The Hindu Business Line : Food-fuelled inflation

The recently published OECD-FAO Agricultural Outlook 2007-2016 that crystal-gazes the farm market fundamentals over the next ten years should serve as a warning bell for India’s policy-makers. Developments in bioenergy policy, technology and feedstock production have become crucial for outcomes in commodity markets. In two short years, rapid developments in the biofuels sector have transformed the global agricultural market. Large quantities of traditional food/feed crops have been diverted for producing renewable energy in the form of bioethanol (from sugarcane, corn /maize and wheat) to be blended with petrol, and biodiesel (from a variety of vegetable oils, mainly of rapeseed, soyabean and palm, for now).

Many governments (mainly the US’ and the EU’s with several others jumping onto the bandwagon) are supporting biofuel programmes by requiring fossil fuels to be blended with biofuels largely for the perceived eco-friendliness and the need to reduce dependence on mineral oil, the market for which has become volatile and prone to geopolitical risks. Thus, tens of billions of dollars have flowed and continue to go into setting up massive production capacities. Whether grains or oils, international prices have spiked by 30-50 per cent in the last year following the demand surge. Corn, wheat, cotton and oilseeds are fighting for acreage. This competition is unlikely to end anytime soon. Policymakers are no doubt seized of the food versus fuel debate; but fuel seems to be winning, at least for now. The OECD report clearly forecasts stronger and rising prices for a number of crops and foods that are important for India — rice, coarse cereals, oilseeds, vegetable oils, sugar… The list goes on. Global economic expansion, driven by strong growth in Asia, is set to boost farm goods prices.

Where does all this leave Indian agriculture and food prices? As a large and growing importer of wheat, pulses, vegetable oil and so on, higher international food prices are sure to be reflected in the domestic rates. Food-related inflation, already at an uncomfortable level, can rise higher still. Consumer interest would be hurt; but there is no guarantee that higher prices would benefit growers notably because of distortions in the domestic market including speculative activity. Worse, given the track-record, indigenous output is most unlikely to rise enough to meet all the demand. Imports may be an easy option to expanding domestic output, but surely an expensive one. Far from benefiting from the biofuel boom, the country is likely to face a serious challenge in terms of augmenting food supplies and controlling prices. It is time New Delhi took serious note of the emerging global agri-commodity market situation and designed a response that insulates the poor from further erosion in their already low purchasing power.