Centre for Public Policy

HIGHLIGHTS & RECOMMENDATIONS

It is necessary to look at what triggered inflation in India, as it has touched almost 20% during the weeks of December compared to the year before, which is literally unprecedented at least for the last years or so. What really are the policy options?
Drought is not today's occurrence. It was known to us at least 5-6 months back that we had deficient rainfall and there was going to be one of the severest droughts since 1972. If we say that the inflation is because of the drought, it is a major policy failure. When we knew that there was a going to be a drought and production would dip 5-15%, that was the time to act on the trade policy front.
The only way to make up for any drop in domestic production is to open up imports into the country. But unfortunately, we have some sort of a phobia for agricultural imports and want to delay till the last minute until a crisis really happens. This phobia against imports emerges from the 1960s when we were forced to depend upon food imports and coercive measures on almost all policy fronts.
We learnt a lesson out of the food crises of the late 60s, and that's how our quest for self-sufficiency in food laid the seeds of the Green Revolution. The situation however, is dramatically different today because now we have almost 280 billion dollars of Foreign Exchange Reserves. But we don't want to import unless we are driven to the wall and do not want to play the global markets to our advantage.
We have been blaming hoarders and speculators but the futures markets can actually tell us months in advance what the price is likely to be, and taking a policy action today on trade policy is mush more easier. But this country does not understand how to dovetail the trade policy with the futures market; it does not know or it simply does not want to know. We are still stuck with the policy tools of 1950s. As far as de-stocking under the aegis of the Essential Commodities Act is concerned, the private sector investments are away from the entire value chain. This country needs huge investments in value chains.
In food grains, India has 47-48 million tonnes of grains in the public agencies, including the Food Corporation of India. Yet prices have gone up because of the taxation structure. We have to directly give those resources to the state and do away with the taxation structure and other things like mandi fees.
It is not very difficult to control the inflation in grain prices. We can control it within a month or two. We should unload 5-10 million tonnes over the next 2-3 months at the price at which we bought.
There is also a little protein drought in this country but we are net exporters of proteins and indeed, of water from this water-scarce country because of our wrong policies.
The amount of corruption in the public distribution system is unimaginable. The Azadpur market in Delhi and the Vashi market in New Mumbai are places where commission agents make a killing. This continues to happen right under the nose of the so-called Agricultural Produce Marketing Committee present there. But we still refuse to allow direct buying by the organised retailers from the farmers so that vested interests can make merry.
Policymakers need to be agile and active to take action at the right time. Short-term, medium-and also long-term measures have to be taken if we want to ensure our food security, and the benefits of these measures have to percolate down to the poor people in the long run. That is where we are lacking. Real reforms have yet to reach the agricultural sector.
We want to compare everything we do with what China does but China started off its reforms with agriculture and not with industry, liberalising its land system and also liberalising prices. India has made its mark in the liberalised IT sector. We have started from the top but after 7-8 years of reforms, we started struggling. There is some revival in the manufacturing sector, but we are still waiting for liberalisation in the agriculture sector. We need to invest heavily in the rural sector and in agriculture.
Some states in India have shown great success in agricultural reforms. States like Gujarat have attained 9.7% growth in agricultural GDP. Other states must emulate this. The best roads are in Gujarat, which has wisely followed the model of unleashing connectivity through good roads. Sadly, we squander our resources doling out many thousands of crores of rupees in fertiliser subsidy but less than Rs10000 crores in agricultural requirements. Our real problem continues to be lack of long-term planning.
We need to look at the perspective of what happened globally in terms of food prices, energy prices, commodity prices and also the economic crisis that erupted in 2007. Last year, the monsoon suffered a big failure; we have also to understand the situation in that context. A number of things should be done in the realm of trade, which has high margins and therefore, it should be reformed in some form or the other.
The problem of inflation, poverty of the unorganised sector and agriculture are all intertwined. We have to think of food prices when we think of inflation and think of a wider gamut in terms of agriculture, employment and so on. The colonial period affected social conditions in India and destroyed the dynamism of Indian society. In agriculture, there was hardly any R&D for almost 200 years. Tools of the 16th or the 17th century continued to be used right until 1950s when India became free. It is both strange and debilitating that 500-year old technology coexists with the current ones, something that is not seen anywhere else in the developed world. The tradition of doing research should have been an integrated part.
The process of innovations and advancements received a huge setback in India within agriculture and industry. During the British rule, feudalism was consolidated. Feudal elements are not at all proactive as far as R&D is concerned. Naturally, agriculture suffered enormously in terms of research and development over a few centuries. Even post-independence, there was very little innovation, research and development in these fields.
Technology in economics goes along with dated capital and dated labour. Labour has also to be going along with the technology; it has to be trained. The Indian farmer had not innovated for a long time, was not trained for that purpose, i.e. for absorption of technology though there are pockets like Punjab which did much better than other parts.
The gap in prices between the producers and consumers is very high in agriculture. There are very high margins and trade is a problem because it is the wholesaler's and the retailer's margin that are apparently very high. This is also being reflected in the gap between the wholesale price index and the consumer price index.
As a result of the change in the consumption bundle, even the middle class is feeling the pressure of inflation far more than what it felt about 20 years back. Because this is the aspiring class; it aspires to consume more than what its incomes are. They live on credit either through credit cards or other mechanisms. This aspiration makes the inflation feel far worse.
Indian farmers are too poor to compete with global forces. They neither have the skill of capital nor technology. They are unable to face this opening up process. We should have had a different kind of opening up process, in a graded manner. We have to assess the historical impact of the colonial rule on the Indian farmers; that has to be overcome before our marginalised can go out and compete openly with anybody else.
The recent agitations that took place in Singur and Nandigram also tell us that for our people, agriculture is not a simple question of markets; it is their interrelated and integrated lifestyle. It is wrong to expect farmers to sell off their land and move somewhere else simply because someone offers them a good price. Farmers view themselves very differently, not as mere agents in a free market.
In states like Kerala and West Bengal, the Public Distribution System (PDS) works far better than in UP and Bihar. Clearly, it is linked to the level of governance, awareness and empowerment of the people. Change is happening slowly and a very welcome change. We can have cash transfer directly to a properly targeted group, which is where UID (Unique Identification Numbers) should help. Unfortunately, for various political reasons, UID apparently is going to have nothing to do with nationalities. Cash transfers through the banks are much better, which is why the NREGA has worked a little bit better. The solution is not to stop change but in moving on and working on that change.