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Rajiv Kumar & Anshuman Khanna: On the back of supply side

It is important to tackle supply-side constraints to prevent the emergence of inflationary pressures

Rajiv Kumar & Anshuman Khanna 

In a poor economy, combating inflation by curbing demand reduces growth and employment generation. Instead, we have to focus on anticipatory measures for removing supply bottlenecks thus preventing inflation from occurring.

One critical challenge we have been facing for over two years now is high inflation in case of food articles. Given the sensitive nature of this problem – inflation is a tax on the poor – the government took several administrative measures. Exports of some items were banned, imports of certain others were liberalised, more grains were released in the open market and select agencies were mandated to sell food items at discounted prices through dedicated outlets. Due to these measures and the good agricultural season last year, food inflation is finally trending downwards.

Key economy managers in the government tell us that this downward trend will continue. As we hope this comes true, we also feel that it is important to tackle supply-side constraints to prevent the emergence of inflationary pressures in future.

Everybody agrees that given our large and growing population, our food supplies need to match our growing demand. However, as we prepare for this we must also keep in mind the changing consumption pattern. As income levels rise, the demand for protein-rich items increases. In our context this means items like pulses, meat, fish, eggs and milk will see a major jump in demand in the future. Early signs of this trend are already visible. Research work also highlights the trend of diversification in the consumption basket away from cereals*. Therefore, as a first step, all these items should come into focus in perspective planning for agriculture development. The 12th Plan presents a good opportunity for the government to showcase its focus on these segments.

There is also ample scope for increasing efficiency in marketing and delivery of food products across the country. This would also quell inflationary pressures.

Take foodgrains for example. Today, the bulk of procurement by Food Corporation of India (FCI) is done in a few states. This has two negatives. One, farmers in other states that have a marketable surplus do not get the benefit of the minimum support price (MSP). Two, the opportunity of procuring at the local level for meeting the public distribution system (PDS) requirement is lost. Further that it comes to releasing foodgrains in the market, FCI generally offers large-sized tenders. From the point of view of inflation management, perhaps it is better if procurement operations are decentralised, PDS requirement is met in states to the extent possible and food stocks are offered in smaller lots spread over multiple locations leveraging tools such as e-auctions.

In the case of perishables like fruit and vegetables, there is no MSP mechanism and farmers are required to sell their produce in the Agricultural Produce Marketing Committee (APMC) mandis. Now, mandis with a limited number of buyers encourage collusion and this forces farmers to sell produce at a low price even when actual market price is much higher. If state governments are incentivised to de-list horticulture products from Schedule 1 of APMC Act and thereby allow farmers to sell their produce to anyone and at any location of their choice, then both farmers and consumers could benefit. Private players can buy directly from farmers and by collapsing the long supply chain offer remunerative prices. A part of the efficiency gains can also be shared with consumers in the form of lower prices. Further, by developing the required infrastructure – cold chain, warehouses, sorting, grading, packaging facilties and so on – private players can also help reduce the post-harvest losses.

To steer state governments towards de-notifying perishables, the Centre can make this move mandatory for receiving 13th Finance Commission grants. The Centre could also link transfer of funds under centrally-sponsored schemes for agriculture market development and horticulture development to reform measures taken by states.

Another suggestion is to encourage the formation of “producer companies” in areas close to key cities or urban centres. By bringing together a large number of farmers, providing them funds to set up cold storage facilties and permitting them to sell directly to private entities, the government can improve the supply of food products. The “National Vegetables Initiative for Urban Clusters” launched recently is an attempt in this direction. Its objective is to enhance vegetable production through off-season production under protected cultivation and offered at competitive prices to consumers. The implementation of this programme should be keenly watched.

The Indian market is still fragmented with multiple check-points on state borders and several levies to be paid by transporters. By offering “special permits” to fleet operators, cutting down the number of inspection points and facilitating payment of all levies at single collection points, the inter-state movement of perishables can be hastened and wastage reduced.

Finally, a robust centralised monitoring system to track the progress of weather and crop growing would help in taking corrective action in time. Though such systems are in place for foodgrains, they are lacking for horticulture products. Such a monitoring mechanism for perishables would have helped avoid the severe price spike in onions in Delhi in December 2010.

Addressing these supply-side issues is critical. Action on all these should begin concomitantly. Food inflation may be inching down today, but the next spike can happen anytime. Let us take supply-side measures to avoid another inflationary episode.

*Demand-Supply Trends and Projections of Food in India by Surabhi Mittal, March 2008, Working Paper No. 209, ICRIER

Dr Rajiv Kumar is Secretary General, FICCI and Anshuman Khanna is a Researcher in the Economic Affairs team at FICCI. These views expressed are personal

First Published: Sat, June 04 2011. 00:30 IST