In Jan, farm produce prices 30% higher than manufactures

The president, Pratibha Patil, hit the nail on the head when, in her address to Parliament, she observed that higher food prices were, “to some extent a reflection of… higher procurement prices” and lucid when she averred that, “in the longer term, our food security can be ensured only through sustained efforts in agricultural productivity…”

Food inflation has topped the 17% mark in January 2010 and indications are that it may scale new peaks in the months ahead.
With this increase, the domestic terms of trade, already favouring agriculture in relation to industry, has tilted heavily towards the farm sector. Relative to manufactures in the official index of wholesale prices, agricultural products now command a premium of 30.4%.

A year ago, this mark-up was lower at 20.3% and was even lower at 18.9% in March 2009. But, in the current fiscal, the inter-sectoral terms of trade are sharply and consistently skewed towards farm produce.

Manufactures had benefited from the across-the-board tax cuts over a year ago as part of the fiscal stimulus. This had led to an easing of the manufactures index from October 2008. But this downtrend was short-lived and this year, the undertone in manufactures is firm.

Even so, the spurt in industry is far less pronounced as compared to agricultural commodities so that the terms of trade have been biased towards the farm products, helped in no small measure by pegging the procurement prices at a higher perch. Admittedly, the terms of trade thus arrived at are rather crude and are more indicative of the underlying trends in the price indexes of agricultural commodities — comprising food and non-food articles under the primary group of the wholesale index.

The composite index is deduced using the relative weights of these two groups.

In part, the flare-up in the prices of agricultural commodities can be traced to the setback in harvest; according to the latest assessment, foodgrains output during 2009-10 may take a hit to the tune of 18 million tonnes.

In per capita terms, the food production this year may be less than what it was in 2003-04. Thus, demographic factor may have something to do with the raging inflation, worsened by the inability to augment supplies by timely imports and to use the official buffer stocks of rice and wheat judiciously to overcome the shortage psychosis.

But, more than this, the official policy of hiking the procurement support prices of various commodities has much to with the raging price fever.

Just how proactive the government in the matter can be seen from the fact that, in the case of common variety of paddy, the support price has leaped by 55% from Rs 550 per quintal in 2003-04 to Rs.850 in 2008-09 and in wheat, the spurt was 71%, from Rs 630 per quintal to Rs 1,080 during this period.

For other crops, too, the jump was substantial but there was no worthwhile procurement as marketable surplus was low due to low volume of production.

Usually, the support prices were much more than what were recommended by the Commission of Agricultural Costs and Prices.

The end result of this hardy annual exercise was that open market prices tended to stay firm as the minimum support prices acted as a benchmark.

The current year was no exception and with drought taking a heavy toll of the kharif harvest, prices turned bullish. Ironically, what was intended to help the farmers by insulating them from a heavy fall in prices due to a bumper crop, became a vehicle for inflation.

As the President had hinted in her speech, price incentive in isolation may not work. There should be also a varietal breakthrough, leading to sharp increases in productivity and hence in production. Food occupies the first place in the hierarchical needs of man and food security is best ensured with massive strides in crop yields.

By stressing price incentives alone in stead of other grave issues facing our agrarian economy, the government was barking at the wrong tree. This year, this shortsighted policy may have be the prime mover behind inflation.

Further, has this liberal approach to procurement prices really helped the farmers? Unlikely in that, this policy only benefits the big farmers who have a marketable surplus to boast of.

For the preponderant majority who eke out a bare living from the farm, the procurement policy is not of much use. The irony is that, the small majority enjoy the input subsidy - fertilisers, diesel and power - and also reap a bonanza in the form of higher prices for their produce -usually even higher than what is suggested by the expert committee - while the government also has to carry a heavy subsidy burden to run the public distribution system.

But, there is no respite from inflation in which the poor are the worst hit. A holistic approach to put the farm economy on an even keel is needed more than ever; price incentives cannot work in a vacuum but it can unleash inflationary pressures as recent experience vividly brings home.