The problem with prices by Arindam Banik

Food inflation is the biggest of stories facing India as we enter a new year. India’s wholesale food prices have risen at the fastest pace in 11 years. An index of food articles compiled by the commerce ministry increased 19.05 per cent in the week ended November 28 from a year earlier, following a 17.47 per cent gain in the previous week. A measure of fuel and electricity prices rose 0.06 per cent, the first increase this year, according to the concerned ministry. Interestingly, India’s primary articles index, with a 22.02 per cent weight in the wholesale-price inflation basket and comprising mainly of food items, rose 13.9 per cent in the week ended November 28 from a year earlier, the highest since December 1998.

The explanations for this outbreak suggest themselves. The weakest monsoon since 1972, which has adversely affected farm output, is the culprit for many experts. The situation is worse because of increasing demand, as well as lower production due to bad weather. This imbalance may likely also cause global prices to rise in the near future, because of India’s possible imports of rice from the global market. An increasing corporate presence in agriculture, speculation in commodity trading and agriculture exports are also considered possible explanations.

That may be part of the story. But the real roots of the recent food security crisis go back almost 30 years, when investment in agriculture started to decline because of the growing perception that agriculture was unprofitable. Public investment in agriculture shrank to 2 per cent of GDP. Many policy-makers expressed serious concern regarding declining investment in agriculture during the ’80s. The demand-supply disambiguation and unbalanced development are the products of stagnant capital formation in agriculture.

Public investment is a powerful ingredient for capital formation in agriculture. In the process this may sustain private investment. The indirect consequence of a fall in agricultural growth will be felt in all sectors of the economy, given the importance of agriculture in India.