New Year, New Thinking: Agriculture and Food Inflation

Inflation-Growth Balance ‘Somewhat Unsettled’: Shakti Kant Das, Former RBI Governor

High Inflation, especially in food items, dominated the discussions of the Dec 2024 monetary policy review. The Governor of the central bank cited unpredictable food prices and preferred to keep the policy rates unchanged. The hidden costs in the Agrifood system vary substantially in magnitude and composition, even after accounting for uncertainties. This article dwells on new thoughts on the fundamental requirement of food security along with commensurate growth, employment, and controlled inflation which calls for a paradigm shift to mitigate the threat of climate change.

In the backdrop of sluggish Q2 growth, national debate and discussion have started to reset the tripod of growth, inflation, and food prices. OTP, as we generally refer to it, is not a one-time password but in the language of Inflation which means Onion, Tomato, and Potato. Shakti Kant Das, did mention that the food prices of items especially veggies have been unpredictable, affecting the consumers and farmers alike. The farmer expects a higher price to sustain food production, which the consumer is not in favor of, as it increases his purchase price, The need therefore is to work on the food production system, which can reduce the cost of production and increase the value it produces. The new paradigm therefore needs to be driven using knowledge, science, and technology.

Food Inflation: Inflation of cereals and products remained elevated in the range of 7 to 17 per cent for over two years, since August 2022. Further, prices of pulses and products recorded a double digit increase ranging from about 10-21 per cent since June 2023. Tur (red gram), Chana (Bengal gram) and Urad (black gram) have led this increase. Similarly, prices of vegetables also registered a steep and persistent increase of more than 20 percent during most months after July 2023. The expenditure on food as a percentage of the total expenditure currently remains high, leading to food inflation and negatively impacting household budgets.

Food & Agricultural Productivity: Traditionally agriculture included both crops with livestock, both complementing each other. Agricultural productivity is an important component of food security. Increasing agricultural productivity through sustainable practices can be an important way to increase food production and yet decrease the amount of land needed for farming. An increase in agricultural productivity can lead to agricultural growth and better income for farmers and wages for labourers as well.

Inflation and food price have direct correlation with the population that is expected to consume the food. Therefore, balance in the demand and supply of the food is important for the productivity levels of the food to be achieved.  As farms become more productive, food prices will decrease and food supplies will become more stable. It is not only the people employed in agriculture who would benefit from increases in agricultural productivity but those employed in other sectors would also enjoy lower food prices and stable food supply. This may be helpful in managing food security and possibly taming inflation.

Climate Change & Food Production: These inflationary trends may persist as uncertainty around production grows further on account of frequent weather shocks which may hold back production and cause supply-chain disruptions. Debate on inflation is never-ending with different sections putting blame on the farmers, while others also blame our agriculture policies and our productivity or low yield/acre etc.

Inflation and Gold standards: The key point always discussed at all forums is that the consumer is under stress because of higher food prices which causes distress to consumers & farmers also. The farmer at his end, exerts to produce more but does not get compensated with his cost of production and at the rate at which he sells his produce. The key question is; “IS IT SIN TO MAKE PROFIT IN AGRIBUSINESS?? DOES THE FARMER GET COMPENSATED FOR THE QUALITY HE PRODUCES”??   

Food prices always have been the subject of intense discussion, where the actual cost of production (including hidden costs, and subsidized input costs) is a major concern for the farmer. Late Dr. MS Swaminathan's report on MSP stipulated 50% markup to the farmer on his production cost?? Sustainable food pricing is far from the expectations of the farmer and the consumer. This gives rise to the need to examine the other sectors of the economy to find the rationale for GOLD EQUIVALENT FOOD PRICING STANDARDS.

While all the Agri economists agree that demand and supply determine the price and food inflation. Technology has played an important role in reducing the cost. For example, mobile data cost today is reduced to 3% of the cost 10 years ago. Thanks to the widening of consumer base and technology upgradation (5G). The hidden cost of food production has become the central theme of discussion. It is time we relook at food production and its system of costing. Below is the price comparison of a few common food items with gold prices over the last 5 years.

Perusal of the above table would help in understanding the important role the Scientific Method of Farming (SMF), as a result production has gone up but gold equivalent prices have substantially come down benefitting to consumer but loss to farmer?

The data reveals that the farmer has put in extra effort, used technology to create value. Meaning farmer has helped to produce more leading to a lowering of the commodity prices equivalent to gold. However, if the farmer plans to buy gold for the equivalent cost, he would be required to offer extra commodities, indicating the farmer(s) loss of purchasing power parity. Thus, the farmer’s agenda to produce more with the support of the government is achieved but not his own distress and the distress of the consumers. The actual cost of a commodity, production in some cases may even be more than the realized cost?

Taming Inflation: It is imperative to examine our approach and to employ all possible means options to tame in food inflation. To deal with sticky inflation in the food segment mutli-faceted challenges which will require a holistic approach along with monetary policy measures and supply-side interventions are:

A. Soil: The current quality of soil is poor & is not fit to achieve the levels of productivity required. The government’s interventions are in place but their execution needs to examined. Some important points related to soil are as under:

1. Soil erosion: Wind or water can move soil particles, which can cause serious problems for farmers. Over-tillage can erode soil quality and reduce its ability to retain water. Dust storms can also destroy topsoil, especially in arid areas.

2. Soil compaction: When soil particles become compressed, the soil can become too dense. This can make it harder for roots to penetrate the soil, and can impact drainage and aeration.

3. Soil salinization: When salt levels in the soil rise to dangerous levels, this is known as soil   This can happen when there's inadequate watering, high evaporation rates, or poor drainage. 

4. Soil sealing: A hard surface layer can form on the soil, which can lead to loss of biodiversity and reduced soil organic matter. The hard surface can also absorb and retain heat, which can contribute to the heat island effect.

5. Soil degradation: Soil degradation can be a major threat to food production and environmental conservation.

B. Water: Agriculture uses nearly 70% of the world's water, and water scarcity is a growing problem. The growing population and changing consumption patterns are expected to increase demand for water. This is due to a number of factors, including: 

1. Overuse:Overusing water for irrigation. 

2. Groundwater extraction:Unsustainable extraction of groundwater. 

3. Pollution:Chemical pollution. 

4. Population growth

C. Emission: India's Agriculture & Livestock sector contributes to greenhouse gas emissions (GHG) in several ways, including:

1. 1. Burning crop residue: This releases pollutants like black carbon, methane, and carbon dioxide (CO2). Black carbon can impact human health and alter regional climates. 

   2. Livestock activities: These are also contributors to agricultural emissions. The problem lies in the lack of nutritionally balanced feeding.

Recommendation: The following approaches related to Agri & Livestock are recommended which may be of help to tame food inflation in the context of climate change:

A. Agriculture & Livestock:

1. Promotion of climate-resilient seed/crop varieties to enhance production in a warmer world.

2. Investments in Agri-R&D can fetch substantial returns

3. Developing and promoting the use of precision agriculture (drip-irrigation and sensor-based irrigation systems) to ensure resource efficiency and enhance productivity.

4. Expansion of latest irrigation technologies to areas that are not covered under existing irrigation systems. Only 57% of Agri-land is covered and this may not be sufficient to act as a bulwark against heat-related stress.

5. Compile data on the food requirement of our country.

6. Providing balanced ration to milch animals.

7. Improve productivity and breeding efficiency of the animals.

8. Popularizing Pashuayurveda and Vrikshayurveda improving soil and livestock health for better production and productivity.

9. Reward good farmers having healthy & productive animals & those cultivating food as quality land having quality soil.

10. Can we also look at the Emissions caused by Industrial & Vehicular pollution?

B. Infrastructure and Awareness:

1. Building new cold storage and upgrading the existing ones can provide protection against heatwaves, reduce food wastage, and extend shelf-life.

2. Setting up processing units for value addition

3. Improve awareness campaigns/skilling amongst farmers to use technology for value addition.

C. Exports:

1. China has robust exports of 3.38T dollars while India has 432 billion dollars. Can we study the other countries like China/Vietnam model of production & export for value creation?

Conclusion: A tailored approach that integrates adaptation and climate-resilient practices along with monetary and supply-side measures may be required to tame food price pressures. The path to disinflation entails increasing Agri & Livestock productivity, building resilient supply chains, and mitigating the adverse impacts of climatic variations on agriculture & livestock. The hidden costs in production also need to be scrutinized for its optimization. Moreover, consumer preferences are shifting and quality food has been the choice, even at higher rates. This is where health and immunity hold the key. The ayurvedic Ahaar is therefore likely to get more attention. The use of quality herbals as supplements is also likely to be another focus of farmers for improving their incomes.

All said and done, the steps taken in time and in the right direction would help in mitigating inflationary pressure on all of us. It would also be important to involve the industry and ask them to collaborate with the government agencies, which work closely with farmers under various schemes. To keep the farmer's interest alive, the government should incentivize the farmers for quality food production, which will drive farmers to continue with agriculture and be more proactive & productive as well.

It would be also important to educate the consumers about agriculture production and its costs along with the challenges the farmers are exposed to, owing to which he offers their produce to whole sellers even at the cost, is even less than the cost of production. If the farmers do not get remunerative prices, will they still be interested in continuing to be part of the Agrifood production system, needs closer examination, apart from a closer look to tame the inflation. How much is too much and How much is too little would continue to be the subject matter of debate, but for Food & Nutrition security with safety and preservation of environment, time for change in paradigm is now.

Government’s actions upon to tame Inflation: an update

1)Government selling wheat to millers: Prices of wheat – a big part of the cereal group that carries highest weightage in the consumer Price Index., have surged more than 8%. Government, FCI has planned to sell 100,000 MT of wheat/week through OMSS.

2)Regional Stockholding Centers for Onion: With current onion shortages, the government has plans to create regional stockholding centers to address the centralization led supply chain vulnerabilities

3)Dialogue to tame Inflation: Proactive discussions are on and MPC is working overtime to balance the tripod of food prices, inflation and growth.