The recent discussions on monetary policy tightening following the persistent and disturbing increase in food prices has put the spotlight squarely on a key weakness in India. There is an unusual consensus among economists and even policy authorities that monetary tightening is likely to be effective at the margins in containing the rising prices of food and vegetables.
While the proximate cause of the price rise is generally considered to be the deficient rainfall in 2009 and shortfall in kharif output, there is a more serious structural deficit that is building up in food output and productivity. Some part of this is evident in price movements over the past one and a half decades. A look back on food inflation since the mid-1990s shows three distinct phases. The first is a period of high volatility but a flat trend from 1995 to mid-2000. The volatility then diminishes till about beginning 2004. Thereafter, there is a distinctly perceptible trend increase in food inflation, although with just a slight increase in volatility.
The reason is not hard to deduce. Very broadly, shorn of government food stocks and other factors, since 2002-03, per capita availability of foodgrains (cereals and pulses) will have dipped to a projected 185 kg this year, from around 200 kg in the two previous years (which themselves were pretty much the 2003-04 level). But this is only part of the story. India?s consumption has increased not just due to an increase in the population, but also in terms of income. Incomes have increased, growth impulses diffused from a few growth centres into the hinterland, demand for proteins and vegetables grown. Foodgrains availability, measured using GDP, has halved, almost secularly, from 7.7 grammes per rupee in 2003-04 to a projected 3.7 grammes in 2009-10. The higher elasticity of food expenditures to incomes going down the income ladder is likely to have led to higher spends on food for the additional incomes as well.
As is well recognised by now, India?s agricultural productivity remains low. China has 933 million hectares of land, a little over three times of the Indian land area of 297 million hectares. Yet, the Chinese have only three-quarters of India?s arable land. China?s arable land is about 13% of its landmass, India?s 54%. Yet, India trails China in some productivity related aspects. First, the extent of irrigated land is about the same in both countries (around 55 million hectares). As a result, proportion of irrigated to arable land is 44% in China, 34% in India. Second, the average size of a Chinese rural landholding is larger than in India. Third, Chinese farmers use more fertiliser in their farms. World Bank data for 2001, albeit dated, shows that fertiliser use in China was an average of 279 kg per hectare, India?s being 103 kg per hectare. The nutrient balance in South Asia for nitrogenous fertilisers is a much higher deficit in South Asia than in East Asia. The extent of machinery use is also higher in China.
This is not just a matter of food prices. Agriculture is a key contributor to the investible surplus of a country. There is a strong case for arguing that SEZs in Shenzen and the Pearl River Delta were fuelled by capital partially raised from the rural hinterland. Some pointers emerge from the initial China initiatives.
Deng Xiaoping?s economic reforms first started in agriculture, where peasants were encouraged to participate in the market economy. Communes and collectives were dismantled, and farmers were given long-term transferable lease contracts and encouraged to grow crops to sell in private markets. With rules that varied from province to province, farmers were allowed to hire a certain numbers of labourers, and sell their surplus; this change was particularly marked in the coastal areas. Similar reforms in Vietnam and Laos have also contributed to their economic growth.
Globally, prices of agri commodities will be on the rise, and probably become more volatile, with more consumption demand from emerging countries and grains being diverted to bio-fuels. Another major concern is also the link of agriculture to water. Irrigation accounts for over 80% of India?s water usage, and delays in pricing rationalisation of this even more scarce resource will add to the distortions in farm output. Add climate change to this.
What is the way out for India? There are no clear answers. Only that all problems have solutions, however partial and long drawn. There needs to be a prolific debate on this, not on the inside pages of newspapers, but up front. While our vocal policy focus is on financial sector reforms, on organised retail, on infrastructure, there is a real crisis brewing out there, which is likely to have a far greater influence on India?s course.
The author is vice-president, business & economic research, Axis Bank. Views are personal