No time for field theories

We don8217;t liberalise until there is a crisis. The food crisis may finally catalyse agro reforms

The wholesale price index isn8217;t the best measure to gauge inflation, certainly not from a consumer8217;s perspective. But given time lags on CPI consumer price index, it8217;s the best we have and for the week ending March 15, we have point-to-point inflation of 6.68 per cent. Primary articles have 22.02 per cent weight in WPI and within this segment, prices have increased for fruits and vegetables and edible oils. Manufactured products have 63.75 per cent weight in WPI and, contrary to what we might think, manufactured doesn8217;t mean textiles, paper, chemicals, metals and machinery alone. There is a food products category there too, and again, prices have increased significantly for these. We may not have noticed it. But the government industry ministry revised upwards its earlier WPI figures, such as for the week ending January 19, 2008. Not only is inflation high, it began to increase much earlier. If the government8217;s inflation target is 5 per cent it probably was a shade lower, 6.68 per cent should set alarm bells ringing, even if it wasn8217;t an election year, particularly because food is involved. We don8217;t have a sensible or comprehensive handle on retail food prices CPI is unsatisfactory. However, retail prices of fruits, vegetables, wheat, pulses and edible oils have clearly increased more than 6.68 per cent.

India hasn8217;t seen riots and protests yet, if you leave out protests against ration shops in West Bengal. But there have been riots and protests elsewhere 8212; Mexico, Pakistan, Burkina Faso, Cameroon, Senegal, Mauritania, Argentina, Egypt and even Italy. There is a global problem and those reasons are easy to pin down. First, increased demand resulting from income growth 8212; India and China are the obvious examples, and also factor in urbanisation and more processed foods to this. Second, a switch in consumption baskets towards meat and dairy, which requires more grain as feed wheat is cheaper than maize. Third, higher oil prices leading to higher fertiliser and transportation costs. Fourth, climate change cum weather-related supply shocks tropical cyclones, floods, cold spells, frost in Australia, Africa, China and Europe. Fifth, subsidies for bio-fuels in Europe and North America ethanol from maize and sugarcane, bio-diesel from edible oils diverting land away from food. Sixth, insufficient increases in productivity. After all, the world8217;s stock of arable land is fixed and population is increasing. Seventh, speculative investments moving away from the dollar and into commodities. Eighth, the mere statistical phenomenon of global food prices usually being quoted in US dollars, spliced with dollar depreciation. Ninth, few governments have sufficient food stocks to warrant intervention. Note most of these factors are semi-permanent. They aren8217;t transitory, even ones related to weather.

Therefore, the scale of increase may get muted in three or five years. Since 1990, FAO has had a food price index. This index increased by 9 per cent in 2006, but by 40 per cent in 2007. However, there8217;s no reason to believe the problem of food inflation will disappear. Let8217;s digress to the WTO now. India has always argued developed countries must remove agricultural subsidies and they circumvented the spirit if not the law of Uruguay Round agreements by not liberalising enough. If these subsidies go, global agro prices will increase. But on balance, we thought this would serve India8217;s interests better, because India wasn8217;t a net importer of food, unlike other developing countries. Yes, we would have to import edible oils and pulses wheat is an exception. However, higher import prices for edible oils and pulses would be more than compensated by higher export prices Indian farmers would get for food-grains, fruits and vegetables. Certainly, every farmer didn8217;t have marketable surpluses, but that was part of the unfinished agro cum rural reform agenda. Indian agro prices were lower than global agro prices and Indian manufactured prices were higher than global manufactured prices.

Liberalisation and integration bring domestic prices closer to global prices. Hence, Indian consumers will pay more for agro products, but pay less for manufactured products. That8217;s the reform argument. And Indian consumers will be able to afford more for agro products, not only because manufactured products will cost less, but because there will be income growth. Setting export quotas, or imposing bans, or minimum export prices for basmati or non-basmati rice amounts to discriminating against Indian farmers and indirectly taxing them. Notice also Indian food prices have still increased by much less than global food prices. Knee-jerk reactions, including slashing import duties, aren8217;t the answer.

The answers are also known. First, increase Indian agro productivity levels. These have not just stagnated, growth has actually tapered off. If food-grain productivity levels can be increased to Green Revolution levels, not global levels, India can feed double the present population and become the breadbasket for Asia. However, there is a battery of reforms required before this can happen. Second, eliminate long links in the distribution chain. For fruits and vegetables, dis-intermediation can bring gains of 25 per cent. For food-grains, the figure is around 15 per cent. That is, this 15-25 per cent translates into higher prices for farmers, without consumers having to pay more. Third, eliminate wastage by improving transport connectivity, warehousing, cold storage and processing. At least 20 to 30 per cent of agricultural production is lost because of this. Fourth, interpret agricultural policy as more than rice and wheat policy and higher procurement prices on these for relatively richer farmers. Have you heard of edible oils and pulses in the context of the Green Revolution or public research and extension? Fifth, target food subsidies better, so that the poor benefit, not the relatively rich.

There is nothing wrong with any of these diagnoses or propositions. The problem is that we have done little about reforms, except mouth slogans and introduce anti-reform policies in the name of the aam kisan. And now the crisis is upon us. If anything, the crisis is likely to get worse. Not only is income growth tapering off, notwithstanding budgetary and Pay Commission concessions, we don8217;t quite know that the monsoon will be like. There is a silver lining though. We don8217;t liberalise until there is a crisis. Perhaps the food crisis will finally catalyse agro reforms. But this seems an unlikely hypothesis, because pay-off from liberalisation isn8217;t immediate. In that sense, every silver lining has a cloud.

In all probability, we will muddle along as always. There will be more imports, with scam spectres about import procurement. There will be more customs duty cuts, more controls on exports of agro products. Interest rates won8217;t drop, but the RBI will allow the rupee to appreciate. Futures trading will be completely banned. There may even be a food stabilisation fund and a few more farmers will commit suicide.

The writer is a noted economist bdebroygmail.com