Thursday, September 4, 2008

Changing Mindsets About Food Prices

Shyam Ponappa / New Delhi September 4, 2008

Food pricing, supply and demand

There is a radical disconnect between reality, policies, and public opinion on a number of issues in India. This is not only disconcerting, it reflects a mindset that is not conducive to resolving these issues beneficially. Consider some examples:

- the state of our food grains production, pricing, supply and demand,

- supply constraints that are structural, but have triggered monetary responses leading to reduced consumer spending and dampened business investment, slowing GDP growth to 7.9 per cent in April-June 2008 (perhaps heading as low as 7 per cent for 2008-09?),

- the shoddy and worsening state of our roads and highways, despite considerable effort and vast expenditure, or

- the misrepresentation by naysayers of nuclear power as an adjunct to other methods of power generation.

Are these just differences of perception and opinion, or attributes of a cacophonous gridlock arising out of uninformed incompetence, misinformation, illogical thinking, or worse? Compounded perhaps by the complacency of thinking one knows it all without having to ascertain the facts: a lack of application of mind. The dogmatism that arises from knowing little and understanding even less, or from biases that skew perceptions and aims.

I’ll address aspects of the first issue below, and the others subsequently.

Food Supply & Demand

One aspect of the problem has to do with supply not increasing as fast as demand. A study by Icrier estimates that given current trends, domestic demand for total cereals will exceed domestic supply after 2020 (Figure 1 - Note: unequal intervals in the chart’s x-axis distort growth rates).

The implication is that with continuing high levels of anticipated world demand, if we do not increase domestic supply through better research and application, extension, and/or strategic investments abroad with supply contracts, high food prices could well get worse in the years ahead.

Repressed Food Prices

A second aspect of this issue relates to pricing. India’s food grains procurement prices have been repressed relative to the market and to world prices for many decades. Small farmers get the worst of it, because they have to sell as soon as they harvest, i.e. when prices are generally low. They cannot afford not to sell at procurement prices which are far below market, as shown by the Minimum Support Price in Figure 2 (international prices in the chart are unadjusted for subsidies, transportation and marketing costs). Yet, while the National Commission on Farmers chaired by Prof. M S Swaminathan recommended an increase in procurement prices, even this newspaper(!) ran an editorial that these recommendations were wrong because this would lead to higher prices and more inflation, without providing data and context, or further explication. While scepticism is healthy to the extent of seeking facts to arrive at conclusions, such statements without supporting data or reasoning appear rather arbitrary and uninformed.

Data & Analysis

The need and collective responsibility is to help establish and address the relevant facts, as well as to make them widely accessible. For instance, studies of relationships such as are shown in Figure 2 need to be done whenever circumstances warrant. For this, the data have to be continually aggregated and available, and studied. For instance, Figure 2 itself is from a US Department of Agriculture compilation of the sort not readily available from Indian sources.

Figure 2

Perversely, many of the same pundits who argue for low food procurement prices make the opposite argument in the case of oil and petroleum products, i.e. that prices should be increased, despite our fuel costs being much higher than in many other countries — which will indeed increase inflation across the board. What justifies these contradictory positions: pass through fuel price hikes, which are an input cost to many products/services, while repressing food prices? Certainly not the simple inequity that makes farmers more expendable, one hopes?

Policies From A Solutions Mindset

There need to be long-term, concerted, well-coordinated efforts involving the Centre and the states to address the underlying supply deficiencies. This needs to be driven by analysis of the facts. Start with tracking realities and analysing the data. This country’s burgeoning population is finally becoming more able to afford the food they need and want. Keeping procurement prices low holds down incentives for production, apart from inflicting great hardship on small farmers who have to contend with rising input costs and general prices, while selling their produce for less.
Additionally, as a consequence of inflation in the market price of food grains, oil and metals, the government has adopted a policy stance to slow the economy to repress demand.
This actually results in depriving some people of food, i.e. the effect is the opposite of what the policies should be aiming for in the case of food.

The answer, therefore, lies elsewhere: in (a) addressing supply, while (b) providing price relief for food to those who need it, whether by directed subsidies to some consumers depending on their needs, or even in combination with general subsidies (limited pass throughs). Above all, we have to try to figure out and do whatever needs doing to increase supply — with research, applied research, effective extension in the field including better practices, organising the logistics, i.e. better facilities for transport and storage/warehousing, the pricing of farm-to-market and to poorer consumers. Along with this, there is also the need to organise timely and appropriately designed and delivered credit, insurance and inputs.

Given the shortfall, we may have to actively pursue augmenting domestic production by making strategic investments, as in the case of oil, with buy-back arrangements from abroad, e.g. Myanmar for pulses, Canada for wheat and edible oil.

These interventions are much more difficult than tweaking interest rates, but solutions with this approach are likely to get better results.