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July 1, 2008

Fruits of knowledge

Issue 16 - Jul 2008

Mukul G Asher & Amarendu Nandy

The sharp increases in prices of commonly consumed staple foods (such as rice, wheat, and edible oils) worldwide over last several months, have caused consternation among policy-makers and the general public in many countries. Global futures markets suggest that there will be no significant price softening of food items in the near future. India’s annual inflation, as measured by Wholesale Price Index (WPI), is over 8.2 percent; with food price index rising by 40.8 percent in the first four months of 2008.

Adequate supply of these commodities and their equitable distribution among the population not only affects household welfare, but has wide-ranging political ramifications as well. The need for politicians to be perceived to be doing something about the issue is therefore overwhelming.

It is widely acknowledged that for India to achieve near double-digit growth, which also improves real income and consumption of the people, annual agricultural growth rate (which averaged 2.6 percent per annum between 2000-01 to 2007-08) would need to be raised to at least 4 percent. The vast imbalance between agriculture’s share in Gross Domestic Product (GDP) at around 17 percent, and its share in employment at 60 percent must be addressed.
Apart from unusual adverse weather conditions in the recent period in several important agricultural countries, there are several factors which help explain the recent increases in food and energy prices.

First, there has been above-average growth of the world economy, with several countries with large population (such as China and India) growing rapidly in real and per capita terms. This has increased demand for not only food, but also energy and other raw materials.

Second, in 2008, for the first time in human history, the majority of the world’s population has become urban. Urbanisation, industrialisation, and infrastructure needs (particularly for roads) have increased the demand for land, which has reduced agricultural land supply.

Third, the use of bio-fuels, which have diverted agricultural land and produce for energy needs in the developed world, has also been a contributory factor. British economist John Kay has argued that US and European ethanol subsidies represent a form of agricultural protection, with damaging consequences for the consumers in these countries, and for the rest of the world.

Fourth, large subsidies for petroleum based products, particularly for diesel and kerosene, and for water and fertilisers in many countries have also contributed to inefficiencies in their use.
Fifth, the accommodating policies of the Central Banks around the world, which have increased supply of credit, and very low or negative real interest rates prevailing in many countries, have diverted some of the financial investments towards oil and soft commodities, contributing to their price rise. A part of the food and energy inflation is therefore due to speculative demand.
The above factors have also led to an increase in demand for food and energy in India. The supply of agricultural commodities (and of energy) has however not increased commensurately. While the measures, such as increasing domestic supply of rice by export taxes and bans, may temporarily mitigate inflation pressures, they aggravate medium-term supply incentives, and therefore are counter-productive for India’s future food security.

To attain food security and diversify the agricultural sector, India will need to apply knowledge economy processes to this sector in a much more strategic and result-oriented manner.


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