New Delhi: India’s finance minister, preparing a budget for the fast-expanding economy, faces the twin test of providing much needed support for a stagnant farm sector while countering the impact of soaring food prices.
India’s food output has failed to keep pace with the demands of its 1.1 billion population, most of whom rely on the land for their livelihoods, widening an already yawning wealth gap between city and village.
A jump in global prices of farm commodities has made importing staples a costly and politically damaging exercise and contributed to a spike in local food prices.
Many may blame the finance minister, Palaniappan Chidambaram, if he fails to ease their pain in his budget address on 29 February 2008.
“It will be a rural-focused budget and he will try and address some of the issues plaguing agriculture and to tackle food price inflation,” said D.K. Joshi, economist at ratings agency Crisil.
For a government that has to face voters at general elections before May 2009, reports of farmers mired in debt and committing suicide, plus soaring food bills for many Indians, are major headaches.
The opposition Bharatiya Janata Party knows that only too well. It was unexpectedly dumped from office in 2004 partly by the votes of millions of rural poor who just couldn’t stomach its “India Shining” campaign.
“There is a large section of the population which has remained insulated from the high-growth environment and Chidambaram has to take steps to ensure the benefits of high growth percolate down,” Joshi said.
Farm secretary PK Mishra said on 26 February that farm growth this fiscal year was likely to slow to 3% from 3.8% a year ago — well below the growth rate of the wider economy, which has averaged 8.8% over the past four years.
Farming’s share of economic output has slipped to 17% from 30% a decade ago. But the sector is crucial for an economy that is driven by domestic demand because the land provides nearly three-quarters of the workforce with all or part of their income.
LENDING A HAND
Analysts say the budget is likely to offer a range of palliatives: more credit for farmers, specific programmes to boost key crops, and greater funds for irrigation systems, which water just 40% of farmland.
D.H. Pai Panandikar, senior economist at the RPG Foundation, an independent think-tank, said farmers are crying out for help.
“There is an expectation that Rs30,000 crore of loans may be waived off for farmers. Maybe the interest rate on farm loans will be lowered,” he said.
“Something new is very necessary as food production is not increasing. There is hardly any increase in cereal production, while the population is going up at the rate of 1.5%.”
To slow price gains in the short term, customs duties could be trimmed on widely consumed commodities like edible oils, which would also help officials tackle stubbornly high inflation.
Global palmoil prices have jumped nearly 21% in 2008 on growing Chinese and European demand, a flood of funds into commodity markets and Indonesia’s plan to hike export taxes.
India’s customs duty on palmoil stands at 45% to shield local edible oil producers, while that on soy oil is 40%. Analysts say both could be cut by 15 to 20%.
A TOUGH LIFE
But farms need some longer-term fixes too. Soil fertility is falling on holdings getting tinier with every generation, irrigation is poor and input costs are rising.
Efforts to get people off the land have been painfully slow with few manufacturing jobs created outside of big cities.
Production of essentials like pulses and oilseeds have not kept pace with rising demand. India imported millions of tonnes of wheat for the first time in six years in 2006 after a poor crop and growing demand pressured supplies.
It followed up with 1.8 million tonnes of purchases last year to build emergency stocks, contributing to a surge 75% surge in international wheat prices.
India banished widespread hunger after independence in 1947 and had been self sufficient in food for more than four decades. Now the world’s second-most-populous nation finds itself unable to grow enough food.
Prime Minister Manmohan Singh has called inflation “a tax on the poor” and says controlling it is the government’s primary macroeconomic objective.
Even if Chidambaram does boost funding for farm revival, economists say India’s central government lacks the constitutional muscle to force more fundamental change in individual states.
“The biggest challenge is in terms of implementation,” said Indranil Pan, chief economist at Kotak Mahindra Bank in Mumbai.
“While the Union government can announce measures to boost farm growth ... the ultimate onus of implementation of such schemes lie with state governments.”