the base effect, experts see moderate to high inflation in near future. Unless the core reasons for the phenomenon is addressed, India could witness uncomfortable levels of food inflation in the long run.