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BW Businessworld

India’s Own Cycle

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It is a sad consequence of the present government's predilections that however fast the economy grows, prices will rise faster. If accidental fluctuations are smoothed out and the trend is identified, it turns out that the growth of the gross domestic product peaked at 8.9 per cent in the last quarter of 2010. So did inflation at 11.7 per cent. Economists of an official persuasion will want to argue that inflation is good for the country — that it stimulates growth. They would say that inflation is higher in protein-laden foods like meat, fish and lentils which people want to eat more of as they get richer than in carbohydrates like wheat and rice which form the staple of common people. But living as they do in their gilded towers, they do not notice that inflation is not inevitable — that in most of the world, it is far lower than is normal in India, and that as world growth has slackened in the past three years, the distance between India's elevated inflation and the world standard has increased. Inflation is a product of policy, specifically of the government's policy of hoarding foodgrains and of spending far more than it receives in taxes and other revenue.

This is a tragedy the people of India have learnt to live with. After all, inflation simultaneously increases their income and what they have to pay. The two do not march in step; inflation will leave some people better off and others worse off. Those who are better off will go to the beaches of Thailand and the malls of New York to spend their easily earned shekels; those who are worse off will fume at the government, demonstrate for some days and then go back to earning their living.

But the global meltdown has brought in a new factor into the equation. Capital has started running out of India, and the outflow has put pressure on the exchange rate. The US dollar is hardly the world's hardest currency, but even in terms of the dollar, the rupee has lost more than 10 per cent in recent weeks. This will feed further the fires of inflation; imports will become that much more expensive, and their rising costs will feed into domestic inflation. But export prices will go up in the same proportion; exporters would be piling up money, at least until their costs start rising.

Amongst those exporters could be our farmers, for they are producing far more foodgrains than the country can eat. They could feed them to chicken and fish; they could make corn flakes and export them. They could grow new export crops. All those possibilities are closed because the government buys wheat and rice at inflated prices and keeps this country uncompetitive in agriculture. India produces 220-230 million tonnes of grains. The monsoon this year is so good, and so persistent, that there will be a bumper kharif crop. The late rains in this monsoon will leave high levels of soil moisture; so the rabi crop will also be a bumper one. Foodgrain production in 2011-12 is thus likely to approach 240 million tonnes, and may exceed the figure — at a time that the people do not want more than some 200 million tonnes. The rest will be bought by the government, and left in open godowns for the welfare of mice and birds. They will no doubt appreciate the government's generosity; but they are omnivores, and will do well even without it.

So the government should buy whatever grains it needs to feed its public distribution system, and leave the rest in the market for prices to find their own level. India is already overflowing with grains; let it also become a land of cheap food. If a cheap food policy is continued for some years, farmers will look around the world markets, find new, more lucrative crops, learn to grow them, and become world leaders in their production. The US has been the world's prime agricultural producer and exporter for a century. Its exports are declining, and the leadership role is waiting for another country to take over. It could be India, if only the government would allow it.

Otherwise, as in manufactured goods, India will cede leadership to China in agriculture as well; and the world will praise the enterprise of the Chinese in agriculture as they do in industry. But it is not the people of China who beat Indians in enterprise; it is our own government. It prefers to feed us, for that is how it thinks that it can win our votes; and having won elections, it can hardly be blamed for thinking so. But this motherly inclination to feed us, and feed us only wheat and rice, has been costly. All that stands between India and global leadership in agriculture is a self-righteous, paternal government. Let it take its constraining controls off, and our farmers will do the rest.

(This story was published in Businessworld Issue Dated 10-10-2011)