Agri inflation: What can’t be cured must be endured

Recent developments on the agri-inflation front have had a positive rub-off — prime minister Manmohan Singh has admitted that India’s food security is all about wishful thinking.

What is positive about this is that New Delhi has finally admitted the problem is a long-term headache and measures to fight it are akin to band aid for a terminally ill patient.

Vested interests have been blamed for the rise in food prices and there are hints of dark conspiracy.

While it may not be wholly off the mark, subscribing to the theory in toto will only exacerbate matters, because long-term measures will be pushed into the background and agri reforms will remain just good intention.

Consider the macro situation: The global population is roughly 7.30 billion and rising. India’s is 1.1 billion and rising. We have almost 20% of the people that inhabit Mother Earth, but less than 5% of its water and agri resources.

By 2050, the global population is expected to touch 13 billion, but arable land and water resources are unlikely to keep pace with rising consumption.

Therefore, food price challenges are here to stay.
Also, a majority of the global population is concentrated in and around Asia where, unfortunately, agricultural yields are among the lowest.

Poverty, malnourishment and under development are a direct result.

So when per capita income rises, the first expression of demand will be in essential commodities — food, shelter and clothing.

Top soil erosion due to over exploitation and excessive farming is also rampant in Asia. This results in rapid desertification — India has reached a precarious stage where 25% of its potential arable land is now desert grade.

Rapid industrialisation, road building, housing and climate change are the other factors that impact food production adversely.
Food production and water availability are inter-linked issues.

About 1% of surface water available worldwide is potable despite the fact that 70% of the globe is covered with water.

India has less than 5% of global fresh water resources. With a 20% global population to feed, you can do the math: prices can only go up in the long term.

That our irrigation system is in a shambles was pointed out way back in 1972 in a Planning Commission document, which includes a report by the National Irrigation Commission.

Up to 1995-96, the government lost Rs 7,000 crore trying to recover irrigation water supply costs.

In 1992, a committee on pricing of irrigation water under the Planning Commission sharply criticised the lack of political will to even recover operational and maintenance costs of irrigation canals from farmers.

As a result of continued losses, water supply is erratic, quality of water supplied is poor, and farmers actually buy water at a premium from alternate sources.

A rational cost structure in electricity and water supply to agriculture is the need of the hour if agri efficiency is to improve.
Financial compulsions will ensure that subsidy burdens will not be feasible perpetually.

Gradual phaseouts will be the only way out and input costs of farmers are bound to go up. That, in turn, will mean higher food prices at the retail level.

Fertilisers, electricity and fossil fuel costs are likely to escalate and long-term impact on food prices can only be inflationary in nature.
Once we face the reality, we can take long-term remedial measures.

Short-sighted, fire-fighting moves will mean brushing the longer term structural problems under the political carpet.

There is no substitute to a bumper harvest and we need many green revolutions. Nothing less will do.

The myth of buying food at competitive prices overseas in case of shortfalls caused by rapid industrialisation and desertification is likely to hit us hard.    

This model has been adopted by China and it will cost them dearly. Clearly this is not the way out.

Thailand and Vietnam (global leaders in rice exports) have refused to step up exports as local buffer stocks get depleted by higher consumption.

Barriers to food exports are going up and long-term food security based on imports will only mean letting the country be held to ransom by overseas markets.

Commodity markets have good antennae and have already smelled a depletion in Indian buffer stocks as the government tries to cool prices by releasing subsidised foodgrains.

Check the futures on wheat — they are indicating more upsides in prices over the long term.

If the authorities clamp down on hoarders and speculators, they may bring down food prices partially, but the main culprit remains the demand-supply mismatches.

Rising consumption (due to increasing population and purchasing power) will mean that no more than 25-35% of the entire price rise can be reversed.

So Rs 20 kg sugar may very well be history.

Commodities have various premiums built into prices. The
speculative premium is but a small component.

Curbing hoarding and speculation will mean compressing that small premium — not rolling back the prices totally, as the larger supply side problem remains.

For a country whose agricultural productivity per hectare of arable land is poor, we also have the dubious distinction of managing our buffer stock of grains badly.

Our granaries stock food inefficiently and wastage rates are excessively high. And half of green vegetables decay or perish before they reach the consumer.

Our surface transport systems are poor as roads are badly maintained, leading to delays in transportation and further wastage. Transportation is a long-term bottleneck and as long as this remains, costs will be high. Cold storage and refrigerated trucks are suggestions that need pondering but are expensive solutions. Food costs will go up if cold storage is employed but maybe made up by reduced wastage. And implementation, in any case, is not swift.

So unless the core of the problem is attacked, we are unlikely to get much relief from the menace of agri-price inflation.

A rising population with increasing purchasing power will cause a long-term supply crunch.

With the prime minister admitting that the problem is more severe than anticipated, one hopes that water and food management will get much-deserved attention at the Union Budget on February 26.

The remedies suggested so far — imports, curbing speculation and fiscal tweaks — are doomed to fail as they are grossly inadequate.

The writer is CEO of BSPLindia.com and the author of A Traders Guide to Indian Commodity Markets. He can be reached at vijay@bsplindia.com.