The Reserve Bank of India Governor, Dr D. Subbarao, on Tuesday said there was a case for revisiting the subsidy regime in the agriculture sector, as it exerted pressure on food inflation.
“Paradoxically, in India we subsidise both agricultural inputs and outputs — subsidies on inputs such as fertiliser, electricity and irrigation to incentivise production and subsidies on output for the PDS system entail a large fiscal burden,” he said in a lecture on ‘Challenges of Food Inflation' here.
He pointed out that if the amount spent on subsidies could be diverted to augment capital formation in agriculture, higher productivity will raise the income of farmers while lowering prices for consumers. In the same vein, he said higher minimum support prices also led to higher inflation. Dr Subbarao felt that the direct role of monetary policy in combating food price pressures was limited. But in the face of sustained high food inflation, monetary action would still be warranted to anchor inflation expectations. “The outlook on food inflation in short to medium term will be determined by the speed and quality of a supply response by the Government,” he said.
Shift in dietary habits toward more protein foods, pressure on food inflation stemming from inclusive growth and large increases in MSPs of food grains were the major factors driving food inflation, according to Dr Subbarao.
“The possible trade off between inclusive growth and inflation has not received much attention,” he pointed out.
The Mahatma Gandhi National Rural Employment Guarantee Scheme which guarantees at least one hundred days of wage employment to rural labour, has pushed up rural wages, exacerbating the wage-price inflation spiral. “Admittedly, increase in wages need not be inflationary provided it reflected higher productivity, but that is not currently the case,” he said.
Dr Subbarao advocated raising agricultural productivity as a way to respond to the challenge of food inflation. During 2010-11, Punjab, with the highest yield in rice of 3.8 tonnes per hectare, was lower than the world average of 4.3 tonnes.
Prof Abhijit Sen, Member Planning Commission, said agricultural growth was expected to be between 3.2 and 3.5 per cent in the current Plan Period, lower than the targeted 4 per cent. He said a thrust should be given to more decentralised agriculture.