As inflation establishes a strong foothold in the economy, it is time to ask a simple question: why did the government go so hopelessly wrong in estimating the demand and supply of agricultural commodities?
The inability to anticipate the supply shortages is largely responsible for the sudden spike in prices, especially in important items of consumption such as wheat and pulses. Indian farm output has grown at an average 2% a year since 1991. Demand for food too has, and will continue, to grow rapidly as incomes rise and consumers eat a better variety of food. Given this, the government should have a very clear idea of the balance between supply and demand of major food items, especially since it has taken upon itself the task of managing food distribution and prices.
Such an awareness is particularly essential in pulses, the average vegetarian Indian’s basic protein, where production has been stagnant at around 12 million tonnes (mt), and in wheat—as demand for its products has shot up in recent years. Worse, wheat yields are falling, so even when annual output moves within a narrow band of 69mt to 72mt, the market gets the jitters.
Last year saw a bad crop in wheat and worse procurement by government agencies. The government failed to line up imports; the decision came at least three months too late. Perhaps the agriculture ministry was hoping for the best, ignoring the signals from the futures market about looming shortages; or perhaps it was busy with other things. Or is it simply that the ministry was hopelessly unaware of ground realities? Could it have been that it didn’t have the right data? Ensuing events suggest a huge information gap in agriculture, resulting from poor statistics and poor understanding of the signals emanating from the futures market.
Like it or not, agricultural statistics are in a mess. Experts from the Pusa campus in New Delhi, home to several agricultural research institutes, lament that the systems of data gathering from the fields are antiquated and incomplete. We hear that officials in the ministry sometimes don’t even pay attention to the food data coming in. They merely mark up the previous years’ numbers by, say, 10% before sending on this “information” to the minister. Often, the food ministry is hamstrung because of this, and its estimates differ from that of the agriculture ministry. Why should this be, despite a common minister, Sharad Pawar, heading both these ministries defeats us.
Ironically, the agriculture ministry is supposed to put out at least four estimates for output in a year, one every quarter. In the current agriculture year—July 2006 to June 2007—the first advance estimates came in late September with a couple of figures for kharif and a low advance estimate for wheat, adding to the first burst of panic. The second came as late as a few days ago, apparently prompted by the Prime Minister’s keen interest in inflation. These confirmed some of our worst fears. Now we are told that since it is raining again, the rabi wheat crop may not be so bad after all. The minister wants to carry out some wheat exports by March end. Now, isn’t that great?
If the problem has arisen because of the weakness in the official forecasting mechanism, then the recent attack on the futures markets by some ministers looks even more absurd. The call for a ban on futures trading is a result of our socialist politicians’ and bureaucrats’ obvious distrust of the markets, abhorrence of hoarding, and fear of losses. That’s a bit of a double-faced viewpoint when the Food Corporation of India is mandated by the government to hoard, and yet runs into huge losses and often fails to maintain a buffer at the end of the day, as seen this year!
A well-developed futures market is our best bet against the uncertainties of weather and global crop output. Instead of encouraging changes that strengthen a market whose daily turnover is Rs12,000-15,000 crore, the government is trying to shut it down to hide its own mistakes. Don’t shoot the messenger; instead check the mail regularly. Plug the information gap before you can plug the supply gap. This will not solve all the problems in the agriculture sector but will save the government a lot of unnecessary embarrassment of not knowing when and how much to import.
How should the government manage its food stock and imports better? Your comments are welcome at email@example.com