Global food prices on a boil: What can Indian policy-makers do?

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Agri commodity prices are pretty high, even in real terms, but they are not unprecedented. There is certainly need for caution, but no need to panic, argue ASHOK GULATI and KANUPRIYA GUPTA, suggesting that the right policy choices could cushion the poor against price hikes while greater investment in agriculture could ensure food security at affordable prices.

Several international agencies such as the FAO, the OECD, the World Bank and the IFPRI, with their very respectable researchers, have lately come out with dire predictions about global food prices. Briefly, their stand is the following: the high global food prices in 2007-08 are unprecedented, and they are not likely to come down soon. If at all, their predictions suggest, these prices are likely to go up further from current levels, and the next ten years will be characterised by commodity crises never heard of before. This has spilled over to international and national media on a magnified scale, creating a spectre of gloom, famines and starvation. The reasons extended for their predictions are: increasing demand pressures coming from Asia, especially China and India, and to some extent also from Africa; increasing energy prices; increasing diversion of food for bio-fuels; limited land and water resources; increasing supply shocks due to global climate change; lowest ever grain stocks reserves; low supply response, and so on. All this does not auger well for the poor of this world, especially those living on less than $2 a day. The moot policy question is: what can the policy makers do in such a situation to avert social and political unrest before they threaten the stability of several emerging economies like India?Get diagnosis rightOur humble submission is that before any policy prescription is offered; let us get the diagnosis right. While most of the factors that these studies talk about are right and appropriate, many of them compare 2007 prices with those in 2000, and that too in current dollars, to arrive at their conclusion of gloom. This, we opine, is not appropriate, if not misleading. The reason is simple: anyone dealing with agricultural prices knows that agricultural prices in 2000 were at their rock bottom resulting primarily from the East Asian crisis. No one expected those prices to stay at those levels, as East Asian economies started to recover. Maybe the pendulum has now swung a little on the other side. Another reason is that 2007-08 prices need to be put in a long-term perspective, say at least from 1990 to 2007. And when one does that, the minimum one needs to do is to take the prices in constant US dollars. One can take the base year as 1990, or 1995, or even 2005, for converting the price series into constant US dollars, but not the year 2000, for the reasons explained above. However, in a situation when US dollar is fast losing its strength in the international exchange market, it may be more appropriate to look at prices in constant euros (with base year of 1990, or 1995 or 2005). We have done this exercise for the major agricultural commodities such as wheat, rice, palm oil, and sugar, at constant 1995 US dollars as well as at constant 1995 euros. And the results are revealing (see Graphs). The upshot of these results is: the 2007 global prices of agricultural products are not very much out of line with what they were in say 1996, just before the East Asian crisis. These prices started rolling down in 1997 due to East Asian crisis, touched a rock bottom in 1999-2000, and then recovered over time. Today, they are a little on the other side of the swing. US economy, the triggerLast time around, it was the East Asian crisis that brought the downfall in commodity prices, but this time it could be the slow down in the US economy itself. (Don't forget that only a few weeks ago, global prices of wheat, soya and palm oil, dropped by more than 20 per cent, perhaps the largest weekly fall in decades!)Does that mean there is no crisis in global agri-prices? Not really. Our stand and empirical finding is that the prices are pretty high, even in real terms, but they are not unprecedented. There is certainly need for caution, but no need to panic. Unfortunately, much of the media writings are creating a hype, and governments are reacting in panic with sub-optimal and irrational policy choices. All this needs to be avoided. We do believe that if Asia and Africa keep growing the way they have during say 2004-07, and if the US economy does not show any serious downturn, there would be increasing pressure of demand on energy, on food, on metals, etc. In the very short run, the supply response is difficult to augment and therefore prices rise, but in the medium to long run, the supply response is likely to come through greater investments in production and research and development. However, in the short run, the best way to augment supplies is to follow an open trade policy, for exports and imports. But unfortunately many countries (including India) have put export controls on key agricultural commodities like rice, wheat, edible oils, etc, while they have opened imports. This is simply irrational from global point of view as it amounts to `save thyself but starve your neighbour'. Such controls further fuel global prices by making the world markets thinner. Use fiscal policiesBut then what should a country like India do to protect its poor? The answer lies in using fiscal and income policies. From that point of view, Indian policy makers have done a rather commendable job. Look at facts: while the global food price index went up by around 25 per cent in 2007 (April to December), the Indian food price index went up by only 5.1 per cent over the same period (see Economic Survey, 2007-08, p. 82, Table 4.20). This is a great success of Indian policy-makers, who did not pass on the high inflation in global crude prices, or fertiliser prices or food prices to Indian consumers. They were largely absorbed in fiscal adjustments of taxes and subsidies. Given the high growth in tax revenue from a booming economy, Indian policy-makers had this cushion to absorb it. Devising income policies for direct cash transfers to the poor could even be better policy choices in this regard. However, in the medium to long term, India has to invest more in agriculture R&D, rural infrastructure including roads, markets, power, and irrigation, and reform its incentives and institutions dealing with agriculture. This will attract private sector investments and unleash another revolution in Indian agriculture giving it long term food security at affordable prices.(Ashok Gulati is Director in Asia, International Food Policy Research Institute, and Kanupriya Gupta a doctoral student at the Delhi School of Economics.)

(This article was published in the Business Line print edition dated April 1, 2008)
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