Nov 26, 2008

India - Agriculture;A different need

The warning by the United Nations’ Food and Agriculture Organisation (FAO) that the global economic crisis will negatively impact agriculture in developing countries is only saying the obvious. The global price surge in commodities had been caused by excess liquidity; non-food agricultural product prices therefore saw as sharp a price increase as, say, metals. Now the reverse has happened; as liquidity has dried up in the wake of de-leveraging by financial firms, speculative demand has disappeared and there is a steep fall in the prices of agricultural products, many of which now rule at less than half their recent peaks. A second explanation for the price drop is that there has been increased output, as a response to the price signals from the market—at a time when, paradoxically, demand is shrinking. The danger therefore is two-fold. As money dries up and economies slip into recession, growing joblessness will lead to a drop in the demand for food, and increase the extent of hunger. Also, as bank finance becomes more difficult to find, farmers will reduce plantings and therefore production will suffer. This supports the old thesis that, irrespective of the causes and origin of a crisis, a heavy price is paid by those at the bottom of the economic ladder.

Where India is concerned, it might be argued that although the country has become more liberal when it comes to permitting international trade in agricultural items, the agriculture sector is still substantially insulated from global forces. This is not entirely true, as effective protection in terms of state procurement and buffer stocking is available in only a few items, notably wheat and rice and to some extent cotton. To be sure, the government makes sure that tariffs are adjusted periodically to operate as a buffer against international price shocks, and India’s commitments as a part of World Trade Organisation leave enough scope for such protective play. Still, the fact is that price shocks in edible oils, rubber and other items impact what farmers get in the market when the crop is marketed.

FAO has chosen to call for a bail-out package for agriculture on the lines of, but much smaller than, that for the financial sector. The cost of such a package has tentatively been estimated at around $30 billion a year, to be spent chiefly on building rural infrastructure and boosting farm productivity in the developing countries. The amount itself is not very large, being less than a tenth of what the OECD countries dole out annually as subsidy to their rich farmers, a sizable part of which is paid as incentive for not growing anything. However, it is far from clear whether agriculture’s need is for the kind of treatment given to the financial, automobile or housing sectors—all of which have immediate crises hitting them. Agriculture’s problems are more long-term, and call for sustained action by governments everywhere, including in India where the productivity per acre for most crops is well below the global average and where subsidy payments typically outweigh investment in the infrastructure for boosting production. The issue in agriculture is not crisis management, but what should be done to prevent crises.

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