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Friday, February 11, 2011

Rising Inflation: A Timely Warning to Address Structural Elements

All of a sudden, Indian economy finds itself in a quandary: on the one hand, the rising inflation is already hovering around 7% and threatening to shoot up with the high rise in the prices of vegetables, fruits and onions (around 82%), calling for demand-side checks—obviously, reining in of money circulation that is currently growing at 15% year-on-year, which is of course, growing at a pace lower than the nominal growth rate of the economy—and on the other hand, slowing down of industrial production to an 18-month low of 2.7% in November that is demanding pump priming the economy to maintain growth momentum at or around 8-9%, plus the rising concern at the mounting subsidy bills and the resulting widening fiscal deficit. And, it is the balancing of these counter-demands that is today challenging the wit of the government and its policy makers.

Amongst these growth constraints, it is the rising food inflation that is driving everyone, both the consumer and the government, crazy. The steep rise of 59% in vegetable prices pushed the food price index to a whopping 18.32%. The rise in inflation is, of course, not confined to agricultural products alone; it even spread to mineral and petrol prices which have gone up by 30.6% and 25% respectively. Nonetheless, as the food articles have a weight of 14.34% in the overall wholesale price index, any further rise in them is sure to upset the inflation estimates. Incidentally, global food prices too have gone up by 30% over the last year, mostly due to the fall in production, which again is the outcome of changing weather, diversion of land use from food grain production to biofuel production, etc., and this in itself is a sure pointer to what is in store for the future.

Whilst on this, it is essential to bear in mind what the expert committee set up under the chairmanship of Rangarajan to examine the implications of the proposal of the National Advisory Council—that proposed legal entitlement to subsidized food grains to both ‘priority’ and ‘general’ households, covering 72% of population under the first phase starting from 2011-12, and 75% in the second phase in 2013-14—has got to say. It opined that the recommendations of the NAC need to be ‘calibrated’: one, owing to non-availability of food grain; two, the potential of such large procurement (63.98 million tons in the first phase and 73.98 million tons in the second phase) being pretty high to distort the open market food prices, that too, when all this requirement has to be necessarily sourced from the domestic production, not through imports as it would be much more costlier and undependable; and three, it entails ‘large subsidy implications’ that can stretch to anywhere around Rs 85,584 cr under the first phase and Rs 92,060 cr under the final phase.

Fairness or no fairness of the recommendation aside, it reveals a truth: we need to do something solid to fix up the supply-side constraints relating to food products—move away from overplaying on/blaming seasonal elements and address immediately the structural elements that we have been conveniently underplaying for all these years. Secondly, any shortfall in agricultural output could only lead to serious distortions in the economy, for no civilized nation growing at an annualized rate of 7-8% can afford to let half of its population go with no food security, that too, indefinitely, while better nutrition is “a necessary prerequisite for economic development.”

After all, agriculture, by itself, is a risky vocation. Globalization has only made it riskier. Given our inability to provide food-security to the populace, the government must do something concrete on the agriculture front. No shortcuts will do. Various reports have earlier indicated that there is tremendous potential for increases in production—all that it calls for is creation of institutions and right policies to build and supply appropriate technologies to farmers coupled with timely credit and right price for their output that incentivize farmers to produce more.

Given the nature of our agricultural markets—localized, fragmented and thin physical markets, because of which the flow of price information remains slow and mostly limits itself to influential market manipulators—what is simultaneously required to be done is: create a market infrastructure that can effectively transmit market information to all concerned well in time. Such free flow of information to producers, consumers and policy makers, coupled with creation of storage facilities in the countryside, transparent and flexible trade policy, and removal of state-level regulations that can pave the way for creation of a pan-India market for agricultural commodities, will cumulatively not only minimize the price volatility, but also disincentivize hoarding by traders—a known element behind every price volatility. 

In this regard, there are a few who, of course, advocate that multi-brand retailing be thrown open to foreign investment so that requisite technology can flow into food-production infrastructure. There is also a counterargument: this can be aimed at even by domestic corporates that are already engaged in retailing business. Whatever be the argument, one thing is certain: Indian agriculture needs all-round modernization. What, after all, needs to be done is, both private and public players must chip in to make agriculture a thriving profession; else India will continue to reel under malnutrition, who knows how long.

GRK Murty


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