Wednesday, September 22, 2010

Time to harvest opportunities

The ability of the economy to cope with high food prices over a year suggests an increase in purchasing power. This presents an opportunity to reorient farm output towards better quality and new varieties that are well-marketed.



 
News of alikely bumper harvest is welcome, as much depends on it for taming inflation.

Official announcements now point to the likelihood of a bumper harvest in kharif as well as rabi this year. Although rabi is still some way away, the monsoon rains would have had a beneficial effect.

However, the Eastern States have not been as fortunate. And the northern paddy belt covering eastern Uttar Pradesh, Bihar, Orissa, West Bengal and Assam has received less than normal rainfall. Despite the overall situation of plentiful rain, the spatial and temporal distribution of rainfall may well be less than ideal.

A bumper harvest is welcome news, as so much depends on it for taming the persistent high rate of non-core inflation in the last six months. A good crop will also mean a push to overall growth of the economy. Increase in agricultural income, as always, raises demand for the consumer goods. It brings stability to the overall macroeconomic environment.

While high prices persisted along with large stocks of foodgrains with government agencies, they were not limited to rice and wheat. The supply shock was widely distributed. High prices also ruled for a longer duration because of the global outlook on farm output.

We now have a new series for wholesale price data. The revised Wholesale Price Index (WPI) series gives a lower weight to primary articles, dominated by farm produce, than in the previous series on WPI, but nevertheless reflects the high prices that prevailed throughout 2008 and 2009. The new series does point to a drop in rate of increase in such key items as rice, pulses and vegetables in recent months. The drop has also been transmitted to manufactured food products.

MEANING OF HIGH PRICES

However, the incredibly high prices of pulses and vegetables, besides the rising prices of rice and atta for a continuous period of nearly a year showed that demand can hold at these prices. For another portion of lower-income consumers the PDS and employment programmes must have helped. High prices would have been hard to sustain without a credible PDS and the other social sector programmes such as the NREGS.

The Government will be faced with the problem of managing food stocks, but the bumper crop is expected to ease overall price pressures. The manner in which the recovery of economic growth took hold in 2009, in the face of high agricultural prices, shows that a significant portion of the consumer population had the purchasing power necessary to tide over the period of rising prices. If the high prices are merely a reflection of shrinking supply due to a weak monsoon, they point to a temporary mismatch between supply and demand. But are these high prices also indicative of the opportunities for investment in agriculture?

INVESTMENT OPPORTUNITIES

The elevated prices have also brought to light the expenditure that consumers are able to incur on food. Although this does not in itself mean that consumers will continue to spend as much on food when the prices drop, it does imply that there is a significant market for better quality produce. Strong growth in per capita income in excess of 4 per cent per year in the non-farm sectors is a significant opportunity for the farm sector.

The revised WPI series points to the changes in the basket of what the economy produces. Although weights for several food items have come down, compared with the previous series, it is in relation to the other growing sectors of manufacturing. The rising purchasing power of a significant portion of the population cannot be just for cars and holidays. There would be an opportunity to re-orient some of the farm output: better varieties, better produce and better marketing. All this will require more investment.

DISTRIBUTION INFRASTRUCTURE

The less-than-evenly-shared good harvest across regions is a reminder of the need to develop an efficient distribution infrastructure for farm produce. Storage and policies on transportation of farm produce across regions need to be looked at. The impact of a good crop on prices would be muted in regions where rainfall has not been adequate.

Effective PDS and income support for those dependent on farm employment will be important in these regions. It is also important to ensure that the prices do not remain high when supplies are plentiful.

Improving distribution infrastructure for farm produce will help develop new markets for the sector, while reducing the potential for large price-swings. These are not new prescriptions, but the experience of recent years is yet another reminder of how important they are.

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