Only worry in this scenario is the farm sector, which is showing very dismal performance; 0.9% growth during the second quarter compared to 2.4% during the previous quarter. More concern is of very high inflation of essential food commodities. The annual rate of inflation for food articles has gone up to as high as 19.5% in the week ended December 2, 2009. Prices of almost all food commodities have increased unabatedly.
Steep rise in the prices of pulses (especially tur, moong, masur), vegetables (especially potato and onion), and sugar have made these commodities unaffordable for all consumers irrespective of income strata.
High economic growth accompanied by a very low overall inflation, on the one hand, and poor performance of food commodities with sustained high inflation on the other, have created a peculiar situation to tackle the prices of food and non-food commodities.
Both demand and supply side factors are responsible for continuous rise in the prices of food commodities.
Obviously, excess demand situation has emerged due to growing gap between demand and supply of food commodities. Increasing population, rising income due to high economic growth, growing urbanisation and unfolding globalisation are responsible for pushing demand for food commodities faster than before. NREGS, has also raised income of poor and increased demand for food commodities in rural areas.
It appears that India is not prepared to meet the growing demand of essential commodities in an era of high economic growth. Available predictions reveal that rice and wheat production should continue to grow at around 1.7% per annum during 2004-11 to meet the growing demand for these commodities.
Unfortunately, production of these commodities was way behind the projected demand. Many second-generation problems (such as deteriorating health of soil and water resources), high uncertainty in agriculture largely due to extreme climate variability, are constraining production of food commodities. This year drought followed by flood has severely affected production of rainy season food crops in many parts of the country.
Global food production and prices have also become more uncertain and volatile than before.
Speculators and middle men have judged the excess demand before the government could take any action, by managing their inventory to take advantage of the excess demand scenario.
Undoubtedly, rising prices of food commodities will adversely affect purchasing power of the poor most.
Though the food commodities account for only 15.4% share in the wholesale price index, about 53.1% of total income by average Indian consumer is spent on food; Americans on the other hand spent only 9.3% of total income on food. Some argue that rising prices would benefit farming community. Contrary to this, farmers, especially smallholders, would be worst affected as they are the net buyers of food commodities. Such a situation would lead to agrarian distress and increase number of people below poverty line.
The question is how to contain rising food prices in changing scenario.
Demand for food commodities will continuously grow, and its speed would be faster than before because of higher economic growth and employment augmenting programs. Therefore, supply side factors need to be addressed more seriously to meet the demand.
Quick and short-term solutions are to offload stock of rice and wheat, import food commodities at a cheaper rate and restrict their export. On import, government should enter global market very cautiously.
Long term solution requires massive reform in farm sector. India needs to develop a medium and long term strategy to meet the demand for food with the dwindling resources such as land and water. There is also a need to constitute a market intelligence cell, not with the government but in a research organization, to regularly monitor domestic and global prices, production and trade of essential commodities.
Agriculture has been ignored in the past and needs serious attention. It should begin with substantial increase in investment. Today, agriculture has become more knowledge-intensive, therefore technology delivery system, must be revitalised and developed to address the complex and challenging problems. Above all, long awaited reform is due in key sectors, such as fertiliser, seed, irrigation and power, to make farm sector more efficient and responsive.
These are authors personal views