Agricultural growth has not been this good in years in India; yet double-digit food inflation is driving overall inflation and squeezing the pockets of the poor. This has resulted in the bitter irony that while India’s granaries are overflowing, half of its children are chronically malnourished. Our report What a waste!, published in June, looks at what is feeding the monster.
Agricultural growth has surged in India to an average of 3.6% over the past decade from 2.9% in the previous decade. However, food inflation has averaged 8.1%, rising to 10% in recent times. This is despite two years of drought compared with only one in the previous decade. There has also been little change in the total area cultivated or irrigated compared to the previous decade meaning growth has come from higher yields.
So why the surge in agriculture? The answer lies in faster-growing and higher-value non-food crops. In the last decade the average growth for non-food grains was 2.9% compared to 0.1% in the previous decade. Higher yields have been partly driven by an increased use of fertilizers. India used 27 million tons of fertilizer in ;, making it the second-largest consumer after China. Fertilizer intensity (per hectare of gross sown area) also rose 1.4 times.
AN UNHEALTHY GROWTH
A second factor has been increased investment and credit for farmers. Gross fixed capital formation grew at an average of 10% during the fiscal years –. The share of investment in agriculture GDP also rose from 11.5% to 18% in the last twenty years, as did a growth in farm credit.
However, a close look at agricultural growth shows it is not all healthy. A subsidy on nitrogenous fertilizer has led to excessive use of urea, distorting the nutrient balance in soil. The ideal NPK ratio – a standard measure of Nitrogen, Phosphorous and Potassium in soil – is 4:2:1. In India, the level was 6.7:3.1:1 in the fiscal –, according to latest government figures. Clearly, the urea subsidy has to go if long-term damage is to be avoided.
At the same time, the journey of food from farm to fork in India has staggering – and artificially created – costs. Once produce leaves the farm, multiple forces ramp up prices: including outdated mechanisms set in place to help the farmer but which have caused distortions, utterly inefficient stock management and poor supply-chains that have not changed significantly for the last 100 years and which are plagued by waste and pilferage.
The government’s Minimum Price Support (MPS), a price-setting mechanism, is causing an imbalance in crop diversity and contributing to food inflation. On average, between and the Food Corporation of India (FCI), which manages India’s food supply chain, purchased around 34% of both wheat and rice output from India’s farmers. The government sets the minimum prices for these purchases.
One of the biggest risks for farmers is that prices might drop. MPS removes this risk. But it also means farmers choose crops that enjoy high MPS, resulting in excesses of cereals, in particular rice and wheat. There is therefore an urgent need for incentives for farmers to diversify into crops needed in the economy such as oil seed, fruits and vegetables.
World Food Day
The Food and Agriculture Organization of the United Nations (FAO) marks World Food Day each year on 16 October, the day on which the Organization was founded in.
SQUEEZING THE FARMER
MSP has also been one of the major causes of food inflation. By providing a floor for food grain prices, they have made them rigid on the downside. The MSP for paddy rice, for example, has more than doubled in the last decade, resulting in sticky inflation. Another problem is that farmers hold on to grain stocks in anticipation of higher prices, thereby creating artificial shortages and pushing up prices.
The government should offload excess supplies at such times to lower inflation and promote export opportunities. Yet while the government’s stocks have tripled since, it has been reluctant to release excess stocks, and so prices are held firm at high levels. One of the reasons is political. India’s food is produced by small farmers and releasing excess stocks could further reduce the prices they receive. These are already squeezed by another malfunctioning government mechanism: the Agricultural Produce Market Committee Act (APMC).
The journey of food from farm to fork in India has staggering - and artificially created - costs APMC agents are meant to help farmers sell their produce to traders and the government. However, they are driven by an incentive to maximize the number of transactions they undertake rather than getting the highest price for farmers. Produce typically goes through three to four layers of middlemen before reaching the consumer, with each layer adding a mark-up to the final price. The higher the number of middlemen, the lower the price the farmer gets and the higher the price the consumer pays.
In our view, the APMC Act must be abolished. This would lower prices and allow markets in new agricultural products to develop. It would also enable farmers to trade freely with private buyers, reducing the role of the middleman. Some progress on APMC reform has begun, but it is unlikely to have much effect until the major agricultural states, Punjab, Maharashtra and Uttar Pradesh join the process.
WHAT A WASTE!
Adding to India’s woes is a creaking logistics system with high rates of waste and pilferage. Unlike in the West, where most wastage happens at the consumption stage of the supply chain, in developing countries like India, food is lost before it reaches the retailer. According to the World Bank’s Food Price Watch, published earlier this year, 80% of wastage in south and South-East Asia takes place in the supply chain compared to just 39% in North America.
Perishable goods such as fruit and vegetables are mostly transported in outdated trucks with no cold storage. The government “mandis,” the markets where traders buy produce, also lack proper storage facilities. Our CRISIL study shows that a third of the entire production of fruit and vegetables was lost in the fiscal year –11. We traced the journey of tomatoes from farmer to market, for example, and found that for every 100 kilograms produced only 73 kg reach the market.
We estimate that improving the supply chain could reduce retail inflation by 20%. In the medium term, the government needs to focus on improving procurement, storage, marketing and logistics. At the same time, developing processed food plants at the point of supply would help the problem of storing perishable items such as fruits and vegetables.
The only area where food inflation is caused by demand outstripping supply is in proteins. With GDP growing at an average of 7.6% in the last 10 years compared to 6.2% in the previous decade, the demand for high-value food items, such as milk and milk products, eggs, fish and meat is rising.
So what needs to be done? The entire system by which food travels from farm to fork must be overhauled to root out inefficiencies. Food inflation in India is a tax on the poor and a major reason for discontent among citizens. Changing India’s farm-to-fork game is therefore one of the biggest challenges for the new government.
The new minister of food processing, Harsimrat Kaur Badal, has said that minimizing post harvest wastage will be her top priority. Unless that happens, the Reserve Bank of India (RBI) will have little room to promote growth. Failure to bring inflation down will force the RBI to stay hawkish, and upside risks to interest rates will remain high.