By Sreekumar Raghavan
Inflation continues to haunt India and most emerging market economies while that in advanced countries is subdued due to large output gaps and high unemployment rates. Even when raising the GDP growth for India in 2010-11 to 8.5% from 8% in the previous monetary review, the Reserve Bank of India has also cautioned that monsoon progress will be critical to contain food price inflation and ensure economic growth.

Associated Chamber of Commerce and Industry (ASSOCHAM) opined that the Monetary measures announced by RBI equitably address concerns for reigning inflationary expectations and cooling demand pressures as also maintaining sustained growth momentum. ASSOCHAM President, Dr. Swati Piramal said that with the hike in reverse repo rate, general liquidity will be maintained in the system for sustained growth of over 8.5% with positive bias.

Depositors with banking system will have higher interest rates with increase in repo rate and their long standing demand will now be meted out with this decision of RBI. However, the lending rates may move north by 25-50 basis points, making bank’s borrowings a little more dearer since repo rate and reverse repo rate have been hiked by 25 to 50 basis points, added Dr. Piramal.

RBI clearly points out why inflation is worrisome in India. First, WPI inflation has been in double digits since February 2010. Headline inflation, as measured by year-on-year variation in WPI, rose to 10.6 per cent in June 2010, up from 10.2 per cent in May 2010. Notably, WPI inflation based on revised data for March at 11.0 per cent and for April at 11.2 per cent, were higher by over one percentage point as compared with the provisional numbers. If this pattern continues, final WPI inflation numbers for recent months can be expected to be higher.

Domestic drivers of growth are robust. However, if the global recovery slows down, it will affect all EMEs, including India, through the usual exports, financing and confidence channels.

There is no denying the fact that high food inflation in the country is also being driven by the food scarcity caused by the low production of foodgrain during 2008-09 and 2009-10. As a matter of fact, India suffered one of the worst droughts in 2009 since 1972, according to a paper by Confederation of Indian Industry. However, in addition to low production and productivity, the prevailing market inefficiencies – lack of coordinated efforts in public procurement, poor distribution, wastage due to inadequate and poor storage facilities, inefficient public distribution system, speculative trading - all have been crucial in allowing food prices to rise sharply.

The complex causes of the current food and agriculture crisis require a comprehensive response, according to Confederation of Indian Industry (CII) which  believes that in the existing situation the Government should take some strong measures to ease the food price pressure as well as benefit the smallest stake holder in the agriculture sector.

CII prescriptions

-India has comfortable levels of food grain stocks. The release of these stocks together with faster distribution can help contain rise in price of food grains.
-State government should take effective action against hoarders and black marketers

-India having comfortable Foreign Exchange Reserves, a part of it can be used for bulk import of essential commodities like pulses, fruits and vegetables etc.

-The second set of actions consists of the following steps for the medium to long term. Since the late 1990s, the government of India (GoI) has implemented a vast array of policy reforms to improve the environment for rural investments, more effective market operations and the development of more efficient supply chains. However, a large domestic reform agenda remains to be completed. Some reform options and their implications are elaborated below:

-Improving food production and productivity: Although the yield per hectare of food grains has shown some improvement in the recent years it is not significant enough to cater to the needs of the rising population particularly when income levels are also rising. Since farm productivity is not showing desirable growth there is urgent need to focus on research as well as better agricultural practices to ensure that productivity levels are increased in the shortest possible time. Special attention should be given to the states with relatively low productivity.

-Though the country has been able to build up strategic reserves of wheat and rice in the last few years the issue of storage, efficient food stock management, and offloading of stocks in time needs urgent attention.

-The government should revamp the MSP policy and make it more market oriented.

-Promoting Private sector Participation in Foodgrain Management: Complementary changes to the food pricing policies are required to ensure that the above enabling changes do result in greater private sector participation. Private marketing should be strengthened through reforming the Agricultural Produce Marketing Committees (APMC) Act, abolishing the Essential Commodities Act (ECA), abolishing rice levies, permitting direct purchases from farmers, eliminating movement and storage controls, facilitating warehouse receipts, strengthening futures markets, and opening imports and exports to the private sector.

-Pulses should be a part of the buffer stock maintained by Government as is the case of Rice and Wheat. Need for a “New Green Revolution in Pulses and Oilseeds” in the way it was done for Rice and Wheat.

-Taking Policy initiatives to enhance food grain availability by broadening the base of procurement. Tap the potential of water abundant areas in North East which possess highly favorable agro–ecological conditions and a comparative advantage in foodgrain production to meet the food security issues.

-Improving the overall investment climate for Promoting agribusiness, agro-industry and overall rural non-farm sector growth. In the long term, measures to improve the functioning of markets (for example, investments in rural infrastructure) and value-addition (such as agro-processing, cold chains) could offer more efficient and cost-effective methods of relieving seasonal gluts.

-Stepping up investments: In the long run, India will have to invest more in agriculture to be able to meet the objective of food security of a growing population. Subsidies if needed should be channeled directly to the targeted groups in the form of coupons or smart cards.

-Creating an enabling environment for PPP: Considering the large investment requirements, the private sector participation is crucial for creating the necessary marketing infrastructure. Private investment/public private partnership requires policy support from the Government both in terms of creating legal environment, stable policy perspective and financial incentives.

-Reformulating tenancy legislations to encourage advanced commercialization of agriculture. In view of the past experience in implementation of tenancy legislation and the prevailing socio-economic realities in the countryside, there is a strong case to legalize tenancy and allow leasing in and leasing out land with adequate safeguards to protect the interest of small and marginal farmers. Liberalization of agricultural tenancy would promote diversified agricultural growth, better utilization of land and increase farm output, increase the mobility of people from the rural to urban areas and improve the availability of land in the land lease market. The legalisation of tenancy is expected to give rise to long-term tenancy contracts, which would offer more incentives to the tenants for undertaking productivity enhancement measures.

-To encourage vertical coordination between farms, firms and supermarkets, marketing and trade policies should be liberalized. A suitable model related to FDI in retail needs to be developed in Indian context. Foreign Direct Investment (FDI) in food retailing with due safe guards of protecting the existing retail corner stores/employees of these stores should be encouraged by allowing phased entry of foreign direct investment (FDI) in food retailing.

Post your comment  (0)

Connect:

Post to Twitter

Post to Facebook