Buried somewhere in the Reserve Bank of India‘s first quarter review of monetary policy released on Tuesday is the following paragraph:
The stickiness in inflation, despite the significant growth slowdown, was largely on account of high primary food inflation, which was in double-digits during Q1 of 2012-13 due to an unusual spike in vegetable prices and sustained high inflation in protein items.
In simple English what this means is that despite economic growth slowing down inflation continued to remain high because of high food inflation. The Reserve Bank of India (RBI) has not seen the last of food inflation and there are several reasons why food inflation will continue to remain high in the days to come.
Below average rainfall: The immediate reason for food prices continuing to remain high is the below average rainfall this monsoon season. As the RBI said in the first quarter review of monetary policy: During the ongoing monsoon season, rainfall up to July 25 2012 was 22 percent below its long period average (LPA). The Reserve Bank’s production weighted rainfall index (PWRI) showed an even higher deficit of 24 percent. Further, the distribution of rainfall was very uneven, with the North-West region registering the highest deficit of about 39 percent of LPA. If the rainfall deficiency persists, agricultural production could be adversely impacted.
The availability of water can make a huge difference to the agricultural output in India. Areas fed by canals form only around 40 percent of the total arable land in India. The remaining 60 percent are dependent on rains. With deficient rains this year the current kharif crop is likely to be impacted with production not being enough to meet demand. This will lead to food prices going up in the days to come.
Rural India is eating better: The various social schemes being run by the current United Progressive Alliance (UPA) government have put more money into the hands of rural India. The income of rural India has more than doubled in the last five years. One thing that seems to have happened because of this is that people are eating better than before. Economists are of the opinion that as incomes of people rise above the subsistence level of $1,000 per year, a substantial portion of the new money is spent on food.
People eat more and better quality food. At the same time they also move from cereal-based diets to more protein-based diets. In major parts of the world this means that people start consuming more meat. But India has a lot of vegetarians and hence consumption of other high protein food items like dal, milk and other dairy-based products has gone up, pushing their prices up. This is likely to continue in the months and years to come given the social commitment of the current UPA government. If the proposed Right to Food Act goes through you could see a further increase in food prices.
The Japan syndrome: As a densely populated country industrialises, the area under agriculture tends to go down. This phenomenon was first observed in Japan, and has since then been observed in South Korea, Taiwan, and very recently China. As Lester R Brown points out in Outgrowing the Earth: The Food Security Challenge in an Age of Falling Water Tables and Rising Temperatures, “First, as a country industrialises and modernises cropland is used for industrial and residential development. As automobile ownership spreads, the construction of roads, highways and parking lots…takes valuable land away from agriculture…. Secondly, as rapid industrialisation pulls labour out of the countryside, it often leads to less double-cropping, a practice that depends on quickly harvesting one grain crop once its ripe and immediately preparing the seedbed for the next crop…Third, as incomes rise, diets diversify, generating demand for more fruits and vegetables. This in turn leads farmers to shift land from grain to these more profitable high-value crops.”
This is a long term phenomenon which is clearly playing out in India right now. Just drive around towards the outer limits of the city you live in and you will realise that what was once agricultural land has been taken over to build malls, apartments, offices, etc. This leaves less area to grow vegetables, cereals and other crops, pushing up their prices in turn.
Depleting aquifers: A huge amount of increase in the irrigation of crops across the Gangetic plain, India’s agricultural heartland, has substantially depleted the aquifers, or the underground water tables. As a report by DWS Investments points out, “Dramatic increases in the irrigation of crops across northern India have substantially depleted the region’s groundwater. Between April 2002 and August 2008, aquifers lost a total of more than 54 cubic kilometres per year. That decrease in groundwater is even more than double the capacity of India’s largest reservoir.”
While this data is around four years old there is no reason to believe that the situation could have improved in the last four years. It could only have got worse. This is something that Brown agrees with in his book Outgrowing the Earth. He writes “the extensive overpumping of aquifers in India will deprive farmers of irrigation water and will also reduce grain production”.