Inflation: Fighting by Trading

Food inflation has been the scourge of the Indian government for the past half-decade. The government is crowing a bit this month because, at long last, it has brought the rate of growth of inflation down by one per cent. Mind you, prices are still rising. They are just rising a bit slower than before. Cold comfort.

India’s inflation is a product, I would argue, of three or four macro-economic developments. One of them is monetary policy. Another, and this is especially so in food inflation, is a simple mismatch between supply and demand– something no interest rate hike is going to solve.

There are many ways to reduce food inflation. The entry of foreign retailers would help in supply chain management. So would investments in agrarian infrastructure. The list is a long one.

But India may want to start preparing the ground for a more fundamentally different agrarian worldview than it has held for the past 60 years. And that is, namely, that India should begin opening up its market to global farm imports.

Let’s list some of the traditional arguments against opening up to agricultural imports.

One, imports would wreck Indian farmers.

Well, Indian farm production is already a wreck in many areas. India imports between 40 to 50 per cent of its edible oil. It imports between 20 to 30 per cent of its pulses. It’s self-sufficient in grain and occasionally exports a bit of sugar and onions.

The past few year, unnoticed by most, India has already reduced its applied tariffs on a whole host of food items to zero or near zero. But farmers haven’t been screaming in protest. There’s enough demand for everyone. They’ve realised farm imports are not a zero sum game for them.

Two, imports will drive up prices.

Well it’s already happening, isn’t it? Edible oils are now so import-driven that there is no difference between local and global prices in this sector. Indian prices, generally, are rising to match global prices – reversing a half century when the opposite was always true. The same is true for pulses. The government’s own incentives have driven up the price of wheat to international levels.

Three, it will reduce incentives for Indian farmers.

It’s not as simple as all that. Prices for dal have gone through the ceiling. Last year, pulse production rose dramatically in India. But this year it fell. The price is still high. But farmers seem to have simply found something marginally more profitable.

Dairy production has risen quite handsomely in the past few years in India, but it hasn’t stopped prices from rising. Domestic demand has easily outstripped production gains and pulses are simply too marginal to be worth any major farmer’s salt. India’s consumption is rising about twice as fast as the four per cent increase in production.

India is competitive in wheat, rice and so on. There is no great incentive to open up to trade there, and India’s competitiveness actually makes it even more sensible for India to lower tariffs.

It is where India is lagging that it makes sense to open up on agricultural trade. Indian consumers are struggling to cope under price increases that are to a large extent the consequence of Indians getting richer and consuming more.

It has been noticeable that agricultural prices in India now defy the traditional seasonal ups and downs – one reason the government’s endless predictions of a moderation in inflation have largely proven false. Commodity trading of many agricultural products is now commonplace. This trade helps boost prices. But it reflects a simple fact: when supply and demand lines more or less converge, risk increases, and therefore so does speculation. Imports would actually help by dramatically increasing the supply and drastically reducing the scope for speculation.

What India should be doing is implementing the inevitable: a permanent opening to agricultural imports. Or at least a large number of items. Many countries will provide agricultural expertise and technical knowhow in return for market access. New Zealand offered something similar about a decade ago. We’ll teach your farmers how to grow better apples in return for being able to export them to you. New Delhi refused, of course. Similar deals would allow India to reap benefits from doing what necessity will require it to do in any case.

Inflation and rising incomes should make India realize the old agricultural story is over. It is time, if you wish, to be more strategic in thinking about farms.

Copyright © 2011 Hindustan Times.