"India's growth story is hollow if food inflation persists"
Advising governments on how best to beef up food security and combat food inflation is what keeps Ashok Gulati, Director, Asia, International Food Policy Research Institute (IFPRI), busy these days. Gulati especially tracks agricultural markets and value chains. In a conversation with BT's Shalini S. Dagar, he throws light on some of the issues affecting the food and agri sector. Edited excerpts:
Why has food inflation not come down even after the harvest?
The main trigger was the drought last year, which raised expectations and fears of high inflation, leading to some speculative activities, too. The second was the enormous amount of money pumped into the system, thanks to the National Rural Employment Guarantee Act, salary increases in the organised sector and the farm loan waiver, among other things.
These led to a massive increase in liquidity, which had to show up in inflation, when output did not increase commensurately. Finally, the administered prices of various commodities have gone up, and in India, that is a one-way street. So, while world commodity prices have come down, we are stuck at higher levels. Hence, while global food inflation is 2-3 per cent, we are grappling with doubledigit food inflation. In India, inflation has largely been led by pulses, sugar, milk, some fruits and vegetables, and not as much by foodgrains.
What are the possible solutions?
In the short run, imports are needed to control inflation. Import duties could be reduced when inflation is reigning at 16 or 18 per cent. The India growth story is hollow if food inflation cannot be controlled. In the medium term, disintermediation is essential. Due to taxes, when grains leave the mandis in Punjab in the evening, they are already 11-12 per cent more expensive than when they arrived.
And this cost increase happens even when there is no concomitant value addition. Further, the private sector needs to be incentivised to invest more not just on the farms, but in storage, processing and retailing, too, besides directly purchasing from farmers, thereby minimising the cost of intermediation. In the long run, however, the government needs to invest more in agriculture and create a favourable business climate. Our agriculture is starved of investments. It is no wonder that uncertain supplies lead to spurts in inflation.
What are your views on the government discussion paper on opening up retail to foreigners?
I think the paper is very timid. China did this in the '90s. We are still debating after five years of discussions. Moreover, the paper suggests that the investor at the front end should also invest in the back end. That is simply a stupid idea, because a retailer may not necessarily be an expert in all parts of the chain. When a Wal-Mart comes to a market, it brings its partners along, who are experts in the back end. If the front end enlarges, the back-end investments, too, will come up.
Will the current attempts at providing food to the poor through law work?
As part of the Food Security Bill, there is talk of releasing grains at Rs 3 a kg through the public distribution system. Half of this entitlement is likely to leak. At this price point, there will be all the incentive to siphon it away. This mishandling of around 60 million tonnes of grains that will be needed is going to be a disaster for the country as it will impede the market functioning of the food economy.
And poverty will not be eliminated even in the next 20 years. The solution is simple: do not get into physical handling of grains. Let Mr (Nandan) Nilekani (Chairman of the Unique Identification Authority of India) issue smart cards to the targeted families. Let the cash to buy food be transferred directly to their bank accounts. And let people use the money to buy the food they want. Most countries have moved towards such conditional cash transfers to help their poor.
