How to contain food inflation

The Centre has been battling food inflation, albeit with limited success. In the last two years, trade and tariff policies have been used to augment supplies and reduce prices. Export of a number of food products was banned, while imports were liberalised and, in many cases, allowed duty-free.

Administrative measures such as storage control were enforced to ensure that there was no speculative build-up of inventory. As a matter of abundant caution, futures trading in select commodities was banned. Monetary policy was tightened steadily. But all these have been of little avail and high food prices continue to burn a big hole in the common man's pocket.

High economic growth, rising purchasing power and population pressure have combined to demand more from the agricultural sector than ever before. While the demand side shows robust growth (a cause for cheer), the supply side leaves much to be desired.

OVERALL CONTEXT

Unsteady production, rising production costs, variable quality and yields combine to make overall farm growth sluggish. As supply growth trails demand growth, shortages accentuate. As has been recognised by experts, financialisation of agricultural markets impacts prices of essential food products.

It is well known that food constitutes nearly half of any average Indian family's monthly budget. For most Indians, high and rising food prices often result in a decline in food consumption, both quantitatively and qualitatively. This development has serious implications for the nutrition security of millions of people, especially those who are already undernourished or affected by malnutrition.

Unfortunately, global developments are unfavourable, too. Rising crude prices and adverse weather conditions of the last several months in many countries have impacted agricultural market prices. Integration of domestic market with global market means that our markets will have to contend with global influences.

Inflation control is an onerous, multi-dimensional task. The Government needs to exhibit sufficient political will to counter the problem. There is no simple one-step solution. A few short-term and medium-term measures may be considered by policymakers.

SHORT-TERM MEASURES

Use trade and tariff policies to augment availability. In addition to steps already taken, there is scope for more. For instance, refined edible oils attract Customs duty of 7.5 per cent ad valorem , while crude oil is allowed duty-free. If import of refined oils is also allowed duty-free, more quantities of refined oils (that are readily marketable) will flow into the market quickly. Also, such a policy will force large importers holding speculative stocks to liquidate their huge inventories. Similarly, liberalise sorghum (jowar) import which is canalised through FCI and attracts a duty of 50 per cent. Sorghum import may be placed under OGL and duty-free. These are but two examples.

The Government may do a similar exercise to identify commodities in which trade and tariff policies can be effectively deployed to augment supplies in the short-run.

Direct FCI to gradually unload excessive inventory of rice and wheat in a manner such that the cereals are widely dispersed through open market sale. This will improve the supply situation and check price rise. If this involves an element of subsidy, so be it.

Strengthen PDS (Public Distribution System). In addition to rice, wheat and sugar supplied by the Centre, add edible oil and pulses. This will bring relief to the poor.

Abolish/suspend levy of multiple levels of duties, taxes and cess at the State and local levels. In particular, APMC cess on essential food products, levies at the mandi level (purchase tax, mandi tax, and so on) and octroi duty in cities should be abolished forthwith. The Centre must bring adequate pressure on State governments to act.

The Railways must give priority for movement of essential commodities of mass consumption.

Start a dialogue with trade and industry associations to ensure that they follow self-regulation or self-imposed discipline in terms of inventory, quality, marketing, price, and so on.

Use the services of PSUs (such as STC, MMTC, PEC) to import essential food items, but make sure imported goods are marketed without delay.

Instead of futures trading (which is nothing but paper trading) in essential food products, mandate delivery-based forward trading so that speculators with no genuine interest in commodity markets are not able to distort prices.

If need be , bring back selective credit control on essential food products.

MEDIUM TERM MEASURES

Improve supply chain management by depoliticising the mandi system; make it more farmer and user friendly.

Review and redraw the FCI's role in foodgrains management.

The exercise should include reduction of carrying costs, investment in modern warehouses facilities and use of ICT to make the agency's working more transparent.

Use smart cards for PDS and ensure improved vigilance.

Step up public investment in agriculture. Areas crying for attention include stronger input delivery management, rapid expansion of irrigation facilities, improving agronomic practices through extension and farmers' education, building rural infrastructure and using ICT to deliver price and market information to growers.

Encourage technology infusion at every stage of farming and post-harvest covering inputs, production, protection and processing.

Instead of excessive reliance on markets and marketisation of food crops, create conditions for production of genuine surpluses primarily through increased yields and improved quality by fostering effective farm R&D.

Encourage contract farming — start with designing model contracts and making contracts enforceable. Incentivise contract farming for corporate houses.

Commercial intelligence and research: The Government lacks the ability to foresee and forecast changes in global and domestic commodity market conditions. This is a serious weakness. As markets integrate, our domestic market is subjected to global trends.

The Government should set up a commercial intelligence and research desk manned by experts who will track global and domestic market dynamics based on leading indicators and provide a ‘price outlook' for the future, say six months' timeframe. It will facilitate proactive policymaking.

In addition to stepping up public investment in agriculture, investment through the PPP model may be followed for building rural infrastructure.

Promote and facilitate agricultural research with industry participation.

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