Do To Agriculture What Was Done To Infrastructure

Jahangir Aziz

Not too many months ago we were congratulating ourselves for having navigated the global crisis largely unscathed. Foreign investment was pouring in. A 9% growth was virtually guaranteed and some were talking about India overtaking China. Today we are seething under the threat of a runaway inflation, wondering how low industrial production can go, watching FII funds leave every day, and questioning whether investment will turn around anytime soon. How did this all happen?

For one, in all the euphoria we somehow overlooked that in the first half of this fiscal year (for which we have data) a third of the growth on sequential basis was due to government spending. Barring infrastructure, there wasn’t any significant contribution from private investment. And this has been the real problem. In contrast to popular belief, the rise in funding cost has not been the critical factor holding back investment. It was the loss in investor confidence. At first, what held back investment was the fear of aglobal double dip. Then, India specific concerns about regulatory uncertainties and corruption surfaced. And now questions about the ability of policies to maintain stability have emerged.

To restore confidence all these concerns need to be addressed, but what is urgently wanted is a show of strength by the government that it remains in control of the macroeconomy. A first step is for the government to see the driver of current inflation for what it really is: an unsurprising consequence of loose monetary and fiscal policies stretching the economy to grow beyond its capacity rather than a consequence of unfortunate supply shocks. If the government comes to this realization then it will also do the right thing on February 28 and pull back the massive fiscal stimulus in play. The slow policy tightening isn’t helping investment. Rather investors are being deterred on of a hard landing in the near term. To minimize this risk, inflationary expectations need to be brought under control and this means sacrificing nearterm growth. If a little growth is not sacrificed now, a lot will have to be sacrificed later.

And this will make the FY12 budget important even if it contains only minimal policy changes. On the surface, the FY11 deficit outturn will likely come around 5.3% of GDP much better than the budgeted 5.5% because of the large spectrum sale revenue and strong tax collection. But the spectrum sale was one-off. Excluding this, so as to compare apples with apples, the deficit will barely move from 6.8% of GDP in FY10 to 6.7% of GDP. If the government fully compensates oil companies this year itself, the adjusted FY11 deficit will be even higher.

The FY12 budget will likely target a deficit of 4.8% of GDP. But achieving this will be a challenge, as it will mean cutting the deficit an unprecedented 1.5% of GDP. The government will likely spread the adjustment: expand the tax base (education, health, and new properties), increase the disinvestment target to include this year’s unfinished IPOs, and even partially rollback the excise tax cuts of FY09. With a significant portion of the spending under the two supplementary budgets likely to remain unspent, overall expenditure will only increase modestly. The government will once again budget a minimal amount for oil subsidies and exclude the cost of the Right to Food Security until it is passed by Parliament. It won’t be an exciting budget but it will help calm nerves and provide the government space to implement the needed reforms and address the regulatory

uncertainty and corruption. Will the government use this space? Much will depend on how the upcoming state elections turn out and its political fallout. But separately and much more importantly the government needs to address the structural shortage in food. There isn’t a dearth of potential solutions, but the lack of a coordinated strategy.

To galvanize support for reforms what is needed is to do for agriculture what was done for infrastructure. And here the Planning Commission needs to step in. Trying to increase agricultural productivity through 4-5% annual growth hasn’t worked. The Planning Commission needs to adopt the same strategy it did for infrastructure. Put out a big target such as doubling agricultural production in a decade and then work backwards to ascertain what is needed to achieve it. Perhaps FDI in multi-brand retail is critical to raising productivity, but perhaps it isn’t? Perhaps we need new laws for land holding and land markets. Right now we don’t have any such strategy. If the Planning Commission can capture the nation’s imagination and raise agriculture to the same level of importance it did for infrastructure we just might be able to solve the recurring problem of food inflation.

The author is India Chief Economist, JP Morgan.

Pulses and Oilseeds Policies: The fault to the core

INDIA is the world’s largest consumer and importer of pulses and edible oils. Pulses are the major sources of body building proteins for majority Indians.

But the per capita consumption of pulses has declined. A factor responsible for this situation is the nonchalant attitude of the government towards increasing pulses production, especially under the National Food Security Mission (NFSM), which focused more on wheat, rice, millet and corn. The situation has resulted in prices doubling during the last one year.

Pulses’ demand remaining price sensitive, the per capita consumption has gradually declined over the years. While total pulses availability in the country has reflected a growth of mere 1.39% (CAGR) during the last two decades, population has increased at a CAGR of more than 1.8%. Low import tariffs have helped increased imports, including the June 8, 2006 decision of allowing pulses shipments into the country duty-free. In order to battle against rising domestic prices and for fulfilling domestic needs, government allowed duty free imports from June 8, 2006. Consequently, imports touched 2.26mt in 2006-07, the maximum since 1980-81. Interestingly, India's export of pulses grew at a far greater pace than imports, from 1.09 thousand tonnes in 1980-81 to 447.44 thousand tonnes in 2005-06. Looking at the rising consumption of pulses in India against domestic output and resultant high prices, the government has banned export of pulses.

India’s oilseed output in 2008-09 is estimated to be 28.16mt against the demand of 45.46mt. The output in 2009-10 is projected to fall due to deficient monsoon this year. The earlier policy allowing free import of oilseeds was detrimental to the interests of oilseed farmers and a set-back for achieving self-sufficiency in oilseeds. As a result, the country remained dependent on imported edible oils. There has been a significant increase in imports of crude palm oil from Malaysia and Indonesia.

There is potential to produce about 25 lakh tonnes of oil from non-conventional sources, but hardly about eight lakh tonnes are being utilised. It is important to work out a strategy to exploit these sources.

The spectacular success of the yellow revolution in 1998-99 could be attributed to an increase in the cultivable area to about 26mha and an integrated approach that gave over-riding priority through a technology mission. Aimed at accelerating self-reliance in oilseeds, the approach adopted envisaged development and extension of modern technological inputs to farmers, thereby providing them incentive prices and storage and processing facilities.

At present, there is not much scope to expand the cultivable area under oilseeds. These energy-rich crops suffer from a number of constraints as they are grown in poor environment and are susceptible to pests and diseases. Besides, farmers preferred to grow high-yielding cereals to earn higher profits. However, in the recent past, improved technology has helped in boosting output.

As major crops, oilseeds meet the country’s needs for edible oils. A second yellow revolution is the need of the hour. Also, a technical breakthrough in dryland farming is needed to maximise yield, productivity and farm income. Making the country self-sufficient in oilseeds would have a great impact on agriculture and the economy and would help reduce our dependence on foreign markets.

New promising oilseeds and pulses like, sunflower, soybean, arhar etc. can be vehemently promoted to break the jinx of productivity barrier and to make the sector alluring to the growers as well as the industry.

Government’s faulty policy has to be mainly blamed for this lackadaisical oilseed scenario as during the same period many schemes had been taken off for foodgrains and horticulture crops, in the name of food security. MSP and other public support have been extended for many of the crops. The private investment is also not much appreciable, in the wake of good and guaranteed remuneration and supports offered by Govt. to the high value crops. The pulses and oilseeds have many slack sides too, i.e., lack of hybrids and improved seed varieties, least R&D, opportunistic ad-hoc policies, no incentives to the growers, risk of crop failure and economic burden on the neglected and rugged tracts. Least adoption of advanced production practices and their inability to go for intensive production also adds to the glitches.