The price of food must be in the policy

The tussle between farmers and the Modi government may have ended, but agriculture remains an essential challenge to public policy. This is the high price of food. For decades now, the cost of food has not come much into agricultural policy when, in fact, it should be the central focus in the presence of poor households. Instead successive governments have demonstrated the Minimum Support Price (MSP) given to farmers and the subsidies given in providing limited supplemental food to the consumer through the Public Distribution System (PDS). The now repealed agricultural laws themselves were introduced as a means of increasing agricultural revenue through higher prices. But what remained untold was that high food prices exacerbate poverty, especially when rice and wheat supplied through the PDS form a part of the average Indian household’s total expenditure on food.

rising food price in india

That the high price of food can trigger economic insecurity for the individual is widely understood but what is not immediately clear is its economy-wide impact. For the household, a higher price of food spends on other items ranging from health and education to non-agricultural goods. This prevents the expansion of the market for non-agricultural goods. The expansion of this market is essential for the growth of the non-farm economy.

It was one of the first discoveries in economics, made nearly two centuries ago by the English economist David Ricardo. Ricardo predicted that due to the lack of good quality land, the cost of producing corn, i.e. wheat, in England was bound to increase, leading to its rising price. The result was not only a certain deteriorating standard of living for the working class, but also a failed industrialization, as the market for industrial goods could not develop. He failed to predict that there was a tremendous increase in agricultural yield that came with the Industrial Revolution in the country. The rising yield ensured that the price of food was kept under control and the demand for industrial goods did not decline. In fact, the price of food in England was not only kept under control, it actually declined in price compared to other commodities. This pattern of downward trend in the relative price of food has been experienced by all economies that have become prosperous.

An indication of an increase in the price of food in an economy is the share of food in a household’s budget. In global comparison we will find that this share is huge for India. Data from the US Department of Agriculture (2016) shows that this share ranges from over 30% for India to less than 10% for the US and UK. For China the figure is around 20%. More interestingly, we find that the share of food in consumption expenditure is low in countries with high per capita income. This is in line with Ricardo’s understanding of how the economy progresses, that is, as food becomes cheaper, growth is fueled in a non-farm economy. The fact that the world’s richest countries have been able to produce food cheaply over time suggests that such a mechanism is working. This is something that we have very little respect in India. In fact, agricultural policy in India remains largely accountable in the face of rising relative food prices. For example, the relative price of food has increased by more than 50% since 1991. The experience of food becoming more expensive over time is not consistent with the global experience of growth. When the success of the 1991 economic reforms is described, this contrasting experience never becomes news in India. It appears that even a section of the media prefers to sensationalise the marginal increase in the administered price of LPG while remaining silent on the rising food prices. Arguably, the high cost of food has been the reason for the disappointing lack of expansion of the manufacturing sector in India, despite repeated attempts to bring it in.

From both the standpoint of food security for low-income households and non-farm sector mobility, agricultural policy cannot ignore the price at which food is produced. This is not to overlook the role of factors in the supply chain beyond production. We are aware of the wastage caused by lack of proper transportation and cold storage facilities, which reduces effective supply and keeps prices high. But the fact of low agricultural yield in India compared to the rest of the world has long been known, and little is done about it. There has been an effective MSP policy for India’s major crops for over 50 years; Now how this facility can be changed by giving it statutory status, it is not clear. Better management of soil nutrients and moisture, assured water supply and information made available through an extension service will be critical.

Since agriculture, unlike industrial production, is an activity that is affected by fluctuations in weather, it is risky. Given the importance of food to our existence, it justifies public intervention in agriculture. The issue is the design and scale of this intervention. In the mid-sixties, when India was facing a food shortage that could not be solved through trade, a concerted effort was made to increase domestic agricultural production. The intervention was successful in increasing food production but it came with collateral damage. It introduced a strategy to ensure agricultural profitability despite favorable prices ensured by the state. Moreover, it reinforced the belief that it is the right of the farmer to buy as much food grains from the state as the farmer wants to sell to the state agency. As a result, the grain stock has exceeded the officially announced buffer-stocking norm. Rising public stocks indicate that the intervention has been successful in raising the price to a price higher than that generated by the market. These stocks often rot, resulting in huge losses, which are paid for by the public through taxes or public borrowings. Finally, with all costs of production being reimbursed and all output finding a sure outlet, supply has outpaced demand. This has put unimaginable pressure on the natural environment, especially on the water supply. It is predicted from reliable sources that Punjab is soon facing the prospect of desertification.

protect the interests of the poor

India needs an agricultural policy which ensures that farming is profitable but it cannot be at the cost of high cost of food. The ‘food problem’ should no longer be seen in the context of the availability of food only from domestic sources. The high cost of food, which is reflected in the high share of food in household expenditure, is another dimension of the problem. Governments are pointing out the existence of PDS has not been given the attention it deserves. But PDS is a roundabout and costly way of delivering food security. Increasing yields will ensure profitability without raising producer prices, which will increase the food subsidy bill. While interacting with the farmers, the government should protect the interests of the poor of India.

Pulapre Balakrishnan teaches at Ashoka University, Sonepat, Haryana