February has finally brought some relief in the rise in India?s food prices. The government has some breathing room in this dimension?just as well when it is beset by multiple corruption scandals. It is easy to get excited about blatant corruption, or even mismanagement of a specific sporting event or allocation of spectrum. And of course it is justified. It is somewhat harder to achieve the same level of concern about governance of an entire sector, food and agriculture?especially when there are so many possible external villains.
Food price inflation can always be blamed on the weather, on globalisation, on evil speculators, and now also on faster growth in poorer countries. Some of these factors do matter, but they divert attention from past policy failures and from what needs to be done going forward. All of the usual suspects may not be guilty, and the others have been in plain view for some time, so policy making should have already taken them into account.
Economic theory suggests that ?speculation? would typically stabilise prices, and recent empirical work (in particular, a 2009 paper by Scott Irwin, Dwight Sanders and Robert Merrin) supports this view for recent global commodity price rises. Similarly, globalisation, in the form of increased trade, should smooth out local price fluctuations, to the extent that it allows food to move from places where it is relatively abundant to where it is scarce. Of course, abundance and scarcity depend on purchasing power, but then the policy response should be to make sure that the poor can afford to purchase enough food, which is different from just ensuring physical availability. India?s inefficient and wasteful system of procuring food grains, storing them, and distributing them to those in need is much more to blame for food price inflation than speculation or trade.
Climate change, in the form of more variable weather patterns, and global economic growth are more plausible causes of global food price inflation, but these are two factors which we have known about for years, and which should have been planned for by Indian policy makers. The fact that agriculture in India has been stagnating suggests that whatever attention has been given to it has been inadequate and ineffective. The failure to reform and innovate in the agricultural sector is squarely behind Indian food price inflation, and the problems will get worse if action is not taken.
Here are the problems with Indian agriculture that have been caused by faulty policies. Fertiliser, water and electricity (used for pumping water) are subsidised in ways that lead to significant waste, as well as to poor choices of crops. There is insufficient investment in irrigation infrastructure and irrigation techniques, development of new crop varieties, innovation in farming methods, and in diffusing what knowledge already exists. On the financial side, credit is not provided efficiently, nor coupled with insurance against crop failures. Mechanisms for selling crops are costly and subject to the control of powerful intermediaries. Storage, transportation and distribution of many agricultural products are still primitive, because of lack of government investment, and failures to enable private investment in areas where it could be financially viable.
The result of faulty policies is agricultural productivity that is much lower than it should be, and an equilibrium that is more fragile than it ought to be?dependent on wasteful use of water and fertiliser, growing crops that do not necessarily match emerging demands of consumers, and unnecessarily vulnerable to weather and market shocks. All this is fixable without tackling the deeper problems of small and fragmented landholdings and lack of alternative employment through growth in labour-intensive manufacturing. But fixing faulty policies will require coordination between the Centre and the states, the latter having primary responsibility for agriculture. The Centre and states have worked out ways of coordinating sales taxes. National missions in health and education have also improved Centre-state coordination in those areas to some extent. But agriculture remains relatively backward, trapped in outmoded ways of thinking.
If agricultural policy reform, coordinated across the national and state levels, does not take place in India, the result will be worse than just the relative stagnation that has characterised the sector in recent years. Productivity will decline as water tables fall, river flows decline and soils are exhausted. Food will become like oil is now?an expensive import subject to the priorities of foreign producers and price rises driven by growing global demand. A food future of bread riots and falling governments will obviously have a severe impact on growth, and on basic social order.
Seen in the light of these risks, the debate about growth takes on a different cast. The need for reforms in other areas of the economy is not diminished: power, transport, manufacturing, land acquisition, competition policy, international trade and investment, all require attention for continued rapid growth. But without food (and water), none of them will matter.
?The author is professor of economics, University of California, Santa Cruz