Persistent food inflation and the structure of the food security legislation are exercising the government and policy wonks like never before. Ashok Gulati, Director in Asia of the International Food Policy Research Institute and a reputed agricultural economist, suggests, among other things, that this is a good time to turn the crisis into an opportunity to reform the structure of the agricultural marketing system and allow the benefits of an open market and technology to flow to the farmer. Excerpts from an interview with Kanika Datta.
How do you explain this persistent food inflation and how should the government tackle it?
The government is rightly worried but we need to understand what is behind this and the policy responses that are needed as a result of this in the short and medium run and then in the long run. From that angle, the diagnostics have been somewhat puzzling. You can explain the onion price rise by the crop damage in Maharashtra. But consider the broader picture. Indian food inflation at present is not driven by wheat and rice, but vegetables, fruit, milk, eggs, which is a high-value, perishable segment. Now, production has not dropped. There are five seasonal vegetables that are less than Rs 20 a kg. But there are many other vegetables and fruit for which prices have gone up. The question is whether they have gone up because there is a drop in production, or some expectation built in. To me, the answer seems to be that there is excess liquidity in the system. For two years, we have been pumping in money to revive growth after the financial crisis — it started at a global level with US pumping in $600 billion, then Europe, China and India followed. For two years, money supply has been growing at 20 per cent. Our agri-production last year was zero, this year it’s going to be 6 per cent, so over the past two years if agri-production is growing at 3 per cent and money supply at 40 per cent, it is clear that there is too much money chasing too few agri-commodities. Food inflation is higher because 50 per cent of income is being spent on food in this country.
So you agree with those who say the Reserve Bank of India should raise policy rates?
I had a meeting with the finance minister last week and this was my first point. It might affect your growth but 7.5 per cent rate of growth with 6 per cent inflation is acceptable rather than 9 per cent growth and 18 per cent rate of food inflation. Not only does India have to tighten rates, the finance minister has to take up this issue with the G20 countries to coordinate, just as he did for the stimulus package. Today, high food prices are not restricted to India, China has double-digit inflation, world food prices have broken all records, and all markets are interlocked.
But there is also the supply issue — that prices are being driven as a result of hoarding…
When you don’t know how to manage the market economy, then you start blaming the trader as you did in the fifties and sixties! It is, at best, a marginal issue. If there is a shortage the first thing you do is unload your stocks of wheat, rice and sugar. Luckily, we have huge stocks, so unloading them will allow market prices to cool since these items have the biggest weight in the food index. But there are no takers; no state wants to lift these stocks because this is not where the demand lies. Now, come to the question of vegetables. The mandi system is archaic. It is designed and captured so that the commission agent is benefiting at the cost of the farmer and the consumer. So the first thing that needs to be done is to break this monopoly. How do you break this? Consider Delhi. Why should there be just one Azadpur Mandi? Why can’t the government other players to come in and open four more agriculture markets at, say, a 30 per cent capital subsidy?
This has been a recurring debate…
Exactly, so what we need to do is encourage direct buying by processors and retailers from farmer groups or clusters since buying from individual farmers will be difficult. Then the government should say that anyone who is willing to buy directly from them will be exempt from market fees, tax and offer a subsidy to build your collection centres and so on. The only thing is that these transactions have to be transparent, like a stock exchange, and you create competition.
But some retailers and food processors do buy directly from farmers.
That’s only on a case-by-case basis. Companies that buy directly from farmers have to go through Agricultural Produce Market Committee, which allows it on a discretionary basis. And even where companies are allowed to buy directly, it’s all unwritten. Tomorrow if, Mamata Banerjee comes to power in Bengal, then she could throw Pepsi out of the potato-growing areas because contract farming is still “illegal”. Most large-format retailers like Reliance source 95 per cent of their produce from the mandis. If you go on the Azadpur mandi website, you will see that officially the APMC allows 6 per cent commission. That in itself is a scandal — the commission should be 0.6 per cent. Add to that the fact that, unofficially, that commission goes up to 10 per cent and you can see how much money the middleman is making. This is true of every mandi in India.
Again, this is an old issue...
Precisely, but this is a wonderful time to convert the crisis into an opportunity. After all, at some point, Kurian took on the dudiyawallahs head-on. So somebody has to take the commission agents head-on. Today farmers who supply milk to the dairies get about 60 per cent of the consumer price. In vegetables, the farmer typically gets one-fourth to one-third.
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The other point is the information systems. Take onions. We knew that the crop had been damaged three months ago. But the crop forecasting people can tell you only this much. What we need is an institutionalised commercial intelligence wing that can collate this information and analyse what this damage means. For that you need to know how much is exported, stock levels, international prices, tariff structures and distill all this data in terms of policy recommendations. Normally, we export 1.5 million tonne of onion. If we knew the crop was badly damaged, that was the time to impose an export tariff; now, this amount is already out of the system. There are 15 sensitive commodities that need to be tracked like this every fortnight and the information distilled into a report every month. There’s no point digging a well when your house is already on fire.
Coming to the Food Security Act, do you think it is feasible, given the procurement costs alone?
Depending on the political settlement, we will have a subsidy of one to two per cent of GDP. Overall subsidies – food, power, fertiliser – account for 24 per cent of agricultural GDP. At least two-thirds of resources going into agriculture are through subsidies. No wonder growth is so slow. My submission is to restrict the subsidy to one-third of resources. Even if you want to give subsidies, at present they go only for wheat and rice. That is going to be a disaster. Why? To procure 60 to 70 million tonne of foodgrain you’ll have to squeeze the market even more. If you do that, the farmers’ representatives will demand that the government raise the minimum support price further, so we’ll be forced to accumulate resources for which we don’t have storage capacity. Also, since the legislation places reliance on wheat and rice we’ll be putting pressure on UP, Punjab and Haryana where the water table is falling dramatically. So you are actually applying an axe on your own people, it’s unsustainable. If you want the poor to eat, the best option is to teach them how to “catch fish”; but if you have to give them food, don’t restrict it to these two commodities. Make the food basket at least 10 or 15 commodities. Poor people should be able to access, say, eggs, milk, coarse cereal, tomato, potato.
But that will still mean that the markets will be strangulated even further.
No, because when you spread this, poor people can go to any shop with their smart cards — whether it is private sector or cooperative, which will get a commission on every transaction, the way you do in post offices. I am not sure this will plug all the loopholes but it will definitely be more direct in benefits.