They both tell us an interesting story. The recent trend in agriculture is not bad for the last three years. Of course, that was before the knocking of Kharif 09. After all, 03 and 05 were both bad years and taking away a bad base always gives good growth estimates. The long-term trend is not much to preen about what they say. But hidden somewhere is the story that cereals are doing badly in spite of the good crop of 07/08. Non-cereals are doing better, apart from edible oils, and its animal husbandry and fish that are the leaders of the pack. In the growth league it is animal husbandry, non-cereals, and then cereals, with pulses and inferior cereals at the bottom.
Now CACP doesnt say so, but the cereal economy is the only one in a government price policy frame. CACP says that the policymaker should announce support at the time of sowing so that the economics work. It also raises its eyebrows on bonuses after the crop is in, having read its Ricardo, but it is left to a group of young economists, who have been doing a slew of acreage and supply response studies, to show that markets dont seem to allocate in cereal crops. My son is a product of the Bombay School and is naturally critical of my planning mindset, but is a part of the pack on this in a forthcoming book on supply response. It is extremely unlikely, it seems at present, that the demand of around 240 million tonnes of foodgrains in the Eleventh Plan will be met. In commercial crops prices matter and the CACP also suggests that it would not be wise to import without protection as in oilseeds. In general, there is hardly any improvement in terms of trade for agriculture and so no big breakthroughs in private investment.
The official and media concern is high agricultural prices. Last year, agricultural prices fell and there was no comment. Seasonality in agricultural prices is a dominating fact and the media and political parties show no awareness of this, the latter asking for good prices for farmers and cheap food at the same time. Montek was right in saying that food prices will fall. In fact, the last Wholesale Price Index, now released only monthly, says that food prices are lower than the same month last year, while overall prices are rising. But housewives are complaining and it is true that consumer prices are rising. Once upon a time consumer and wholesale prices always moved together. Now this is not so and we dont know why.
A study by Sukhpal Singh and Naresh Singla at the IIMA on the impacts of retail supply chain effects showed that the retail mall paid a price of nine rupees per kg of cauliflower, while the A-grade price in the mandi was eight rupees a kilo in a major metro where retail malls are popular. Obviously in this case farmers are getting better prices. Equally obviously the price was 12.5% higher and would show up in the consumer price index. In cabbage the January price was around 17% higher, but taking into account off-season prices, the average was only 4% higher. One of the objectives of supply chain management was for the farmer to get better prices and now that he is getting it, one cant cavil. But the price would rise.
These are only stories and we still dont know why retail and wholesale prices are behaving differently, but they should find out. Quality may be an answer, improving incentives another. The CPI is reportedly ready for urban areas and needs looking at for rural areas. One hopes it will have some answers before policies are put into place. On a general plane we do know that the central bank and the chief economic advisor are right. There is too much of purchasing power in the system and a liquidity overhang, and it makes it difficult to fight inflation. Inflation pricing has to be separated from incentive pricing policies as apart of the reform process. There are many things we dont know, neither do many others, but they wont say so. Its time to find out.
The author is a former Union minister