The Price of Neglect

Anyone who has read the recent United Nations report, Sustaining Growth and Sharing Prosperity, can guess which issue will dominate the 2009 general elections – inflation, driven principally by rising food prices. The report predicts that India will be relatively insulated from slowing regional growth amid global turbulence, but high food prices, growing public debt and unequal progress were strong risks to sustaining growth. Nevertheless, the report concluded that the Indian economy would expand at an average 9% in 2008. US investment bank Morgan Stanley, however, has cut its forecast for India’s economic growth from 7.4% to 7.1% for 2009.

During the week ended March 15 this year, the rate of inflation touched 6.68% compared to 5.92% a week before. The rate was 6.56% during the corresponding period last year. Rising domestic inflation is the result of a surge in global commodity and food prices coupled with higher vegetable prices at home. A case in point is the supply shocks generated by the world’s traditional “bread baskets” -- Australia, the United States and the European Union. Australia, one of the biggest grain producers, is confronting its worst drought in a century with rampant fires devastating agricultural areas, rivers drying up, crops failing, and farmers forced to sell off their livestock.

Retail prices on staple American foods rose by double-digit percentages in the last year, according to new data from the federal Bureau of Labour Statistics (BLS). The cost of milk rose 26%, and egg prices grew by 40%. Against this grim backdrop vast areas that could be used to grow food are being turned over to the production of ethanol and biodiesel, derived from corn, sugar, soya and palm oil, as the developed world (read as US and the EU) seeks to reduce their dependence on oil. For example, palm oil prices went up from 2,000 Malaysian ringgit per tonne in January 2007 to around 3,900 per tonne in March 2008 as a result of diversion of palm oil for bio-fuels.

India cannot remain insulated from these global cues especially considering the depletion of grain stocks in the recent past. According to a recent report by Morgan Stanley, food grain production has declined by 0.1% every year in the past five years. In 2006, India imported 5.5 million tonnes of wheat. Speculation is rife that this year too India is likely to import another 2 million tonnes as its domestic production is estimated at 75 million tonnes. This, when at 109.4 million tones, the global wheat stock is the lowest in the last 30 years. Even China is facing the heat. Its inflation rate of 8.7% for February 2008 has been its highest in the last 12 years. Pork and vegetable prices have shot up by a staggering 63.4% and 46% respectively.

Finance Minister P Chidambaram acknowledging the scale of the problem said that he would settle for slower growth in order to fight inflation. But is there a way to combat inflation without sacrificing growth? Yes, but only if the government can make its investments in agriculture pay. Augmented investments and better agricultural policies are the weapons to tackle food price-led inflation. The Finance Minister promised to hike investments in agriculture to 16% from the current 12.5% of GDP. He said that this would help achieve a 4% growth in agriculture. Chidambaram had also proposed setting up of a National Security Mission (Rs 4,800 crore); a Rashtriya Krishi Vikas Yojana (Rs 25,000 crore); increased allocation for irrigation works and higher procurement prices for wheat. This is music to the ear considering the fact that Indian agriculture has suffered from inadequate investments, lack of proper storage that renders waste as much as 40% of food stocks, depleting groundwater sources and rising costs of inputs such as seeds and fertiliser.

As an immediate measure, the government has announced a range of duty cuts on food and fuel, which make imports cheaper and reduces some of the inflationary pressure. The Reserve Bank of India has kept interest rate relatively high which, coupled with strong capital inflows, should keep the Rupee relative strong. That too will help make imports cheaper, even as it makes India’s exports less competitive. But the revenue loss this will entail combined with the huge unfunded commitments on loan waivers, the 6th pay commission recommendations and the numerous subsidies will put tremendous pressure on India’s fiscal health. That is the price we will have to pay for the neglect of agriculture in the years to come.

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