Productivity Can Be Expanded Through Greater Mechanization

Food currently accounts for over one-third of our wholesale price index (WPI) and over one-half of our consumer price index (CPI). Since the food economy is essentially dependent on domestic production, fluctuation in agricultural production has a direct bearing on output and hence inflation.

Components of food inflation seem to have changed in recent times. Although, cereal inflation has risen, it is mostly protein items as well as fruits and vegetables that have driven the overall food inflation at the wholesale level. At the retail level, food inflation has been even higher. Though food inflations at the wholesale and consumer levels tend to move together, consumer food inflation rises faster during an uptrend, accentuating the divergence between WPI and CPI.

Mohanty says that there has been a significant increase in real expenditure on protein and vegetables in rural and urban areas across income deciles. "Data for the years 1993-2012 suggests that it is only in the second half of the 2000s that annual average real expenditure turned mildly positive. But, thereafter, during 2010-12, the real average per capita expenditure has remained significantly positive. Moreover, there is greater allocation of expenditure away from cereals towards other forms of food items such as protein and vegetables. Hence, demand seems to be one of the factors driving the prices of protein and vegetables." says he.

He further adds that the prices of various inputs have gone up and the cost of cultivation is one of the factors to have led to higher food inflation. "The cost of fuel and fertilisers has gone up because of high international oil prices combined with exchange rate depreciation. The dominant part of the cost of cultivation is labour. This is particularly so in our set up with the preponderance of small holdings, which are less amenable to mechanisation. Agricultural wages have shown a sustained increase since the mid-2000s. Even after accounting for inflation, real wage increase has been significantly positive. Non-agricultural wages too have shown similar increases in rural areas." said Mohanty.

Talking about monetory policy and how it should respond to food inflation, he stated that it will be a mistake for the policy to not respond to the increase in food prices if the supply shock is persistent and becomes structural. The inflation expectations in the economy also add to the complexity. Inflation expectations are low and well anchored. The inflationary impact of a supply shock may turn out to be transitory; this is because wages normally do not react to such inflation. However, if inflation expectations are high and not so well anchored even a temporary supply shock could have an adverse impact on expectations and hence the medium-term inflation outcome.

Concluding his thoughts on the way forward so that the food economy does not pose a major constraint on the path of non-inflationary growth, he added, "There is a substantial wastage of agricultural produce, particularly perishables like fruits and vegetables which needs to be minimised by improving the supply chain logistics by setting up cold chains and processing facilities at producing clusters. Second, there is a need to further liberalise agricultural trade by modifying agricultural produce marketing committee (APMC) Acts by state governments and even exempting perishables like fruits and vegetables from the provisions of APMC to give wider access to both producers and traders for better price discovery. Third, the medium term supply can be improved in a non-inflationary manner by augmenting productivity. One important way of productivity expansion is through greater mechanisation. However, dominance of small size of land holdings puts a constraint on the choice of technology. Hence, contract farming and leasing of farmland while protecting the ownership rights of small landholders should be facilitated to enhance production and productivity."

In the last five years, from the year 2008 to 2013, we have seen average food inflation rise sharply to 10.3 per cent per annum and it has remained persistent since then. Also, good rains in the following years have failed to douse food inflation. We agree to Mohanty’s view and feel that food wastage should be stopped and the above conclusions should be adhered to in order to keep the food inflation in check.