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Why blame the farmer for price rise?

Tuesday, 6 May 2014 - 2:01pm IST | Agency: dna

Farming is considered a patriotic enterprise, and nearly half of India’s labour force is engaged in agriculture and allied activities. Almost everyone believes that in the election season, political parties should pledge to aid this patriotic endeavor to feed the nation.

But, farming is a risky profession, and agricultural products form only 14% of India’s total produce. After the economic reforms, the growth in agricultural GDP has averaged only 3.4%. Even India’s high inflation is said to be caused by such low agricultural productivity. George Bush had once said that India’s greedy middle class that consumes more than it produces is responsible for the rise in food prices across the world. Now, one of the greatest challenges the new government would face is that of controlling inflation. But, are these claims even plausible?

In March, for instance, the consumer price inflation was 8.31%. The rise in food prices was 9.1%. At least in March, there is not much of a difference. In any case, it is clear that it is not just the prices of agricultural goods that are rising. There is a general rise in prices, and there has been such a general rise in consumer prices for decades. If it is indeed true that prices of agricultural goods have been rising, how could have the consumers paid more for these expensive goods? The money has to come from somewhere because there has been a general rise in prices, year after year, since independence. 

Low as it is, after the Indian independence, the annual production of agricultural goods has risen many folds. At the same time, the prices of agricultural products have risen many folds too. In surveys, inflation is on the top of the list of the scourges that anger the Indian voters. Except for a short period in the early 2000s, inflation in independent India has always been high. How could agricultural productivity and prices rise simultaneously, year after year? It is surprising that such obvious questions have not occurred to the policy analysts who take such claims at face value. The prices rise when there is more money chasing fewer goods. But, if the production of goods has been rising every year, the price rise cannot be attributed to low productivity. If the production of goods has been rising year after year, prices would not have risen without an increase in the money supply. If the prices of food grains are high in 2014 because of low agricultural productivity, why were the prices much lower in 1947, when the agricultural productivity was much, much lower? Surely, there is something missing.

Even in years of drought, this explanation does not fit. Food supply will not fall drastically because of droughts or a year of bad crops or such occasional threats. In countries where there is abundant and varied food supply because of fewer trade restrictions and prosperity, an occasional year of bad crops does not affect the public much.

Even in India, this is true. India faced a drought in 2002, but in the financial year 2002-03, the price rise in food prices in the wholesale price index was only 1.4 percentage. This was nearly a quarter of the general price rise, which was 6 percentage. But, the price rise was high in the drought of 2009. The reason is simple. The RBI was more serious about controlling inflation in the early 2000s. But, the RBI was less of an inflation hawk after mid 2000s. Many economists blame the inflation in India on low agricultural productivity, global economic crisis or other structural problems only to divert attention from this fact. It is easier to maintain that inflation is beyond the control of the government and the RBI, by blaming it on external factors.

Remember that even in 2008, when the then President Bush complained about rising global food prices, the average inflation in the United States was only 3.8 percentage. This was the highest in that decade. If this were fueled by the global economic crisis, it would have affected other countries too. But, in the countries were central banks are independent and have an inflation target, the inflation rates were often ridiculously low. India would not have found an inflation of 3.8 percentage worth losing sleep over. In its history, India has almost never seen such low levels of inflation.

But, if so many people produce so little as they claim, perhaps not many people should engage in farming. The agricultural productivity in the United States is much higher today than it was in 1870, when close to 80 percentage of the population was engaged in agriculture. India is a net exporter of agricultural goods and many believe this to be a great achievement. But, in the United States, less than 2 percentage of the population engages in agriculture, and it is still a net exporter. Still, the Indian government and the liberal intellectuals do not allow the farmers to sell agricultural land for non-agricultural purposes. Not surprisingly, the farms are small, the means of production primitive, and the yield much lower than in prosperous countries.

A short evening on a farm might have convinced the panegyrists of the past that the farmers themselves might not agree with their romantic view of the farmer. 

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