The spectre of a runaway price rise is haunting the corridors of power in this pre-election year. Memories of earlier elections lost because of onion prices or sugar prices are fresh enough to divert all attention to inflation management.  The usual knee jerk reactions are there-price controls, restrictions on forward trade, bans on exports and import duty cuts.

The Government also blames the “perfect storm” raging in world grain markets.  The diversion of grains to ethanol production because of the blending goals and subsidies in the USA, the rising demand for animal feed, adverse weather in some major growing areas and low world food stocks have come together and led to a big increase in world grain prices over the past three years. The world food price inflation affects us because the way our food economy has been managed has made us more dependent on imports and required us to sail out and face the storm when we could have been safe in a harbour behind protective walls with a large measure of domestic self-sufficiency.

Food grain yields have stagnated for the past eight years because of a slowing down of input growth.  The expansion of irrigated area was only 0.5 per cent per year between 1996-97 and 2005-06 against about 2.5 per cent per year between 1980-81 and 1996-97. Fertilizer use started slowing down even earlier and has grown only at 2.4 per cent per year since 1990-91.  Public sector investment in agriculture also registered much lower growth after 1990-91 and the share of agriculture in gross domestic capital formation, which tended to be around 25 per cent, has dropped to around 15 per cent in recent years.

Perhaps the most disturbing figure is the difference in the technology input measured as the yield potential of new varieties of paddy, wheat, maize, groundnut and mustard/rapeseed. Since 1996-97 the “growth” in this has been 0 per cent as against an average growth of yield potential from 1980-81 to 1996-97 of around 3 per cent per year.  Clearly there is a major failure in the publicly funded research system. Anecdotal evidence corroborates this.  Unrecognised and unregulated private seed suppliers have stepped in to fill the gap and what Prof. Y.K. Alagh describes as “benign lawlessness” is responsible for the rapid spread of hybrid paddy in UP.

The short term crisis in the food economy will roil the macro economy this year even if the Government keeps kicking away at every presumed wrong-doer in sight.  But this will not help as high liquidity, expanded by loan waivers and arrears payments to civil servants, low food stocks, a rusty PDS and a string of state elections make the task of demand and market management more difficult. 

The deeper issue is whether we know what we need to do to revive the agricultural economy in the longer run.  This is crucial, not just for inflation management in election and pre-election years, but because of its impact on people’s welfare.  As I have pointed out last month, we are still a country where a third of the adults and half the children are undernourished.

The stagnation in food grain production and the slowing down of agricultural growth worsens rural-urban disparities and inter-regional inequality as states like UP, MP, Bihar, Rajasthan, Jharkhand and Chhattisgarh, where 70 per cent or more of the population depends on agriculture get left behind in the growth process. 

The Government has recognized this and some major initiatives have been launched recently to revitalize agricultural growth-the recently established National Food Security Mission and the Rashtriya Krishi Vikas Yojana account for the bulk of the Rs. 3000 crore increase in this year’s budget provision for the Dept. of Agriculture. The first is essentially a technology upgradation scheme and the second is meant to persuade State governments to increase their allocations for and commitment to technological progress in agriculture. But the experience of earlier schemes does not inspire confidence.  They are the usual mélange of committees to coordinate and direct, an army of secretariat bureaucrats, handouts to “progressive” farmers to demonstrate new practices, etc.

This is what we have been doing for years, trying to repeat the exceptional success of the green revolution that rescued us in the late sixties.  But the problem may not lie in the vigour of bureaucratic effort but in the policy frame.  We need to look at the profitability of food grain production and of farming operations. The big increases in this year’s MSP will help.  But farmers still have to cope with a policy that liberalises imports when world prices are low relative to domestic prices and clamps down on exports when the reverse situation prevails. Fertilizer pricing is a mess that will take years to clean, particularly now when world prices are rising, because of which the subsidy burden could balloon.  Investment in agriculture needs to go up and this years Budget Highlights does promise that capital formation will go up from 12.5 per cent of agricultural GDP to 16 per cent.  But where will the credit for this come from, now that credit repayment has been made voluntary?  Water management requires innovative partnerships with farmers, particularly in groundwater development, for which, the engineering oriented irrigation and PWD departments are not very suitable.

Perhaps the Government has been trying to do too much.  Public policy interventions have often been capricious and destabilizing and we would perhaps be better off if the Government limits its own role to one of protecting low-income consumers with food stamps or their equivalent and getting the policy frame for producers, particularly the price regimes, right.  But getting prices right does not mean trade liberalization of the sort that we had for manufacturing. The huge subsidy oriented distortions in agricultural policies the world over require that we too protect our agriculture with a firewall between domestic and international markets.

Of course the Government will have to continue to invest in and run the public infrastructure of irrigation, research and extension, hopefully more efficiently. Beyond this a freer hand for the domestic private sector service providers and organizational innovations that allow farmers to profit from market forces is what is required

The manufacturing and service sector took off when Udyog Bhavan gave up all pretence at micro-managing industrial development. Perhaps farmers in India are also waiting for Krishi Bhavan to do the same.