Agriculture strikes back

The Reserve Bank of India (RBI) will make its quarterly monetary and credit policy announcement later today, against the backdrop of a buoyant macro-economic environment. If the third-quarter corporate numbers are any indication, GDP during the quarter will match the 9 per cent annual rate of growth that it clocked during the first half of 2006-07. This, of course, is precisely the problem that the RBI faces. With growth showing no signs of a let-up even after several attempts to rein it in with interest rate hikes, the potential inflationary consequences of rapid growth are visibly transiting into reality. The weekly inflation numbers, measured by the Wholesale Price Index (WPI), show an annual rate of inflation of around 6 per cent, having crossed that mark a couple of weeks ago before falling marginally below. While the rate is higher than the RBI's apparent comfort zone of 5-5.5 per cent, what really has the political establishment in a tizzy is the inflation rate as measured by the Consumer Price Index (CPI), which, due mainly to the higher weight of food items, has accelerated to over 7 per cent.

For the first time in several years, virtually all major food items appear to be showing supply deficits. For some commodities, particularly fruits and vegetables, this is typically a temporary spike that subsides when the fresh crop comes into the market. However, over the last few months, this pattern has been repeating itself for different products with some regularity, suggesting a broader supply problem. For others, prominent examples being wheat and some pulses, there has been a sustained increase in prices. The decision by the government to suspend futures trading in urad and tur reflects the concern it has with sharply rising futures prices, which in turn signal expectations of persistent supply constraints. All this harks back to the situation of the 1960s, before the impact of the Green Revolution manifested itself. The tight controls on food distribution that marked that period are now a distant memory. The dominant pattern of recent years is the swelling of rice and wheat stocks up to about 60 million tonnes just four years ago, compared to a recommended food security buffer of about 22 million tonnes. The situation has dramatically reversed itself since then, with stocks falling to near the minimum requirement, even as production has stagnated. This is a recipe for price increases if there ever was one. Worse, it has been compounded by the government's laxity in speeding up imports where possible, due presumably to a combination of inefficiency and pandering to domestic interests.

From the RBI's perspective, it clearly wants to rein in inflation and also, reasonably, to be seen to be doing something about it. To the extent that interest rate increases and quantitative measures work and are used, they are more likely to have an impact on the prices of manufactured goods. This will bring WPI inflation under some check, but going by the rather weak linkages between monetary aggregates and food prices, it is unlikely to have much impact on the latter. In effect, the short-term and long-term factors that have contributed to supply constraints in agriculture have made life difficult for the RBI. All in all, the economy appears to be paying a higher and higher price for its flawed policies with regard to agriculture.