India’s food inflation woes

India’s food inflation woes

India is likely to see a drop in its output of wheat in 2009-10. If the first official forecast of wheat estimates is to be believed, output will shrink from the record 80.58 million tonnes (mt) last year to 79 mt this year, a drop of around 2%. In itself, the drop may be minor, and given the volatility in official estimates, may not amount to much. What is worrying are the long-term trends and their consequences on inflation management in the country.

Predicting the reasons for such a small shortfall is a hazardous game. But one reason for the volatility in our agricultural output, apart from the monsoons, is that there is growing agricultural fatigue in the green revolution parts of the country. Soil exhaustion and incessant use of fertilizers have resulted in outputs reaching the output frontier. The optimum combination of fertilizers and improved crop varieties has been scaled. Unless new land is brought under this combination or biotechnological discoveries brought to the farms, stagnant outputs may become a norm.

Given the combination of government procurement bottlenecks, erratic monsoons and stagnant yields, food inflation management may become difficult in the years to come. In recent years, due to the large-scale entry of private traders in the grain business, there has been robust demand for wheat from industries such as biscuits, millers and manufacturers of processed foods. As a result, the government has had to compete hard with these players to lay its hands on wheat from farmers.

That explains, to some extent, the phenomenon of record yields and high food inflation. In a bid to secure more, the Union government has had to set higher and higher minimum support prices for wheat and rice. On the one hand, this has meant higher deficits on account of the mismatch between the economic cost of wheat and rice to the government. On the other hand, as a policy measure to tame inflation, these huge stocks have not helped to the extent they were expected to.

Fundamentally, higher outputs are the only way to solve this problem. But that will require investing heavily in agricultural infrastructure in virgin parts of the country such as those in eastern India. Unless that is done, food inflation and stagnant outputs will continue to haunt us.

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