Originally Published 2010-01-13 00:00:00 Published on Jan 13, 2010
Agriculture will be a weakest area this year because there is to be a shortfall in rice production by over 13 million tonnes due to deficient rainfall to the extent of 22 per cent
It's time to concentrate on agriculture
Everyone is predicting the future these days -- about the world and India because we are entering a new decade of this millennium. There is a lot of hype about where India will be in 2020 and 2030, and even 2050. Such long-term thinking is really quite misplaced when the ground reality is stark and not so cheery. No doubt, India and China are going to have a better future than most other countries, the government today, perhaps, ought to take stock of what is important for the happiness and security of the common person or aam admi in the year ahead. Today, it seems that food prices and job security are the most worrisome issues for aam admi. Controlling food prices is not so difficult if past experience is any guide, because the government can easily enhance and extend the public distribution system so that the poor are protected. Creating jobs is, however, difficult.

Agriculture will be a weakest area this year because there is to be a shortfall in rice production by over 13 million tonnes due to deficient rainfall to the extent of 22 per cent. Agricultural growth is crucial for GDP growth because around 60 per cent of the population lives in the rural areas. Due to the drought this year, agricultural growth is going to decline by at least 1 to 2 per cent.

Agricultural production the world over is unable to cope with the world demand for food. It started with the world’s agricultural land being diverted to the production of ethanol, and global demand could not match the supply of foodgrains and prices shot up between mid-2007 and mid-2008. In India, too, from that time onwards, food prices have been rising.

World Bank President Robert Zoellick has recently said that after the global financial crisis, another factor responsible for high food prices is excess liquidity and he warned, “You could see additional moves towards the agricultural commodities sector, if there were perceptions of market shortages.” This view is being aired by the Indian government also. There has been an excess of liquidity in the monetary system in India after the Reserve Bank of India eased its monetary policy following the global financial crisis. People also got extra incomes through the three stimulus packages and government salaries were hiked, tax rebates granted and dearness allowances raised. Excess liquidity has led to money being diverted for speculation and hoarding which has accentuated food price inflation. Apart from fresh fruits and green vegetables, most agricultural produce can be stored and released when the prices are higher. Hoarders have been amply rewarded by the 20 per cent food inflation.

According to FAO (Food and Agriculture Organisation of the UN)-OECD agricultural outlook, crop prices around the world are projected to be 10 to 20 per cent higher in real terms in 2009-2018 than in 1997-2006 while the real prices (price minus inflation) for vegetable oils are expected to rise more than 30 per cent.

One way to control excess liquidity from straying into speculation is to raise interest rates, which could bring down inflation but would adversely hit investments. The government has a balancing role to play but currently it is denying that there would be a tightening of credit via higher interest rates.

The FAO says that all over the world a long-term decline in farm investment is to be blamed for food shortages and high prices and estimates that $44 billion in new investments would be needed annually to boost agriculture in developing countries. Quite clearly, India, too, will have to invest heavily in agriculture, especially in irrigation facilities, and only then can there be a rise in productivity. Food self-sufficiency is a goal that ranks high for a huge country like India. There cannot be import dependence for feeding over one billion people because of the vulnerability India would develop geopolitically. Thus, the government’s stake in enhancing agricultural production is very high.

Its hands, however, are tied because of the ballooning fiscal deficit which is high at 6.8 per cent of the GDP. There has to be more money in the government’s coffers in order to increase public investment in agriculture. It can do so if it consolidates its expenditure and withdraws its stimulus package. But how should it exit from its stimulus package without disturbing economic recovery? For example, car makers have been flourishing because people have been spending their extra money on cars and other consumer durables.

Similarly, if the stimulus package is withdrawn in the US too soon the repercussions will be felt in India because Americans will consume less of imported goods and save more. India’s private sector, which has been thriving on the basis of its business links with industrial countries like the US and the EU , will suddenly face slack demand, lower foreign direct investment and financial institutional inflows.

After the global financial crisis, all countries which gave generous stimulus packages last year would have to face the challenge of how to withdraw these so that recovery from recession is sustained and governments are able to manage their budget deficits better.

As for creating jobs, it is only manufacturing, mining and infrastructure that can provide new jobs for the semi-skilled and semi-literate labour force. Agriculture has to be more productive so that fewer people are dependent on it. The surplus labour would then have to find jobs mainly in manufacturing. But for higher manufacturing growth and expansion, higher agricultural incomes would be needed because rural demand is very important for manufactured goods. The recent rise in manufacturing growth can only be sustained if rural population has more spending power. Remember the highest number of mobile phones and two-wheelers are sold in the rural areas. Similarly, the “fast-moving consumer goods” have found a ready market in the villages.

The growth in manufacturing also depends on the disposable incomes of people in towns and cities after meeting their food bill. But most people today, the rich and the poor, are groaning about high food prices and their demand for manufactured goods like TVs, washing machines and refrigerators is being adversely affected.

Agricultural growth of about 4 per cent and investment is thus of highest importance, but the government is in a bind because it has to find resources for a quantum increase in public investment in agriculture. It has to tax the other sectors more and transfer resources to agriculture in the form of new investment. Unless it does so in a carefully calibrated manner by raising taxes and gradually withdrawing the stimulus package, the projected 9 to 10 per cent growth for this decade may remain a pipedream.

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David Rusnok

David Rusnok

David Rusnok Researcher Strengthening National Climate Policy Implementation (SNAPFI) project DIW Germany

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