Food inflation challenges

It is least surprising that despite politically expedient noises and predictions made by so-called experts as well as some superficial initiatives by the government, food inflation has stayed stubbornly high.

Worse, the risk of continued high inflation during 2011 is very real. It is ironical that the poor and the needy – upwards of 400 million - of this country are forced to pay an usurious indirect tax in the form of high food inflation during the last two years. Across the world, food prices have spurted for a variety of reasons including demand and supply side factors.

While demand-supply mismatch (for whatever reason) does create price volatility, such volatility is exacerbated by rabid financialisation of the food market.

Unchecked flow of speculative capital into the derivatives market for major food crops — already in the throes of weather concerns and robust demand growth - exerts a disproportionately larger impact on food prices. In the process, the poor are hurt the most.

On current reckoning, in the world market, food supply growth in 2011 may well trail demand growth and, additionally, be subject to weather aberrations.

Price spikes on cards

The pressure on supplies will mean a call on stocks; and worsening stock-to-use ratio is a sure recipe for further price spikes.

All major drivers of food prices are intact. Rising incomes and expanding population in emerging markets, especially Asian countries, create voracious appetite for food. In addition, rapid urbanisation and changing food habits, soaring crude prices as also bio-fuel policies of governments propel food prices higher. Land constraints, water shortage as also global warming and climate change are newer challenges.

As in the last five-six years, in 2011 too, developing countries are set to drive growth in food production, consumption and trade. In the short-run, that is next two-three years, the world is likely to witness two-speed growth – weak and hesitant recovery with high level of unemployment in OECD countries as opposed to strong growth in large developing economies. This is sure to have an impact on consumption.

Bio-fuel debate

Energy market will have heightened impact on agriculture and food. As energy prices are expected to stay at elevated levels, higher inputs costs as well as higher production and transportation costs will push the agricultural cost structure higher. High energy prices are sure to impact crop supplies, prices and trade flows. It will also reinforce feedstock demand for bio-fuels.

The food versus fuel debate is likely to get shriller. Bio-fuels depend on government mandates and incentives. Production of bio-fuels to meet mandated use will create additional demand for a number of crops including sugarcane, corn, wheat and vegetable oils.

India cannot remain insulated from the global influences. As global food prices are expected to stay at elevated levels, we have to brace ourselves to face the situation.

Of course, our policymakers can surely do something to reduce the adverse impact of global developments on the domestic market; but they seem to be too preoccupied with ‘other' activities that ignore the genuine needs of the poor and hungry.

Real concern

In some sense, the real concern is not so much the global market dynamics as the utter lack of focus on, and attention to, domestic supply side problems.

New Delhi seems to be hoping against hope that the problem of food inflation will sort itself out or go away over time. Nothing can be more illusory.

Also, there seems to be combined inertia within the government that suggests an unholy belief that GDP numbers will overshadow inflation concerns.

As we enter the terminal year of the XI Five Year Plan, annual growth rate of agriculture over the last four years has left much to be desired. The target of 4 per cent growth has slipped away. Agriculture is clearly a laggard in the growth story. Someone within the government should be held answerable for this poor performance.

Worse, there is now the talk that the same 4 percent growth target (that we failed to meet in the XI FYP) should be good enough for the XII FYP.

It is at best a joke because there is nothing to suggest that there is going to be a shift in strategy to achieve the targeted 4 per cent growth. For all that, we may have ‘more of the same' in the next Plan. Routine and casual approach to planning must give way to more focused approach.

Political will lacking

We lack the ‘political will' to effect genuine transformation in the farm sector. India has all it takes to become a farm power.

There is no country in the world that is blessed with over 270 days of sunshine, 900 mm of annual rainfall, extraordinary biodiversity, varied agro-climatic conditions, hundreds of rivers crisscrossing the country, over 7,000 km of coastline and of course manpower.

We keep crowing about what we did nearly 40 years ago – the Green Revolution. But the world and our country for sure have come a long way since then. There are newer supply and demand side challenges waiting to be tackled.

Indian agriculture needs growth-oriented policies for the supply-side that would ensure higher production of food crops in a sustainable manner. This calls for a national food security movement that aims to achieve reasonable self-sufficiency and self-reliance in the coming years.

Huge investment is required in the farm sector to enhance production and productivity. States have to play a catalytic role in the national effort. If we have to make a success of the ambitious Food Security Act, there is no escape from demonstrating a sense of urgency to tackle supply side problems.