The double digit
food inflation shows no signs of abatement. Meanwhile, the headline CPI (7.35%)
hits the highest point in recent years. However,
the core CPI has stagnated around 3.6%, WPI continues to be low and core WPI is
in near zero zone. There is negative inflation in manufacturing sector as also
in fuel and power. GDP deflator is less than 2%. In normal course, low real
growth will translate into low nominal growth depressing the economic buoyancy.
Therefore, barring food inflation, other components are well under control, yet
unless food inflation is tamed, political costs are like to be substantial. There are grounds to suggest the causes to usual
inter seasonal volatility, but that would be short-sighted. There exists an opportunity in the crisis long
term solutions to agricultural production.
In endeavouring
a solution, there however lies a catch. Agriculture is state subject thus
resulting in each state adopting a different approach. Further, farmers
constitute a strong political voice and hence few would dare to stand what is
perhaps represent short term gains but long term losses. To an individual, it
is the short term horizon which is embedded in their planning and demand and
not the long term. Given the lobbies of not merely farmers but whole host of
intermediaries in the system, it seems a long road ahead for the eradicating
the hitches in agriculture and allied areas.
Contrary to
usual romanticism on agriculture, it is risky. Both type of crop and acreage of
sowing is independent of demand patterns that might arise months down post-harvest.
Implied is price risk. Bumper harvest might lead to drop in prices whereas
scarcity causes increased prices. The farmer often follows what one leading
agricultural expert termed ‘rear view mirror’ driving. Given the current high prices, there is good possibility
of farmers more of higher priced agro products thus a potential bumper harvest,
drop in prices and perhaps low profits if not losses. Unsurprisingly, the cycle
will be followed by low production, thus shortage and possibly higher prices and
thus repetition of the same year over year. The bumper harvest paradox- farmers
actually lose by producing large harvests, is on account of the relatively
inelastic price elasticity of demand of food. Higher food production doesn’t
translate into higher demand, pushing prices downhill. In standard economics
paradigm, food prices follow cobweb model. If the price elasticity of supply is
higher than absolute value of price elasticity of demand, there is increasing
divergence from the equilibrium causing upward spiral in prices. In the other
direction, there is convergence towards equilibrium causing downward trend in
prices.
Beyond the
model, agriculture is subject to numerous market distortions in procurement,
storage, distribution, transportation, intermediary, trading etc. These
distortions are the unintended consequences of APMC act and other agricultural legislation
and policy measures over the years. APMC Act was introduced with an intention
to help farmers to gain remunerative prices and eliminate information asymmetry
on prices. The transaction costs of introducing crops to the market by the
farmers was high given the potential exploitation by intermediaries. APMC in ostensibly
eliminating this distortion has become a hold-up in itself, a barrier between
free markets and farmers. E-NAM, the intended solution is in the early stages
and might need few more years before it is able to attain the critical mass. Besides,
many farming groups and political parties have deep vested interests in the
APMC set up and are unlikely to let go of their controls. FCI was essentially
in business to procure food crops to maintain buffer stocks nevertheless with
passage of time, it has turned into a problem itself than a panacea. Food parks are still to attain critical mass to
provide changing end uses for agricultural products.
Cropping
patterns remain unchanged and are politically linked. Despite water shortage,
sugarcane farming continues to thrive given its political importance. MSP is a
tool of political patronage and thus potentially inflationary. The advent of MNREGA
increased rural wages impacting cost of production. Rising costs of production
increased food prices while decreasing production. On the demand side, the
increasing income has shifted the demand patterns have shifted towards more
protein rich diet of vegetables, fruits, milk, eggs etc away from cereals based
production.
Solutions sound
nice in theory but given the political cost, appear impractical to implement. If
the bull has to be grappled with its horns, radical movement away from the APMC
set to market based set up and ending the auction system must be inevitable. Investment
in storage and distribution needs to be war footing. The pace of innovation and
progress is lagging behind the demands of the same. There needs to be shift away
from water guzzling crops. The relative lucrativeness of sugarcane farming
relative to other crops given pricing and production patterns demand the change
in tems of interaction. Increased certainty to profitability might compel
farmers switch to crops like jowar or fruits or vegetables following what economics
terms as income and substitution effect. Given a level of nominal income, price
changes of one alters the portfolio of the entire basket changes, partly due to
fall in real income and partly due to change in the prices. Similarly, by
creating reduction in cost prices and increasing prospective profits for one
good in the production portfolio prospectively transforms the dynamics of the
entire production basket. Moreover, supply is a function of the profitability
of alternative goods and substitute goods. For water guzzling cash crops, India can invest
in farms overseas not unlike what Britain and other European powers did in Caribbean
and other parts of the world at the height of colonialism. Rather than inward
seeking measures and short term fire fighting measures, these outward looking
approaches would go long way in building food security while enhancing our
diplomatic strength. MSP while linked to inflation should be extended to each
and every crop.
Jal Yukt Shivir
and similar schemes must have relevant incentives to reduce dependence on
rainfall. Open door policy for private investment in agriculture and irrigation
is vital irrespective of short term political costs. Farm insurance schemes
have suffered lacunae in terms of settlement of losses. Freebies need to be
converted to direct benefit transfers at least with respect to power and
fertilizers. Cooperative societies are politically lucrative cartels and need
to be induced towards creative destruction while encouraging for increased
corporate set up for agriculture.
The bigger
hurdle remains the differing interests and priorities among the states, thus a
context for radical changes. Sovereignty
pooling on the lines of GST to frame a common agricultural policy demand side
and supply side reforms is an ideal measure though improbably in current
circumstances. Alternatively, the centre must take over agriculture from the
states to itself for short period 3-5 years under Article 258A. Possible
state-centre confrontation notwithstanding, extreme circumstances require
extreme actions. Indubitably, there is
presence of political will, which might be capitalized for long term solution
to agrarian reforms and doubling for farmer’s income. A declaration of ‘Agricultural
Emergency’ and massive implementation of reforms seems the easier way out of
the state of affairs.
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