The causes of agflation and its consequences for India

Abstract

The last two years have seen dramatic rises in the prices of agricultural commodities, along with the prices of oil and other commodities like metals. Very recently, these prices have also taken a dramatic downturn. We feel that the prices will exhibit great volatility in the near term. This greatly increases cost of carrying excess reserves, as well as the cost of insulating Indian food markets from world prices India s using the Minimum Support Price and the Public Distribution System (PDS). In addition, it increases its unpredictability, which is an equally serious problem. With volatility, there is also great pain to the weakest (women and children) of the weak (population below poverty line).Thus, this problem needs to be identified, addressed and managed. With the Green Revolution of the 1965s, India, enjoyed a golden period of self sufficiency in food. Self-sufficiency is extremely important because India has had a history of famines. While they were usually caused by mismanagement, scarcity had also become an issue in the sixties. After four decades of good yields and weather, we are now being hit by production shocks caused by recurrent droughts. The amount of arable land is stagnant, irrigation is poor, and yields have started to plateau at a fraction below the achievable levels in the rest of the world. Thus, production growth is starting to lag population growth, which is a large point of concern for food security. Climate changes caused by global warming complicates the situation by making production even more unpredictable. Meanwhile, demand continues to grow with population and with growing income. While income elasticities of demand for grains are small, they are positive. In addition, there is a migration to higher-value foodstuffs like meat, fish, eggs, poultry, processed foods and beverages. Thus, an equal calorific intake would now require a larger based of grains to support it. With the rising demand and production not keeping up, India s food stocks have been the safety buffer. However, due to the excessively large stocks built up around 2002 and the attention paid to excessive costs of carrying and wastage, a process of diluting the reserves by exporting was begun in 2002. However a massive unexpected drought in2002-03 saw the need to dig deep into the buffers. Rather optimistically, the exports of food grains were continued amidst a steadily decreasing buffer stock, until 2006 when, for the first time in more than 30 years it was forced to go to the market and import wheat in a very large quantity at high prices. The dominant conventional wisdom finds this acceptable. However, we find that there is a high correlation of world stocks with Indian stocks. Thus, when we need to import, there is very little availability in the international market. As expected, this has resulted in high prices. Thus, trade is not the panacea it was thought to be and food security will be obtained, only by paying attention to production and yield. This could be done by implementing mechanized farming with specialized technology and machines more suitable for the Indian scenario. The other option could be to obtain genetically modified seeds with much higher yields. However, GM crops can only be a short-term solution. The long-term effects of their introduction into the human food chain have not been sufficiently studied and there remains the scope of improbable accidents with large consequences. The only solution that will work in the long-term is to invest in developing indigenous intellectual property at institutions like ICAR for yield-enhancement and productivity enhancement in institutes like ICAR. To enable the benefits of innovation here, investment is also required in rural infrastructure and market development. In addition, incentives to private sector investment may be required to reach self sufficiency once again in food amidst growing global concerns of food security.