There is a clear and present danger confronting the Indian economy — the threat of inflation. Thanks to rising food and agricultural prices, it has hit a 11-month high of 5.9 per cent. Such a prospect is worrisome for the government as there are important state elections ahead, including a national election probably taking place during the last quarter of this year. The buzz is that the timing of the general elections is dictated by the fact that the government won’t be able to hold the line on fast-rising prices beyond September or October this year.
So why are food and agricultural prices rising? Economists typically would attribute this problem to supply-demand mismatches. Simply put, prices go up when food supplies are not enough to meet the demands of a growing population. Since the 1990s, the rate of growth of foodgrain production has, in fact, decelerated to 1.2 per cent while the population has grown by 1.9 per cent. This has resulted in a decline in per head availability of cereals and pulses. From an earlier situation of self-sufficiency, India is now an importer of wheat.
This shortfall in availability has occurred when global output of grains has declined and stocks are lower. For instance, less-than-targeted wheat production during 2004-06 led to lower procurement for the public distribution system (PDS). This forced the government to import wheat when global prices zoomed to $ 345 a tonne in December 2007, compared to $ 159 per tonne during January-December 2006. Costlier imports are again inevitable if the government cannot procure enough wheat in the coming weeks.
While domestic food prices remain vulnerable to global price shocks, shortfalls in availability of food also force the government to resort to measures that have a built-in inflationary bias. Tilting the terms of trade in favour of agriculture through higher support prices for farmers is one such important measure taken since the late 1960s. Higher support prices introduce a downward rigid, upwardly flexible element into the prices of wheat, rice and 22 other important crops. These were substantially revised upwards in 2007-08.
Thanks to higher support prices, food prices keep ratcheting upwards regardless of a bumper or lean harvest. Ahead of important elections, the pressure to provide higher prices to farmers has only mounted as the UPA and the NDA try and score brownie points to show their concern for the kisan. But the farmer these politicians have in mind is not the small and marginal one eligible for loan waivers. Instead, it is the surplus-producing rich farmers of Punjab, Haryana and western Uttar Pradesh whose grain feeds the country who are being wooed and ‘taken care of’.
Exemplifying the compulsions in this regard is Prime Minister Manmohan Singh’s statement in Parliament: “During the Congress regime from 1991 to 1996, the terms of trade increased year after year in favour of agriculture. During the NDA regime, the terms of trade, the prices to farmers deteriorated. What was the concern for the farmers? You look at the procurement prices. The NDA, in five years, increased the procurement prices by the pittance, Rs 50 in four or five years. Look at the record of our government.”
The farmer-friendly UPA jacked up wheat prices by as much as Rs 370 to Rs 1,000 a quintal over a four-year period. Support prices for rice, too, were hiked substantially during its term, even bringing them on parity with wheat for the 2008-09 season. The message from the ramparts: the UPA cares more for farmers than the NDA. There is also a subtext: the UPA is ready to do more to bolster its poll prospects. There are no prizes for guessing how it will respond to pressure lobbies to provide even higher prices for wheat.
Manmohan Singh is, of course, perfectly right that the terms of trade — measured by the movement of relative prices of manufactured and agricultural commodities — went in favour of agriculture throughout the tenure of the P.V. Narasimha Rao government (1991-96). However, they remained so even after that period, reaching a peak level in 2002-03. Manufactured prices recovered since then till 2005-06 and 2006-07. But with agricultural prices rising much faster, the terms of trade continued to remain in its favour.
On this reckoning, the previous Congress regime clearly did more for the farmers than the present UPA government. But the latter appears to be making up for lost ground with a vengeance, tilting the terms of trade even more in favour of agriculture this financial year. Relative to 1993-94, the ratio of industrial prices as a percentage of agricultural prices showed a differential in favour of agriculture by 14 percentage points till March 8, 2008. Is it then any surprise that food inflation is up?
The only Economic Survey that dealt in extenso with this problem was in 1991-92 when Singh was the Finance Minister. The general price rise then was associated with a 15 per cent shift in the terms of trade in favour of agriculture. “With deteriorating terms of trade, relative profitability in the industrial sector has tended to decline. There has ensured an industrial recession in which industrial investment has slowed down. There will also be a concomitant depressive effect on industrial profits and wages,” it added.
Obviously, the government of the day didn’t want to hurt farmer interests to win a reprieve on the inflationary front. Tilting the terms of trade away from agriculture was simply not politically feasible — a calculus that assumes greater significance ahead of the crucial elections later this year. Wearing the hat of an economist, Singh then justified the move that agricultural terms of trade cannot be depressed beyond a point if agricultural production was to grow and that farmers need incentive prices.
These compulsions haven’t changed over the years, even though the current situation is more favourable than it was in 1991-92. Foreign exchange reserves are plentiful at $ 300 billion for food imports, if needed. But these options are not feasible as global food prices have hit the roof. If imported inflation is not desirable, what better option is there than shifting the terms of trade further in favour of agriculture? And all of this being contemplated when the UPA government is also bearing down on industry to hold the line on cement and steel prices.
It bears mention that higher food and agricultural prices do not uniformly benefit the countryside. The only ones who gain are the rich surplus- producing farmers. The small farmers do not gain as they dispose of their production to traders and also depend on the market for 40 per cent of their food requirements. This dependence is much greater for landless labourers. The fact that higher food prices affect a substantial section that live off the land is conveniently forgotten in the ‘jai kisan’ populism of political parties.
While the UPA government is, no doubt, concerned over inflation, what is equally doubtless is that the recent uptrend is also due to the terms of trade shifting sharply in favour of agriculture. Demands for higher prices and other measures to appease the farmers are intensifying as elections draw near. Add to this the possibility of a wayward monsoon after five consecutive good seasons. A tremendous inflationary upsurge is likely and will weigh heavily on the general elections later this year.