Solving the Food Inflation Puzzle

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.