MUTING THE MALTHUSIAN KARAOKE

Inflation, the metronome of the nations pulse and purse is at 7.41%. Same is the case globally with these figures being higher and breaching the quadrant of food security among the masses. This sounds like the karaoke of the prognostics; speculated by the English economist; Thomas Malthus. Who stated that in the absence of moral restraint; population tends to outstrip the available means of subsistence.

Ugly economics: Calorie versus Salary

Without doubt a competition is being hosted by inflation at the expense of people from all nations. The consequences are huge. It is not merely the energy producing potential in food that has been pitted against the income of the salaried people of this country. Prudence in consumption will be exhibited by the middle class as they hug every unit of their salary. But the graveness of the situation is amplified as soaring food prices are threatening the subsistence of millions of people living below and merely above the poverty line. Data released by the World Bank shows that the surge in food prices threaten to make at least 100 million more people hungry. Riots have sparked across the globe from Haiti to Philippines. Citizens are holding their governments accountable for the spike in food prices. Governments are rightly liable, but should not deserve all the blame. Powerful economic forces from all corners of the globe have crippled even the most carefully articulated monetary and fiscal policies that were designed to streamline and sustain the economy towards prosperity. On the demand side, economists and political leaders in the west are pointing towards the economic growth in India and China as one of the prime factors contributing to global inflation. Increasing economic prosperity in India and China has allowed more people to consume meat than ever before; changing the dynamics of acreage under production from cereals to animal fodder. Classic biology tells us that calorie derivation from intake of cereals and food crops is more productive per acre than producing food by feeding animals. Vegetarians may stop applauding as there are more reasons to costly food. Supply side constraints have been highlighted with draughts in major food producing nations like Australia. Other exporting countries such as India, Vietnam and China have placed a cap on exports; in order to contain domestic prices and satiate heightened internal demand. This has further exacerbated global food prices. The falling dollar is also contributing to rise in food prices, as commodities traded in the international market with price tags denominated in dollars become expensive. The fallout from the sub prime crisis is also attributed as cause for increase in commodity prices. As hedge funds and retail investors withdrew money from capital markets and poured it into commodity markets. Speculation in the commodity bourses may have resulted in the rise in price but the medium term growth of supply is not able to attenuate it. Oil prices have been sleeping above 110$ per barrel for a long time and this has had its impact on agriculture in the developed nations which rely on oil guzzling, technology intensive methods of production. In the developing nations oil prices have been factored in as fuel prices involved in logistics

A tale of two causes: Bio fuels in the US and agricultural productivity in India

Here is a brief insight on the problems faced by policy makers in the United States and India. Bio fuels were introduced as a tranquilizer to the problem of excessive consumption of oil. But it was soon realized that it was a double edged sword.. The highlight of the dilemmas is the tug of war between energy security and food security. The International Monetary Fund says that the use of crops such as corn for bio fuels accounts for about 20 per cent of the rise in prices over the past couple of years. As the acreage of corn used to produce ethanol for fuels increases; the opportunity cost of producing food meant for human consumption ascends more rapidly. Policy makers are caught in a vicious circle circumscribed around them by bio fuels. They have to encourage bio fuels in order to reduce consumption of oil and thereby bring prices down. And on the other hand they have to discourage the use of bio fuels; in order to increase the area under agriculture  meant for human consumption. The tension of these policy makers is heightened as the global cause for inflation spotlight falls on them.

In India the monsoon forecasts this year have promised adequate amounts of irrigation vouchers to the Indian farmer. But Indian agriculture is faced with a graver problem. There has been an increase in migration of the rural population towards the urban regions of the country. Thereby accentuating labour shortage in the agriculture sector. In the state of Punjab, there is delay in procurement of agricultural produce. Incentive for agriculture is bleak despite the rise in prices as most of it is shaved off by the middlemen. Farmers don’t even breakeven on their investment on seeds. There is also an acute shortage of warehouse facilities. The lack of silos and cold storage is destroying supply as produce is being wasted due to rodents and spoilage. Indian policy makers are responding to inflation by maneuvering monetary and fiscal policy. An anti inflation public finance policy is hampering growth in this emerging economy.

Green revolution version two

Policy measures, such as the recent CRR hike by 25 basis points are just helpful in absorbing excess liquidity which may be funding demand. This may help in the short run. But in the long run India needs to step up efforts to revolutionize agriculture .If I were a policy maker this would have been my suggestion. Use India’s burgeoning forex reserves in creating a Sovereign Wealth Fund. A sovereign wealth fund that does not invest in companies abroad but in India itself. The quintessential logic is why invest abroad when we need the capital, this also applies to the practice of RBI investing in US treasury bills (that are currently generating negative returns because of the falling dollar). The funds will be used to create a PSU Construction Company called the Indian Agriculture Infrastructure Developers (IAID), a commodity exchange called the National Commodity Exchange of India (NCE) and grants for research in bio technology. IAID will build warehousing facilities phase by phase in select rural locations based on proximity to agricultural land holdings. These warehousing facilities will have connectivity to the commodity exchanges and will also engage in distributing (if need be) subsidized fertilizers to the farmers directly.  The commodity exchanges will procure produce directly from the farmers and allow them to participate in the process of price discovery by linking them to the national commodity exchange. By making price discovery transparent on a commodity exchange that will be regulated by Forwards Market Commission of India. Farmers will be able to reap benefits of the actual price of the commodity and also hedge their products.  Also by constantly monitoring the demand requirements as projected by the commodity exchanges the farmers will have first hand information in maneuvering supply to meet demand. Since one of the reasons for low agricultural productivity is the fragmented farm holdings, a system will be introduced which encourages farmers to form partnerships among themselves while producing food. Agricultural Cooperative Societies will be formed with the guidance of Village Panchayats. These Agricultural Cooperative Societies will educate the farmers on the working of the commodity exchange and also reap the synergy of consolidating farm land. Government investments in bio technology are the way forward. Agricultural productivity can be increased manifold using bio engineered seeds. Just as developments in Information Technology has heralded the growth of India as a service producing hub for the world. Bio technology shall herald green revolution version two in this country.  I believe that phase two of the great Indian growth story will see the empowerment of farmers. Apart from being self fulfilling Indian agriculture has the potential to feed the world as well. There is no doubt that a massive induction of bio technology in agriculture and the systematic improvement of our agricultural framework will kill the Malthusian proverb once and for all.