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Graph in the dinner plate

The prospects of a respite in food inflation appear dim. In 2008, grain prices joined the sharp spike in commodity prices the world over.

india Updated: Dec 17, 2009 19:43 IST

India’s wide experience with monsoon failure yields a formulaic response: draw down grain stocks to feed the poor, sell some of it in the open market to keep a lid on food prices, lower taxes on food imports, pay more for farm produce, and ensure availability of power for irrigation. Since the last drought, in 2002-03, the Centre is now better equipped to arrest the associated shrinkage in agricultural incomes and jobs through a nationwide employment dole.

The costs of a drought are well documented. The average drop in grain output in a drought year has been 11 per cent. The impact on the growth of the economy is, of course, progressively declining as agriculture’s share in national income shrinks and the correlation with industrial output becomes looser. There is, however, no secular downtrend in the price impact. Food price inflation, already at 13.7 per cent, will accelerate next year as grain reserves are replenished at higher prices. Historically, food inflation has ratcheted up by 4 percentage points in every year after a drought. The continuing story in the inexorable rise of food prices is that population is growing faster than farm output. At an estimated 1.5 per cent, the annual rate of increase in population is ahead of the 1 per cent growth in grain production in 2008-09.

The prospects of a respite in food inflation appear dim. In 2008, grain prices joined the sharp spike in commodity prices the world over. Rice was quoting at twice its price a year ago, and wheat 50 per cent more. These levels have not been witnessed since the 1970s. The drastic falls in most of the speculation-driven commodities — for instance, oil — after the financial bubble burst in September 2008 did not carry over to grain prices, which were in actual short supply. Although India did not import these wild fluctuations, the government on its part added to the inflationary process by hiking the procurement price for all crops by 30 per cent. The government’s approach to drought has been that of crisis management, not mitigation. This mindset, and the accompanying resource allocations, must change. The alternative is to invest in a second Green Revolution that combines technology upgrades, a shift towards more expensive but drought-resistant seeds, and rehabilitation of water delivery systems.