Innovative solutions for combating food inflation

Weather shocks during the onset of 2010 in several States in India and key producing and exporting countries, including Australia, Pakistan, Russia and the US, lead to a tight supply situation, which resulted in increased inflationary pressures and global unrest.

However in India, apart from natural catastrophes and growing demand from the rising population, a paradigm shift is observed in the consumption pattern of the expanding middle class, which consumes more nutritive food including meat and milk that require larger quantities of grains to produce.

To add to this, the share of agriculture in overall GDP has fallen successively over the years to <15 per cent leading to supply constraints. The cumulative effect of erratic monsoons and natural disasters including floods, rising population, growing income especially in semi-urban and rural areas has fuelled demand for food leading to multifold rise in food inflation since the last five years.

FOOD INFLATION TRENDS

The average rate of annual inflation, based on the WPI (1993-94) was close to six per cent during 1994-95 to 2004-05. The lowest inflation during this period was experienced in sugar and the highest in fruits and vegetables. It is important to point out that food inflation in wholesale prices since 2005 has been accelerating, and it was close to 20 per cent in January 2010. Annual average food inflation during 2006-2009 was more than 80 per cent higher than inflation in non-food commodities. These trends show that the real prices of food (food prices relative to non-food prices) declined during 1993-94 to 2004-05 and increased after 2005. Within the food group, the highest inflation is observed in the case of pulses and the lowest in the case of edible oils.

High Food inflation has become a matter of global socio-economic concern and must be addressed with a war-footing. An integrated approach to curb the demand-supply mismatch would be required to address the economic and policy issues to mitigate supply and distribution side constraints and risks due to natural calamities such as unseasonal rains, cyclones, floods, droughts, pests and diseases leading to a devastating effect on crop and livestock.

Increase farm productivity: Given limitations in expansion of agriculture acreage, improvement in yields assumes great significance. As compared to developed countries, India's crop yields are low and in some cases, less than the world average. Yield growth rates in 2001-2010 have stagnated to <1.5 per cent for rice and wheat as compared to over three per cent in the 1980s.

Although steps have already been taken by the Government to increase productivity of various crops, strong and urgent focus is needed to enhance farm productivity by way of technology transfer in seeds, advance agriculture practices including farm mechanisation and drip irrigation and other agri-inputs. A case in point is cotton, where post the introduction of Bt cotton yields have grown at a CAGR of 11 per cent in the decade 2001-2010.

Lower costs of inputs: India is a significant net importer of phosphatic and complex fertilisers and large subsidies would be unsustainable in the long run leading to ballooning fiscal deficits which lead to inflation. Impact of fuel costs, which is a key input for transportation of agri-commodities to processing or consumption centres is significant and India is a net importer of crude to the extent of 70 per cent of its requirements.

Increase in share of irrigated land: Water would play an extremely important role in food security and food prices given the large dependence on monsoon and restriction of large cultivation acreage to a single crop cycle. Sixty per cent of net sown area is rain fed and this needs to increase and projects such as the river linking project can be viable long term solutions to achieve the same.

Improve storage and processing infrastructure: Inefficient and insufficient post-harvest storage infrastructure in the form of warehouses and cold storage results in loss of over 10 per cent of food grains and fruits and vegetables produced. The WADA Act passed in 2007 and notified recently will provide a fillip to creation of storage infrastructure and also provide access to credit to farmers against warehouse receipts. Improvement in post harvest processing (which currently is <10 per cent of F&V produced) can also significantly contribute to reduction in losses and longer shelf life for perishables.

Improvements in supply chain: Processors and organised retailers should be incentivised to procure directly from the farmer groups and minimise layers in supply chain which add to the prices of agri-commodities.

Broadening Procurement Base

Taking policy initiatives to enhance food grain availability, by broadening the base of procurement in water abundant areas in the North-East, which possess highly favourable agro–ecological conditions and a comparative advantage in food grain production, to meet the food security issues. East and North-East has vast potential to increase its share of fruit and vegetables and select food grains to meet the national requirements.

Public Distribution System

India needs to act quickly to invest in expanding and modernising storage capacities in both the public as well as private sectors to capture the huge amount of wastage due to inefficient distribution supply chain along with a huge amount of leakages. The release of these stocks together with faster distribution can help to curtail the price in a crisis situation.

Also enabling better coordination with the State Government would keep a check on hoarders and black marketers.

There is a need to change regulation in food markets to encourage and involve the private sector in the food market, trade and stock management for price stabilization along with active participation of public agencies.

Risks due to Natural Calamities

A recent study predicts about $3 trillion in annual global agriculture production is increasingly at risk from wild and unpredictable weather fluctuations.

In a vast and geographically heterogeneous country such as India, which has over 40 million hectares (about eight per cent ) is prone to floods, 68 per cent of the area susceptible to drought and over 8,000 km coast line prone to cyclones/high wind velocity, agricultural risks are widespread, and have a profound effect on agriculture and on the economy.

It is absolutely necessary to manage such risks if impossible to mitigate them.

Response to the Macro Weather Calamities

India has largely focused on micro risk management at the farmer level and the macro level response is mostly ad hoc and need based.

In case of natural calamity, huge funds are spent to support farmers by giving inputs, buying the damaged crop output, writing off the existing loans etc.

These measures are required in the short term to bring in social stability however an integrated long-term weather risk mitigation planning could contribute in reducing the burden on public spend.

Globally various countries have adopted various measures to tackle large scale weather risks and natural calamities that affect people, animals, infrastructure, agriculture etc. Some of these measures are very pertinent for Indian conditions.

Advanced weather risk modelling & forecasting systems: Advanced weather information from renowned weather institutions should be sought to decide the regions and quantum of insurance required to cover the risks.

This weather information should be matched with the crops grown in a large region to assess the risks for each crop and predict the damage for specific crop.

Catastrophe bonds/CAT bonds

The 2009-10 Economic Survey suggested introduction of Catastrophic Bonds in India. With roughly $12 billion market size, CAT bonds are mainly prevalent in the West, and are used by the governments and re-insurers to raise money and hedge the risk arising from natural calamities. These bonds act like any other debt instruments and are mostly linked to insurance, as well as for CSR initiatives. Agriculture risk transfer is a key risk management tool to protect farming incomes, support much needed investment in the sector and ultimately increase production and control inflation.

Development of crops that can withstand abnormal weather: Agriculture universities and private players are working on developing draught tolerant crops.

IRRI in Manila is working on paddy strains that can withstand submerged water conditions in fields and in saline waters. Boosting such studies and enabling commercial launch will help mitigating the risk of crop loss by draught or flood.

CONCLUSION

Tackling food inflation is the key priority of the Government and policy makers as it impacts the weaker sections of the society.

The issue should be tackled by addressing supply side risks through economic and policy-oriented actions and by mitigating risks due to natural calamities. Only an integrated approach would ensure long term food security.

The author is the President and Managing Director, Food & Agri and Development Banking, YES Bank.

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