This is the transcript of an interview given for the forthcoming issue of CII's Economy Matters:
Why are the food prices rising unabated despite
several measures taken by the government?
Firstly, let's set the context correctly. The government has an
unenviable task of walking a tightrope between the diametrically opposite
expectations of the farmers for higher prices and the consumers for lower
prices. Given that the majority of our farmers are small and resource-poor, and
the consumers are largely low or middle-income, the government cannot
short-change either constituency for the sake of the other.
In this backdrop, let’s recount the key actions taken by the
governments from time to time, and the
limitations of such actions, because of which the prices continue to rise.
When the objective is to balance conflicting interests, any government’s
first strategy is to subsidise. Subsidies on inputs like water, power, credit, and fertiliser
to keep the cost of production low; and then subsidies on food itself by buying at high
support prices from the farmers and selling at lower prices to the poor consumers through the public
distribution system. No doubt,
subsidies have delivered the expectations to a large extent. But, given the fiscal
position of the government, this strategy is neither scalable nor sustainable
beyond a point. Once that point is reached, as we have now, the subsidies
strategy leaves both the farmers and the consumers dissatisfied despite
consuming massive amounts of money. Additionally, the resultant market
distortion discourages the private investment in the sector, and the value chains
remain under-developed.
Another strategy that's adopted is to import food products, or ban the exports
in times of shortage. Given the
fleeting speed at which the international commodity markets move, our responses are often too
late. The problem is further compounded by the weak market intelligence system
the governments typically have, and the complex logistics of the global trade. In times of shortages, expectedly,
the domestic prices are sky-high while the crops are standing in the fields, raising
the price expectations of the farmers; then the import consignments usually arrive just about the time the farmers are ready to harvest their crops, and the
prices start falling like there is no bottom!
Imposing stock limits to prevent
hoarding of farm produce is yet another measure that's commonly used
to control prices. This action does soften the prices, but only temporarily.
However, because this measure cannot actually increase the availability of food
in the season as a whole, the prices do go up eventually. Besides, since the
government doesn't distinguish between hoarders and the genuine Agri Businesses
/ Food Processors, such restraints render investments along the supply chain
and processing unviable, and the value chain participants remain fragmented.
One can possibly refine these strategies a bit more, viz. sharper
targeting of subsidies, proactive imports through real-time market intelligence
etc., and keep the prices under check a few weeks longer. The longer-term food
inflation cannot be truly tamed unless the key drivers are appreciated and
managed.
What according
to you are the key drivers of food inflation?
While quite a few reasons have been cited for
triggering food inflation, demand outpacing supply is definitely the key cause,
to my mind. Increasing incomes and changing lifestyles & aspirations have spurred
the demand for food items, especially high value products such as fruits,
vegetables, milk and milk products, eggs, fish, and meat. Per capita
consumption of many of these products in India is still significantly below
that of comparable countries, suggesting the likelihood of this trend
continuing in the years to come. Given this scenario, it is crucial that the supply
rises substantially to meet the rapidly expanding demand for food.
That brings us to supply side drivers. Though farm
yields in India have grown significantly over years, they are still largely
dependent on the annual monsoon rains and other vagaries of weather. In certain
crops like vegetables that are more vulnerable, adverse weather conditions
result in serious damages, leading to exorbitant prices for a few months almost
every year in some
corner of the country. Rising Minimum Support Prices
for certain key commodities, especially wheat and rice, have pushed the prices
of those crops up. With the introduction of the Mahatma Gandhi National Rural
Employment Guarantee Act, agricultural wages have risen as a result of labour
shortage, contributing to rising costs of production. Then there are chronic supply
chain deficiencies (high transaction costs due to long chains, huge wastages
due to broken chains, increasing cost of transportation due to rising fuel
costs) that don’t let a fair share of the consumer price flow back to the
producer. The supply chain deficiencies also prevent the demand
signals from flowing
seamlessly to the farmer. In the absence of such a mechanism, most farmers produce crops
based on the prices obtained for the previous crop rather than the prices
expected for the crops being planted. This results in huge price swings due to
supply-demand imbalances around the harvest time.
As a combined effect
of all these complex factors, the food prices in India kept moving up since
2007 when supplies fell short of demand globally; all that the various price
control measures achieved was temporary respite from time to time. In these
seven years, prices of cereals rose unabated, at an average of 10% per annum;
the vegetables also started at a similar rate of 10% per annum, but accelerated
to an average annual rise of 30% in the more recent years.
More broad-based
reforms in the agricultural policy framework, together with the creation of
certain market based institutions and instruments only can deal with these
complex factors and solve the problem of food inflation in the long run.
Otherwise, one would have to fire-fight every few months to deal with the
crisis.
What are those
reforms, which can really contain food inflation in India?
There are four areas
of intervention that will make a difference:
Reforming the APMC Act
along the lines of new Model Act recommended by the central government in 2003
is the first step. The alternative marketing models envisaged in the Model Act,
viz. Direct Marketing, Contract Farming, and Private Mandis will provide a
healthy competition to the conventional Mandis and offer a choice to the
farmer. These models will be customised to different contexts, eliminating the
non value adding transaction costs that came into being only because the
conventional Mandi was mandated as the only mechanism for a farmer to market
his produce. APMC reform will also help in changing the purely transaction
oriented relation between an Agri business / Food Processor and the farmer in a
Mandi set up, to a reciprocally dependent partnership. This will motivate
Businesses to engage with farmers to raise farm productivity and align crop
quality to consumer demand in mutual interest. This will also lead to
complementary investments in storage and handling infrastructure along the
supply chain that reduces wastage.
Secondly, the Forward Contracts Regulation Act
(FCRA) must be amended to permit trading in ‘Options’. Farmers will then be assured of a
minimum price at the time of sowing itself, based on the future projections of demand simulated by a market consensus. This will help adjust the production volumes to the
future demand conditions, thus minimising the potential shortages as well as avoidable
wastages, and the consequent price volatility.
Solutions
like crop and weather insurance are also essential to enhance the risk-taking
capability of the farmer, who can then invest in the
required technology and inputs to step up productivity.
Lastly, the protocols for approving new
technology must be scientific, made transparent and predictable to attract
investments into R&D. We have some distance to cover in discovering
seeds that will optimize drought tolerance, disease resistance, yield
enhancement, pest resistance, enable nutritional enhancement etc.
You mentioned Food
Processing briefly. Can it play an important role in dealing with food
inflation?
Anywhere from 5% to 40%
of food is wasted along the chain, depending on the inherent perishability of
the crop and the season. This obviously reduces the actual availability of food
even after the farmers have produced. Food Processing offers a solution to
reduce this colossal wastage and contain inflation.
India processes just
about 2% of its agri-based products compared to other developing countries
such as Malaysia and Thailand who process as much as 40 %. A key constraint for
the growth of the sector is the high prices of processed food, primarily because of
the cascading effect of taxation along the value chain. Consequently,
consumption of processed food remains low despite rising disposable incomes, adversely impacting the
investments in this very important sector.
Full potential of this
sector can be exploited if processed food products are made affordable at lower
prices through a zero-tax regime. Such a tax regime must be extended for a
minimum period of 5 years to “communicate” stability and attract
investment.
With
the prediction of a deficit monsoon this year due to El Nino, do you see food
inflation going out of bounds soon?
Just as El Nino was showing signs of weakening, a
monsoon blocker developed in Indian Ocean! It is certainly a situation that
requires close monitoring. More important than the overall deficit in rainfall,
is its spacial and temporal distribution. There is insufficient visibility on
that count at this time. We therefore need to be prepared with contingent plans
for different micro-regions, to be able to rapidly deploy them as the situation
evolves. A big comfort, of course, is the large stock of wheat and rice
available with the government. So, if at all something goes out of bounds, it
would only be a vegetable here or a fruit there…
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