Agricultural mess and food inflation – India's weak underbelly

On an overall basis India is set to grow aggressively over the next few years. However there is one segment of the economy which is getting totally mismanaged and there is no emphasis on any structured manner of either improving agricultural production or dealing with issues like drought, excess rain etc. Indian agriculture even after more than 60 years of Independence and rural areas still constituting a majority of India‘s population continues to be in a mess. Food inflation in India today stands at 14.5% vis a vis the overall WPI inflation of just around 1.3%. The reasons for this are severe supply shock both in the domestic as well as international perspective. Unlike other global commodities given the restrictive trade of agri commodities in India the inflation is largely domestic in nature. Today due to improper food planning and cropping pattern the inflation of most pulses stands at over 50%, in products like onions and potatoes which for a staple diet for most Indians the inflation stands at above 50%, in products like eggs it is almost 60% at the retail level. This has been exaggerated by some global commodities like sugar, tea etc. where global demand supply has turned adverse.

Whereas the overall Indian economy has moved up from a trajectory of around 5% growth around 10 years back to a 7% plus growth rate, the agricultural growth still continues to fluctuate vastly depending on the performance of the monsoons, floods, unseasonal rains etc. This is very concerning given that three fourth of India’s population still stays in rural areas and 70% of them are dependant on agriculture for their livelihood.

The biggest issue till a few years back and which still remains a big issue is the availability and cost of credit in rural areas. As a result of poor credit availability and high cost loans there still continues to be significant indebtedness in rural India. Over the last few years due to a greater focus of the government on agricultural credit and the growth of Microfinance Institutions the credit availability has improved. However a lot still needs to be done.

Despite having the largest arable area in the world the productivity of agriculture in India continues to be dismal with most key crops like wheat, rice etc having productivity that is not even half that of international averages. Except for cotton where there has been a revolution mainly due to the introduction of BT Cotton most other crops continue to reel under extremely poor productivity. Poor quality seeds are a big menace and most of the better productivity and higher yield seeds in case of crops like corn and soybeans have not yet found their way into India.

Fertilizer usage in India is hugely distorted due to the nature of the Subsidy regime in that sector where Nitrogenous fertilizers dominate in usage and other minerals are used much less. This is mainly because the subsidy regime was largely directed towards Urea. There have been some changes made lately, however there has been no move towards farmer education on this subject. As s result land productivity in India has gone down steadily. Excessive usage of ground water, improper rotation of crops, planting of unsuitable crops etc have also led to a significant decline in land productivity.

Besides this the sector also is prone to being politicized as has been seen in the case of the recent sugarcane pricing related protests, where the sugarcane crushing in one of the largest sugar producing states i.e. Uttar Pradesh has been held up due to farmer protests for higher sugarcane prices. Sugar companies, which made huge losses during the time when prices were down have to now contend with higher outgo for sugarcane as well as an increase in Levy sugar from 10% to 20%( which the government takes for Public Distribution at a price of around Rs 13 per kg as against a market price of Rs 35 a kg). The result of all this in a year where sugar is already is in shortage and prices have shot up will be that the shortage will continue even longer and there is a risk of prices moving up further.

The entire agricultural production, transportation and storage system in India is in a mess. It is estimated that around 35-50% of India’s production of fruits and vegetables gets wasted mainly due to non availability of proper storage at the farmers end, poor transportation facilities, non availability of proper cold storage facilities and cold stored transportation etc. etc. This is a colossal loss both in terms of farm incomes as well as for the national economy. Steps to improve these aspects of the agrarian supply chain have been few and far between.

There is a lack of proper guidance to farmers as to what crops they should go in for and as such typically there is a boom and bust cycle in most agri products in India where high prices of one year prompt a higher production next year. This leads to a crash in prices due to poor storage and transportation facilities.

The buildup of irrigation facilities has also not been consistent all over the country. Although some states have invested a lot to move agricultural production away from Monsoon based to irrigation based, the recent example of the current year where monsoon were poor and food grain production is estimated to have fallen by 15% in the current Kharif season shows that there has not been much improvement made on this front.

The state of food storage with Food Corporation of India Limited is such that there are huge wastage’s in storage. A large part of the storage takes place in open which is prone to weather and rodent attacks. As such there is a huge wastage that takes place even after procurement of food grains by Food Corporation of India and its storage.

Crop diversification is not properly carried out by farmers and there is no incentive given for the same by the government. Most of the farmers are still illiterate and need proper guidance for carrying out proper cropping and need continuous guidance on what kind of seeds, pesticides, fertilizers etc. should be used.

Modernization of agriculture by using efficient equipment has also lagged behind in India and most farmers still carry out most agricultural procedures manually.

Overall along with economic reforms it is important that there are substantial agricultural reforms so as to improve agricultural productivity and also match consumption patterns to actual demand and supply. Buffer stocks have to be maintained properly so as to deal with any supply shock. The key is that unlike demand induced inflation on the manufacturing side food inflation can
not be controlled by tightening monetary policy.

I believe that I can write on this topic endlessly as there are so many issues to be addressed on the agricultural production and productivity front and nothing seems to be done on this at all. The long term consequences of this in terms of food security as well as improving the state of the rural economy can be quite negative in the context of the strong growth expected in other segments of the Indian economy. There needs to be a proper action plan to go to a 3-4% sustainable agricultural growth rate.

Since I do not profess to be an expert on agriculture I will stop here. I believe that it is an important issue which we do not discuss much in the midst of industrialization, infrastructure investments and economic reforms.