We are constantly reminded that food inflation is India?s biggest problem today. Will the increase in food prices come under control? Probably not. But inflation need not be what it is right now, if proper policies are followed. Proper policies will, however, probably not be followed, so we get back to square one. At best, somewhere in between where we are and where we should be. But let?s begin at the beginning. The wholesale price index for food items went up by a little over 10% for the year ending August 20, 2011. (As I write this, September 8 figures are yet to come in). The 52-week average increase was 11.5%. For cereals, however, this was only 4.2% and (as the kharif crop is to come in), and the price of pulses went down by 4.16% this year and the 52-week average decline was 6.5%, so that the farmer feels cheated when he comes in to sell pulses. But, on August 20 this year, as compared to the same day last year, vegetable prices were 15.8% higher, fruits 21.6%, milk 9.2%, and meat, eggs and fish 12.6%. The 52-week average increase was higher.
Seasonal variations apart, will food prices fall? No. When your economy grows at 8% and per capita income at 6.5%, if the income elasticity of demand is around 2, the demand for that commodity grows at 13-15%. In other words, demand goes out of the window. We are fairly good at estimating price elasticities because before Professor Rangarajan with the concurrence of Shri Ahluwalia decided that the Planning Commission should not have details in plans or discuss plans with anybody, we had a very good system of demand forecasting there. Perhaps one of the best anywhere. The Linear Expenditure system started by the Task Force on Poverty that I chaired in the mid-seventies did the first workout but professional economists kept it up. The elasticities for foodgrains are as low as point one of 1% for urban people and never above a third of 1% for the poor in rural areas. But as I report in a book on the future of Indian agriculture that?s in the press, even for the rural poor they are over 2 for milk and milk products, around 1.5 for meat, eggs and fish and sugar and over 1 for fruits and vegetables and edible oil. Agricultural supplies never grow by 10-15%; foodgrain prices will not rise much and non-foodgrain prices will. I report in my book that the decadal growth figure for the demand of cereals is 11%, but for potatoes it?s 24%, 30% for vegetables, 40% for milk, 200% for eggs and 250% for chicken. Since supplies will not go up at this rate and imports have limited scope, prices will go up as slow-growing agriculture hits an 8% growth economy.
In fact, in any fast-growing economy, some high-demand inelastic or slow-growing supply items will go up in price. But growth also means technical change and relative prices of other goods will go down. On balance, inflation would be limited. While technical change is fairly rapid in India, the fall in some prices is not happening in India as?RBI constantly tells us?because our central and state governments are living as if there is no tomorrow. Raising interest rates, apart from choking growth, only go so far.
At least economists have to speak the truth in the days of competitive politics where parties will always promise goodies without costs. But the price increase need not be what it is. This is the third part of the story.
If the government decides that it will give technological assistance and create a positive economic environment for the next crop season, our production of food items will rise. Since almost all imports are more expensive?and will become more so, given ongoing trends in the rupee exchange rate, as the oil and pulse importers have said?this will mean that prices will rise less as compared to an environment where such policies are not there. This will require calibrated medium-term tariff policies, no subsidies for imports, and financial and technological packages for domestic producers. They have said they will not have a tariff policy with a medium frame for reasons that aren?t very opaque; sugar farmers have to get more protection than cotton farmers although this doesn?t make sense; and so will it go on.
It breaks my heart to see hybrid projects being wound down or GM seed trials put at the mercy of state governments. The government has nixed Bt brinjal. Now we will pay the price for another luddite decision as vegetable prices rise annually by 20%. It is truly a bizarre world.
Finally we have a lot of cereals in stock and prices are not rising and demand won?t either. In fact, the food security Bill should be pushed through for, given the relevant elasticity, the poor are not demanding that much of grain. But overprotecting grains leads to lower supplies of the items where demand is rising, for land and water are limited. Another bad policy we will not change, to protect some politicians? boroughs.
So it will go on. But maybe somebody out there is reading this, and we will get some better policies. I am really an optimistic kind of blighter.
The author is a former Union minister