ECONMIC HIGHLIGHTS

New Delhi, 18 January 2007

Rising Inflation

AGRICULTURE HOLDS THE KEY

By Dr. Vinod Mehta

A few years ago there was a situation wherein the rate of inflation was higher than the rate of growth in the country.  For instance towards the end of 1998 the rate of inflation was 8.85%, the highest in the past three years while the rate of growth was between five and six per cent.  The increase in the rate of inflation was partly attributed to budgetary proposals for the 1998-99 fiscal year.

Today we find ourselves in a situation where growth rate is higher than the rate of inflation; the rate of growth is around nine per cent while the rate of inflation has jumped to 5.8 per cent.  On the face of it, there is not much to worry about as it calls for certain short term measures along with medium-term policy measures to tackle inflation, for inflation with growing economy is a better proposition than inflation with stagnating economy.

But this is a cause of concern for the Government.  It is a well-established fact that though inflation affects everybody, it hurts the poor more and that it leads to re-distribution of income and wealth in favour of the rich.  Given the upcoming State Assembly elections, now the ruling coalition at the Centre would like to see that their constituent parties do well and this is possible if the inflation is under control, notwithstanding the incumbency factor.

The Reserve Bank of India is also concerned about the negative impact on the economy as it would lead to higher interest rates which will make borrowing relatively costlier and would ultimately hurt the economy.  Both the Government and the RBI were hopeful that the rate of inflation will be kept below 5.5 per cent. But it has crossed this threshold now.

The remedy available to the RBI is to restrict the expansion of money supply which means restricting credit and raising interest rates.  The RBI has already taken this step and any further restriction could slow down the current momentum of current growth which neither the Government nor the RBI would like to see.  The onus of controlling inflation is then clearly on the Government now.

A closure look at the nature of inflation would show that it is the prices of essential commodities, especially foodgrains, edible oil, pulses, vegetables, fruits and other agro- based products are rising very fast as the demand for these products far outstrips their supply.  It may not be far-fetched to say that this has always been like this for the past fifty years and has always been the major cause of inflation

The only way this problem can be tackled is by augmenting the supply of agro based essential commodities.  In the short run, the supply of essential commodities can be augmented through imports as we are doing now.  But over a period of time it will become a drain on our economy with serious security implications.  Therefore our focus should be on augmenting the supply of agro-based products through a second agricultural revolution.  Apart from enhancing the productivity of various crops rural infrastructure will have to be built up to augment the supply of essential commodities. 

The UPA Government through its Common Minimum Programme is committed to step up investment in the agricultural sector.  One would, however, like to see real action on this front.  It is more than two years and things do not appear to be moving fast.  Given the almost continuous shortage of essential commodities the Government needs to move fast on the agricultural front.

Agriculture requires massive investment and it may not be possible for the Government alone to bring all the necessary investment. In fact, outlays on agriculture have been going down.  For instance, the outlay on the agricultural sector was 16.7% till the Fifth Plan but it came down to 11.3% in the Tenth Plan. Private sector will have to be roped in if we have to provide a big push to this sector. 

The Federation of Indian Chambers of Commerce and Industry (FICCI) in one of its reports has called for an annual investment of Rs.60,000 crore and has indicated that at least 6% of the GDP should be invested in the agricultural sector. Further, the study emphasizes that over the next five years the Government should be investing Rs. one lakh crore while the private sector may invest double that amount i.e., Rs. two lakh crore.

To allow private sector to invest in a big way we may have to change our land laws to allow contract farming on a big scale.  It may be a good idea to give waste lands to the private sector so that they can develop these lands to produce agricultural products.

Besides monsoon, the success of the agricultural sector is also linked to the growth of the rural specific infrastructure. Apart from linking every village by road, the country will have to establish a chain of storages, cold storages, warehouses etc. all over India and link them to airports and seaports, introduce modern packaging techniques to increase the shelf life of products, carry out market surveys to determine the demand pattern of agricultural products and then advice the farmers from time to time as to what could be the most profitable product for them to grow.

Processing of perishable food can prolong not only its shelf life but also fetch better prices to the farmers. But we are lagging behind in this area.  The country will need to help the farmers to process food at the site itself to reduce on wastage. The processed food industry is still under-developed in this country. Currently, India processes about 2% of its vegetables and fruit as against 15 to 40 times in other countries. Because of the inadequate storage and cold chain facilities almost 25% of the total output of fruit and vegetables goes waste. The processed food industry, which can increase the incomes of the farmers manifold needs to be given all the necessary facilities to grow including zero excise duty.

The government in consultation with the state governments should do everything to allow full movement of agricultural produce within the country as well as allow produce to be sold outside the mandis. The farmers may even be allowed to sell directly to international buyers. Like we have one domestic market for industrial products, there should be only one domestic market for agricultural products.  This will help not only farmers to get better price for their produce but also will benefit the consumers who will pay less.

The present system of favouring farmers to sell their produce through middlemen and through designated mandis leads to jacking up of the prices. If we have to enter the international agricultural market in the near future then this outdated system needs to be abolished. The only way to control inflation in the medium and the long term is to concentrate on augmenting the supply of agro based essential commodities.---INFA

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