Can Dr Singh do a Robert Peel?

(BL Aug 13 2009)


India is faced with the prospect of persistently rising food prices or food inflation. Even the Supreme Court thinks so.Some of this increase has to do with the failure of the monsoon. Only about 40 per cent of the gross cropped area is irrigated.


Some if it has to do with low agricultural productivity. Small holdings are an almost insurmountable obstacle to raising productivity. Some of it is because of profiteering by intermediaries. However, an efficient distribution network requires a lot of intermediation, with commissions at each stage which all add up.


Rising demand





But, most of all, it is because the demand for food is increasing faster than its supply. Demand is increasing because there is more money now in the hands of people than ever before.
Both rapid economic growth and half-baked programmes such as the NREGA are responsible. If supply doesn’t keep pace, prices will go up, as indeed they have done. That is all there is to it. You don’t need to be an Adam Smith or a John Keynes to figure this out.


High food prices are leaving people poorer, even though they have more money to spend now. In spite of all the growth of the last 10 years, the poor are actually eating less. This is specially true of the last two-and-a-half years because the average increase in food prices has been 50 per cent while wages for unskilled and semi-skilled labour have remained more-or-less constant.


Role confusion





This poses a moral problem, as Amartya Sen never fails to point out. But it is also an economic problem, as the Marxists never fail to point out.
Dr Manmohan Singh is an economist-turned-politician. So he faces a huge problem now because he seems to have reached an advanced stage of role confusion.
He lacks the uni-dimensionality of economists and the multi-dimensionality of politicians. This stymies him almost completely.


As an economist, he would like to increase supply. But the politician in him stays his hand. He is forced to ask: Which way will the millions of farmer vote if prices fall?


The economist in him knows that the number of those who buy their food, instead of growing it, includes millions of the landless who also vote. So do urban food buyers. Taken together their number is now about the same as the number of those who grow food and take care of their own needs.


The grain merchant



Indeed, it is possible that the number of net-buyers of food is now higher than the number of net-sellers. This is because not all those who grow food have a surplus to sell in the market because they can’t even grow enough for their own needs. The politician in Dr Singh also has to cater to another constituency, namely, the grain merchant, whose profits come from high prices.


Dr Singh, the politician, can’t afford to annoy him because his party needs a portion of those profits to finance one sort of election or another, as indeed do other parties such as the BJP.
Net-net: The political establishment in India tends to see the food prices problem more as a producer issue than a consumer issue. That is why it will not increase supply via free or virtually free imports.


Increase supply



It will, instead, try to trap domestic supplies at home by banning exports. Indeed, this is why the UPA-I pumped in Rs 87,000 crore into farmers’ pockets last year through the increase in minimum support prices. It won the election as a result.


But if the politicians continue to see it in this way, and do nothing about rising food prices, we could have food riots soon. The time has come to stop worrying only — note, only — about the producer and start worrying about the consumer also. About 70 per cent of net buyers of food are abjectly poor and live in the rural areas, so there is a moral dimension as well.
The Government thinks food subsidies are an answer. In a limited way, they are. But the final answer lies in increasing supply now, and not waiting for productivity to increase at some distant date. And there is only one way to do this: Import.


Import ban



In a way, therefore, the Prime Minister has to do what a British Prime Minister, Robert Peel, did exactly 150 years ago — he repealed that infamous corn laws that had been enacted in 1815 to protect British corn prices against cheap imports from America.


This import ban had caused millions to become poorer even as their incomes rose because of industrialisation.
In the years after the repeal of the corn laws, that is between 1850 and 1900, food prices in Britain fell continuously, as did the land under corn. Import dependence went from only 2 per cent in 1830 to 75 per cent by the end of the century. That had other adverse consequences, mainly for India and China, but food in Britain became cheap.


Buy cheap food



In the past when foreign exchange was a problem, we needed charity. But today with enough forex reserves, we can buy grains from the US and Australia because they are subsidising their farmers.
We can, and should, buy this cheap food. It is silly not to do so. What holds for industrial goods holds for agriculture also.
The choice before the Government is thus clear: High import dependence or high food prices. It is a political decision. It needs not just courage but also the wisdom to see that the buyer-seller balance in food has changed.