Seize the crisis

Government has the opportunity to rein in food inflation on a sustainable basis

IN HIS Independence Day speech, Prime Minister Narendra Modi counted his government’s achievements. Bringing down inflation from double digits to below six per cent was emphatically mentioned as one that brought relief to the aam aadmi.

Without doubt, we witnessed moderationintheoverallconsumerpriceindex(cpi) and wholesale price index (WPI) levels in the past two years. However, how much of it was due to government policies, especially of the RBI, and how much due to the global commodity price slump, is debatable. The global food price index of FAO fell by more than 20 per cent in the last two years.

Any analysis of Indian inflation is incomplete without looking at its food price component. It is critical given that an average household spends 45 per cent of its expenditure on food, and the poor ones even more. While overall retail inflation in July (yearly) stood at 6.07 per cent, food inflation (CFPI) was at 8.35 per cent. Within food, pulses inflation stood at 27.5 per cent, sugar at 22 per cent and vegetables at 14 per cent. At wholesale levels, the price rise was much steeper — between July 2015 and 2016, the overall index rose by 3.5 per cent and Wpi-food by 11.3 per cent. Within food, pulses’ prices rose by 36 per cent, sugar by 32 per cent and vegetables by 28 per cent. Such price spikes for selected food items are worrisome. Also, since significant increases in salaries under the Seventh Pay Commission have yet to play out on expenditure, one needs to remain cautious on the food price front.

Amidst this anxiety, however, there is some good news. High pulses’ prices and good monsoon rains in most pulses-growing states have attracted 33 per cent more area under kharif pulses over the last year. This may give a bumper crop of kharif pulses, easing price pressures during October to January. Clearly, our farmers are price-sensitive, and therefore, to ensure a sustained growth in pulses’ acreage, favourable relative price incentives need to be maintained. If a bumper harvest leads to a price crash, it may drive farmers away from pulses in the next season.

The solution to this is four-fold: Get government to procure pulses, encourage greater private participation by abolishing stocking limits, facilitate commodity market operations by reintroducing futures and free international trade by abolishing export bans, and imposing import duty of 510 per cent.

In Parliament, Finance Minister Arun Jaitley announced his government’s resolve to reduce and stabilise pulses’ prices by creating a buffer stock of two million tonnes (MMT). The coming harvest season will be the most opportune time to do so by procuring from our own farmers rather than importing from abroad. But the existing procurement machinery is more attuned to procuring rice and wheat than pulses — they require an operationally different treatment. This necessitates gearing up the system accordingly.

With 32 per cent wholesale price inflation and 22 per cent retail inflation, sugar is really making the food basket bitter for the common man. Worse still, there are not many chances of its moderation in the near future too. Sugarcane acreage is down by eight per cent over the last year as farmers had a bitter experience in their cane payments from sugar mills during the last two seasons. The carryover stocks are also low and global prices of sugar are surging. Within a year, the FAO sugar price index for July is up by 54 per cent. If only the government had created a buffer of 2-3 MMT in 2013-14 when India had bumper sugar production, the situation would have been sweeter.

There is a fascinating policy paradox in the sugar trade policy. Since 2010-11, India has been a net exporter of sugar but its trade regime has been highly restricted and ad-hoc. In fact, India just may be the only country in the world with an export duty (20 per cent) and an import duty (40 per cent) on sugar at the same time. The policy is both anti-farmer and anti-consumer. The time to rationalise it is now. To facilitate market functions, reduce the sugar import duty to say 5-10 per cent, and abolish export duty.

Next up is vegetables and even fruits. The aam aadmi is already suffering from high prices of dal (pulses), and now even subzi and phal are slipping from his thali (plate). High wastages due to inappropriate post-harvesting practices, lack of storage and missing efficient value-chains make supplies unpredictable each season. The solution lies in streamlining the entire ecosystem in the fruits and vegetables (F&V) market just on the lines of Operation Flood in milk. Start by delisting F&V from APMC regulation and simultaneously freeze agent commissions in regulated mandis at no more than one per cent. This should be strategically preceded by initiatives for expanding the F&V wholesale market network by providing land and infrastructural support and by encouraging and facilitating direct farmer markets in at least major cities like Delhi and Mumbai. This way the farmer’s dependence on APMC markets and commission agents will gradually reduce, and farmers can get a better price for their produce while consumers still pay a low price. Maharashtra Chief Minister Devendra Fadnavis has set a great example by opening the assembly premises for farmers’ markets and assuring the availability of school/college premises during holidays. Combining the above initiatives with a policy environment incentivising and encouraging organised food retailers and processors to build value chains for F&V — starting from direct purchases from farmers, aggregating, grading, assaying, packing, bar-coding, at the village level itself through Farmer Producer Organisations (FPOS) — the sector can repeat the same growth story as Operation Flood.

The road is long and twisting but by reforming the existing system based on a clear-defined strategy, the government can transform the sector. Can the Modi government harness the opportunity hidden in this brewing crisis to rein in food inflation on a sustainable basis? Only time will tell.

Gulati is Infosys Chair Professor for Agriculture and Saini a consultant at ICRIER