A huge challenge

A huge challenge

The success or failure of the Modi government, in popular perception, will be judged in terms of taming the beast of food inflation.

If one has to mention one issue which was most responsible for the defeat of UPA, it has to be the chronic food inflation. Slow growth rate of GDP is just a number to most people as they do not see the connection between slow growth and rising unemployment. But rising food prices hurt them all the time. Consequently, the success or failure of the Modi-led BJP government in popular perception will be principally judged in terms of its success or otherwise in taming the beast of food inflation.

There is another problem of perception here. Most people fail to realise that even when the rate of inflation comes down, prices may still go up. For example, if the price level changes from 100 to 110 and then moves to 118, the rate of inflation has come down from 10 per cent to 7.27 per cent. Most people would still be complaining about the persistence of high inflation and the failure of the government. 

Therefore, if the success in containing inflation has to be registered in people’s mind, there has be a substantial fall in the rate of inflation. The government has already announced a few steps to bring down food inflation (currently it is more than 9 per cent per year). It wants to be pro-active as monsoon rainfall is feared to be below normal this year. The steps include a rise in the minimum export price (MEP) of onions and potatoes (which would reduce exports, increase domestic availability and hence reduce prices), offering credit to states to directly import pulses and edible oils to meet shortages (which would add to supply in the domestic market and bring down prices), releasing five million tonnes of rice from the FCI godowns to depress grain prices in the market, selling onions through fair price shops, advising states to delist fruits and vegetables from Agricultural Produce Marketing Committee (APMC) Act so that these can be sold and transported anywhere by the growers directly, and exhorting the administration to crack down on hoarders in anticipation of a supply shortfall due to sub-normal monsoon. 

On the flip side, the tough decision by the new government to gradually raise diesel prices to international levels and to raise rail freight rates would exert some upward pressure on prices by adding to transport and cold storage costs. The trouble in Iraq may add further to international oil price and hence to prices in India.

In any case all these measures are short term steps which should produce some downward pressure on these specific food articles but would not touch the root causes of rising food prices – specially of superior foods like vegetables, fruits, milk, fish, eggs and meat. The root cause lies in the steadily rising demand-supply gap for the non-grain food articles. The growth in income – specially income of the poorer sections in the rural economy in the form of MGNREGS – is increasing the demand for the superior varieties of food as people with higher incomes are switching from basic grains to better quality foods. On the other hand, steadily rising MSP (Minimum Support Price) and open-ended procurement by government agencies is making cultivation of grains a safe bet for farmers. For example, in the first half of the last decade, the MSP for paddy was raised by about 10 per cent while the same went up by about 75 per cent in the second half. A similar trend prevailed for wheat. 

Producing more grains

Thus, agricultural land (whose availability is shrinking due to urbanisation and industrialisation) is being diverted to produce more grains whereas the demand is switching the other way. Yet, grain price in the market is rising because of rising MSP and ever-mounting stocks of foodgrains in FCI godowns (much above the prudential buffer stock norms) where the government becomes the biggest hoarder of grains. At the same time, there is a huge wastage of perishable agricultural products, thanks to bad storage and transportation facilities. APMC Act gives monopoly rights to wholesale trade in agricultural produce to a few mandis and leads to price manipulation by creating artificial scarcity at times of production shortfall. 

Clearly, therefore, the long term solution would have to be rising productivity in non-grain food articles, cutting wastages through improving storage and transportation facilities and introducing competition by amending the APMC Act so that retailers get a choice of buying from mandis or directly from the farmers.

Allowing FDI in retail could be one option which the BJP has ruled out. But, if APMC Act is appropriately amended, domestic big retailers can also play a similar role through mechanisms like contract farming. Both public and private investment needs to go up in rural infrastructure (power, irrigation, better seeds and farming techniques, cold storage, transportation) and the sharply rising trend of MSP for grains needs to be moderated. The grain stocks have to be held at strategic locations all over the country so that these can be sold quickly whenever prices spike.

Restricting export when there is a domestic shortage -- though it may reduce inflation in the short run -- may aggravate the problem in the long run as farmers would shy away from producing these crops as they can not take advantage of profitable export opportunities. Foreign buyers would also regard Indian suppliers as unreliable and would look elsewhere. 

Politically, it is difficult to take out fruits and vegetables (however much the Modi government at the centre may want it) from the APMC Act as it falls under the jurisdiction of states. The mandi middlemen are big contributors of funds to political parties and some of them are also local leaders with significant political clout. The powerful lobby of big farmers would fight any attempt to flatten the rising MSP curve. It is to be seen whether the BJP, whose one major support base is small traders and big farmers, would muster the political will to bring about these long term reforms in the agricultural sector.

(The writer is a former professor of economics, IIM, Calcutta)