On uneven keel

On uneven keel

India needs to overhaul its procurement policy and invest heavily in agriculture to boost production and keep inflation in check

Can India insulate itself from the rise in global food prices? Answers are neither certain nor unanimous. While some economists believe that price rise is a cyclical phenomenon and will be under control within three months, others believe the trend is here to stay. However, with the inflation rate keeping above the 5 per cent rbi limit for three consecutive weeks, one thing is clear the government needs to act.

The agriculture ministry estimates a bumper 76-million-tonne wheat harvest this rabi season, but the Institute of Economic Growth, Delhi, pegs the figure at a maximum of 73 million tonnes. The Commission for Agriculture Costs and Prices also warns of an overall increase in the price of essential commodities in 2008-09. Traders and farmers also expect that supplies would be tight this year.

Food inflation

Crossing the RBI limit of 5%

"The production is estimated to decrease by 20 per cent if the temperature does not dip by early April," says Parikshit Singh, a farmer at Haryana's Tarawari grain mandi. He has a reason to worry, for the wheat yield is susceptible to slight temperature variations (see box Degree of yield).

"The prices are high because there is shortage of grain supply in the market and demand is high," says Mahavir Prasad, a trader at the Narela mandi in Delhi. Wheat is going at about Rs 11,000 per tonne, up from Rs 9,000 a tonne in April last year. Prasad and other traders believe it will rise to Rs 13,000 per tonne in the new season, while the government has fixed the minimum support price (msp) at Rs 10,000 per tonne.

AGNIMIRH BASU

Surjit Bhalla, the managing director of consultancy firm Oxus Research and Investments, has a different take. "The prices of foodgrains in India have stabilized in the past few months. And this year they are going to improve since Australia and India have increased acreage of wheat. In India, the area under wheat has increased by 10-12 per cent," he says. Himanshu, associate professor of economics, jnu, also thinks that domestic supply is not a problem. "2004-05 was the last bad agricultural year after which food production improved. The production of rice and wheat was above the target last year," he says.

This view, however, oversees the fact that unfavourable weather in India can diminish the yield, while over-production could lead to a glut in the market. There is an additional threat this year a wheat fungi capable of completely destroying the wheat produce, is moving eastward (see South Asia Wheat fungi may have reached Pakistan). Major wheat-producers in Asia, including Uzbekistan, Kazakhstan, India and Pakistan, have been put on high alert.

Signs of worry
There are reasons beyond demand and supply that can influence prices. "Agriculture is largely energy-intensive. And with the crude oil price touching the us $110-per-barrel mark, the cost of agricultural inputs like fertilizer and pesticides is bound to increase, thus, increasing the price of food," says M S Swaminathan, agricultural scientist.

If Indian consumers have not quite felt the pinch that is because prices have been controlled by subsidies. "Although India has raised the msps, it has kept the pds prices unchanged. As a result, the food subsidy bill has gone up to more than Rs 31,000 crore (from Rs 24,000 crore in 2006-07). Similarly, the fertilizer subsidy bill has gone up to Rs 41,000 crore (from Rs 25,900 crore in 2006-07). This is the buffer protecting Indian food prices from rising at the same rate as global prices," explains Ashok Gulati, director (Asia), International Food Policy Research Institute, us. According to the institute's director-general Joachim von Braun, however, the current global food price crisis is "worse and more long-lasting" than that of early 1970s.

"Apart from subsidies, the fact that we are producers of paddy and wheat helps. We are able to meet 90-95 per cent of our foodgrain requirements through what we produce. We need to import a marginal quantity and even if it is at a higher rate, the domestic prices are controlled," adds Bhalla. But as Himanshu points out the problem does not lie with supply as much as it lies with faulty foodgrain management and procurement. India had to import wheat in the past two years despite good production. "Private players procure at a rate higher than the msp and then the government has no option left but to import at higher rates," explains CSC Shekhar, assistant professor, Institute of Economic Growth, Delhi. "There is a need to de-link the msp and the procurement prices. The government should purchase foodgrain from farmers at the current market rate," adds Shekhar.

Small margin

between production cost and MSP (Data for wheat, Punjab, 2004-05)

* Quintal= 100 kg; In this case the MSP is just Rs 76.48 higher than the cost; the difference depends on demand and supply of a crop and its importance for food security. In case of poor yield due to unfavourable weather or bad inputs, the farmer will have to bear the loss.

Regional imbalance

States with low yield suffer (Data for paddy, 2003-04)

* Quintal= 100 kg

Unjust pricing
The current pricing process takes into account the rates of various inputs fertilizer, seeds, electricity, water, etc. But usually, the time gap between setting the msp and procuring the product is large and during this period input costs often go up substantially. Though the msp gives a margin of 15 per cent over the total input cost, Swaminathan argues "that is not enough" and prescribes a margin of at least 50 per cent (see table Small margin). While yield varies across the country, the msp is fixed (see table Regional imbalance). "The whole set up of the msp should be changed," he adds.

The National Commission of Farmers, headed by Swaminathan, has recommended giving farmers a lucrative offer to cut imports. The offer should be in the form of support prices in the beginning of the season to help farmers decide the economics of the produce, and procurement prices at the time of buying the produce. In case the government goes for imports, farmers should be given smart cards that would give them concessions on seeds and fertilizers. The proposal is under discussion.

To control prices the Indian government will have to aggressively procure foodgrains. It is believed that if India ends up procuring even 1 to 2 million tonnes of foodgrain from the international market, the prices will shoot up. Estimates of low winter oilseed yield add to the fear. Already, domestic prices of edible oil have been growing at a rate higher than the wholesale price index.

Time to act
On March 17, the finance minister assured the Rajya Sabha that the government would do its best to control inflation to ensure that it did not hit the poor. What followed was a ban on the export of edible oils. India has already banned export of wheat and set minimum export prices for rice. It drastically reduced import duties on palm, mustard and sunflower oil. The government has also done away with the import duty on semi-milled or wholly milled rice.

Banning exports is a short-term measure to control inflation. It is also anti-farmer, say experts. Already there is resentment in Kerala over ban on export of coconut oil and the lowering of import duty on its substitute, palm oil. "There is a lot of untapped potential in eastern India. There is a need to introduce the right technology, train farmers in multiple cropping and empower them to utilize government schemes," suggests Swaminathan.
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