The Economist has a very good chart explaining the causes of the current crisis. While the food prices started rising, the market has started responding with in creasing yield in the last year. The other notable thing to note is how the yield growth has stagnated over the last 45 years.
I guess that the rise in food prices is following the natural rise of commodity prices in the last decade or so following increasing demand from India China etc, and thus food prices thus following commodities like Oil, Metals etc (While you may argue Metal prices are cyclic, i do believe the current upturn is more secular in nature. So, if we agree with the given analysis and assume that the increased food prices are here to stay, we shall come to the important question - What will be the impact on India, and thus How should the Indian policymakers respond.
Regarding the impact, i think there is a clear dichotomy exist(as it should), between the demand side and supply side. While the Indian consumers will suffer, there is tremendous scope for gains to the Indian primary sector. Let us focus on the structural changes due to higher prices which will improve the primary sector*
Government - Government will be unencumbered by the minimum support price (MSP) mechanism and then can fully focus on the market enabling measures to ensure that the gains in trade are diffused enough to prevent backlash of higher prices among general populace. Here the basic logic is that while the MSP does create a floor of prices, the given inefficiencies in the buffer system, means that the gains form trade are not passed on to the farmers in times of high prices. With the high prices, the burden of procurement will be on government and thus will have a fiscal impact, but anyway i don't expect the government to be fiscally efficient in near term.
Market - Higher floor prices means that enough incentives exist for the middlemen and traders to take advantage of India's improving road and rail connectivity to reach the hinterland leading to better price discovery across locations
Farmers- Incentives to improve productivity, and increasing disposable income.
Frankly, rising food prices can be an unmitigated blessing for a country like India with the worlds highest gross acreage and largest population in agriculture. Just imagine Oil Prices doubling for Saudi Arabia and Saudi Arabia on the cusp of finding more oil wells. Well for us, the oil prices have just doubled and the infrastructure and communications improvement are our new oil wells.
* Of course the glaring omission in this analysis is the effect of high prices on inflation thus leading to loss in real income for many of the populace. I still feel that the government should take a fiscal hit rather than limit the upside of the price rise for million of farmers by commodity price targeting which seems to be the current mode of thinking in the current political/bureaucrat regime.
Picture Courtesy The Economist
ur feeling of government taking the fiscal hit doent go well with the hope of maing a return in the power...shor term measure wud b taken crushing us in long term
ReplyDelete@ Vibh: Hmm..You are right to an extent, but what i am suggesting is, governemnt plays the populist card by regulating the demand side as in importing food items, procuring etc at high prices but lets the market work in the supply sector and see how it goes. It can only be good.
ReplyDeleteagreed...bt u can remove the @vibh part as i m , as always, the only one commenting
ReplyDelete@ vibh - haha - True enough - wont happen next time
ReplyDeleteA gud theory but aren't u assuming information symmetry? the full impact of rise in prices may not be passed on to the farmers, after all....baring cases like e-choupal
ReplyDeleteAnother variable that'll add to the world food crisis in years to come is the substutution of farm produce to bio fuels the world over - lead by brazil and U.S. We know how sugar produce has tanked in South America and added to that is the more than triple fold increase in prices of maize and corn (5-6 times increase)led by U.S, due to bio fuel production. Added to this is the E.U's mandate to increase quantum of bio fuel consumption. Food riots aren't too far away. But I'd still continue to order sweet corn soup.
ReplyDelete@ Nithya - Sure that will be the case in the first few years, but if Government actually regulates well and doesnt interferes, i think in 2-3 years, farmers cna get their due share. Remember - Its the govt.s writ that entrnenches a middleman class. without the govt's interference the will to lower distribution costs means farmers can get their due prices.
ReplyDelete@ Baidik - That has an impact, but i think we are past that phase. Already people are realising that atleast in developed countries the ethanol subsidy is not worth it and the carbon footprint of such an scheme is positive. So i dont think this should be an issue in the coming future. Bio fuels have peaked as per me. And dont be an larmist. Food riots are way way off. The prices are up sharply cos they are making up for the lag. It will stabilise.
@ Vibh - What do u hv to say now. shud i use @v ibh??
yes..i dnt mind
ReplyDeleteWithout going into what will it do to FRBM Act targets if government were to take a fiscal hit, have you looked at the "demand shock" to the economy from your "disposable income for farmers" solution?
ReplyDeleteNot at all am I suggesting that farmers' income should not be increased....but if you think about what % of population still dependent on primary agriculture sector incomes...any "sudden" increase in incomes due to price rises will present a huge demand shock and thereby instigate inflation further.
any rise in incomes, therefore, should be smooth and should come a genuine increase in productivity.
now productivity increase can't happen overnight....so immediate solution of controlling price rise at primary level looks a sensible tactical act.
the saudi-oil example only applies for export sector... when we are more than self-sufficient and ready to export (with acceptable quality for international markets)...but that seems a far fetched goal at the moment..
@ Pradeep: Why do you assume a "Demand Shock". If you comprehended my post, the major part of my worry is how soon can the benefit of the increased prices could be passed to the farmers. Forget demand shock. And its the demand that has been driving the economy for the last few years. And dude, whoever is afraid of demand driven growth. Get out of the 80s mentality. Read something. Reading you will find is knowledge enhancing. It clears miscopnception.
ReplyDeleteAnd talking of the Fiscal impact, you think a real cost of food prices will stop politicians from promising free food through an ill targeted PDS
Yes exactly, in some moments I can reveal that I agree with you, but you may be considering other options.
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