India's arable land area of 159.7 million hectares (394.6 million acres) is the second largest in the world, after the United States. Its gross irrigated crop area of 82.6 million hectares (215.6 million acres) is the largest in the world. India is among the top three global producers of many crops, including wheat, rice, pulses, cotton, peanuts, fruits and vegetables.
Food inflation in India has been a major challenge to policy makers, more so during recent years when it has averaged 10 percent during 2008-09 to December 2012. Given that an average household in India still spends almost half of its expenditure on food, and poor around 60 percent (NSSO, 2011), and that poor cannot easily hedge against inflation, high food inflation inflicts a strong ‘hidden tax’ on the poor.
Why did India go astray on its fiscal path delineated under the FRBMA 2003 ?at the global financial crisis of 2008, and the concomitant fear of a severe recession and unemployment that may follow. It was this fear, and its strong possibility, that brought together the G-8 and plus 5 countries to think of the possible pathways out of this recession. What came out of this collective wisdom was the age old principle of Keynesian economics, boosting demand through deficit financing. As a result, a major global fiscal stimulus was conceived and injected by most of the countries. IMF recommended up to 2% of GDP to be given as fiscal stimulus. India was not far behind. It was very much a part of this symphony and increased its fiscal deficit to more than 100 percent in 2008-09 and 2009-10 over 2007-08. However, the major difference between the Chinese and the Indian stimulus packages was that while China spent lot of it on developing infrastructure, Indian fiscal package largely comprised of boosting consumption through outright doles (like farm loan waivers) or liberal increases in pay to organized workers under Sixth Pay Commission and expanded MGNREGA expenditures for rural workers. All this resulted in quickly boosting demand. But with several supply bottlenecks in place, particularly power, water, roads and railways, etc, very soon, ‘too much money was chasing too few goods’ (Figure-6). And no wonder, higher inflation in general and food inflation in particular, was a natural outcome. The political difficulty in rolling back what was meant to be temporary spending to boost a troubled economy made it a long-term challenge to manage the deficit. It is interesting to observe that after India had passed the FRBM Act in 2003, it was trying to contain fiscal deficit, and as a percentage of GDP, the combined fiscal deficit of the Centre and the States was coming down steeply from almost 10 percent in 2001-02 to 4 percent in 2007-08 (Figure 6), which was a commendable achievement on fiscal front
As per Reddy (2013), there are necessarily three types of supply reasons causing inflation and each subsequently needing an appropriate policy action. One is a supply shock- which is like an exogenous factor, not permanent in nature; second is a supply bottleneck: which is endogenous to a system and can be answered by catering to the supply-side logistics and other support mechanisms; and then the third is supply inelasticity, which requires substantial investments. Green revolution came in the sixties. Tasked with ensuring food security, it pushed high-yielding varieties (HYVs) of wheat and rice over jowar, bajra et al. It began in the floodplains of the north. Where, as canals came up, farmers, realising rainfall risk was a thing of the past, switched to HYVs. In the drylands, the story evolved differently. The green revolution came here in bits and pieces. The seeds and fertilisers reached. So did the exhortations to farmers to adopt 'modern' farming. What did not reach was water. Predictable water supply is something the farmers created for themselves. When electricity came, they invested in groundwater pumps.
The immediate impact of these increased farm wages is to drive-up the farm costs and thus push-up the farm prices, be it through the channel of MSP or market forces. It is typical of ‘cost push’ inflation.
Policies on export of agricultural products have seen frequent changes mostly to protect interest of domestic consumers and industries. Indication of increase in prices of agricultural products has in many instances led to export restrictions to the detriment of farmers in the absence of other alternatives. The implication of such ambivalent trade policy has to be carefully considered in view of the legitimate interest of the Indian farmers, our increasing integration with world trade and our commitment to international organizations like the WTO.Frequent changes in export policy measures create a situation of uncertainty and underminecredibility of the country as a reliable source of agricultural produce for exports. Once a market is created, a sudden declaration of ban erodes such a reputation making it difficult to regain the market developed by the exporters. Often there are very small windows of opportunity in terms of time and price for exports in today’s competitive world commodity market. Uncertainty in policy prevents realisation of such opportunities.Such a restrictive export policy amounts to penalising farmers and subsidising theconsumers. With more than required availability of agricultural products, the time has come to do away with ad hoc control measures, which harm the interests of farmers including those who are aimed to be protected through such measures.Despite policy uncertainties, over the years India has developed export competitiveness/niche for certain specialized products like basmati rice, oil meals, cotton, maize etc. India is among the 15 leading exporters of agricultural productsin the world and has also emerged a significant exporter having share of more than 5% of global exports in certain crops like cotton, rice, eggs and oil meals. As per United Nations Commodity Trade Statistics Database (UNCOMTRADE)2010, the global agricultural export trade was USD 994.95 billion, out of which India’s share was 1.63% at USD 16.26 billion. India’s share in global agriculture trade is 1.48%.India is a founder Member of the World Trade Organization (WTO). As a Member, Indiahas to abide by WTO rules, including the rules for agricultural trade as contained in the General Agreement on Tariffs and Trade, the Agreement on Agriculture and relevant provisions of other WTO agreements.The Agreement on Agriculture (AOA) applies to basic agricultural products such aswheat, milk and live animals; products derived from them such as bread, butter and meat;and all processed agricultural products. It also applies to wines and spirits, tobacco products and fibers. It does not apply, however, to fish and fish products or forestry products. India’s commitments and obligations are governed by these rules and its schedule of commitments notified to the WTO in 1995 after the Uruguay Round of trade negotiations.India has to file annual notifications of its domestic support and export subsidiesand ad hoc notifications of any interim measures. Tariffs on agricultural products have to be kept within the ‘bound’ or ceiling levels committed in India’s schedule of commitments to the WTO. While no subsidies are prohibited under the AOA, Members have to ensure that these arewithin the limits to which they are entitled and are in accordance with criteria specified in the Agreement for various types of support
Indian agriculture sector
Importance of Agriculture to the Indian
“Everything else can wait but not agriculture”
– Pt. Jawahar Lal Nehru
Why has the contribution been
• More urbanization and employment opportunities in services sectors
• Small land holdings- 1.16ha (2011,individuals and institutions) –which
inhibit large scale mechanization ,and are a less than optimum use of
labor resulting in disguised unemployment .
• Less irrigated area -35.2%(2010)
• Low cereal yield –for 2009-2013 ,it was 2.95 ton/ha ,as compared to 5.83
ton/ha (China) ,4.6 ton/ha (Brazil) , 1.86 ton/ha (Russia) ,and 3.65 ton/ha
• Lack of land reforms ,storage facilities work as disincentives .
• Lack of infrastructure –access to markets
• Government policies – MSP,power subsidies to wheat and rice have
distorted the diversification .
Gross Fiscal Deficit & Revenue Deficit as % of GDP
Gross Fiscal Deficit
• High Fiscal deficit to decrease unemployment has increased inflation .
• High prices oil are cascaded in the supply chain ,leading to price rise .
• Hence ,increased borrowing crowds out the private sector investment .
Fiscal Deficit and Subsidies
• Subsidies form a significant portion of government
• Total subsidies increased from Rs 67,498 crore in 2007-08
to Rs 208,503 crore in 2011-12 .
• Effective subsidies to farmers are 40 to 75 % for fertilizers
and 70 to 90 % for irrigation and electricity.
• Apart from overshooting budget estimates ,they also have
unwanted effects like overutilization of inputs ,leading to
environmental degradation .
• India performs worst amongst BRICS countries .
Source : http://www.thehindubusinessline.com/features/investmentworld/macro-view/underestimating-subsidies/article3266293.ece
Dependence on rainfall
• Monsoon plays an important role in agricultural
• Dependence on rains results in switch to lower
yielding crops like jowar, bajra ,pulses ,etc.
• To produce mare water intensive crops ,groundwater
resources get depleted ,which becomes a sustainibility
• Institutes like ICAR are pioneering low cost biotech
Rising input costs
Trends of Indian Farm Wage Index: Base 2004-05= 100
• Gulati and Saini (2013) examined the trend of rising farm wages for
ploughing, sowing, transplanting, weeding, and harvesting
• From 1995-96 to 2011-2012 ,nominal farm wages increased @ 9.68% p.a.
and real wages @ 3.5% p.a.
• However ,from 2007-08 to 2011-12 ,nominal wages increased @17.5% p.a.
and real wages increased @ 6.9% p.a.
• This also results in increased minimum wages and cost push inflation .
Source: Gulati, Ashok, and Shweta Saini. Taming Food Inflation in India. No. 4. Discussion paper, 2013.
Transmission of Global food inflation and Agri -Trade
• Share of agriculture in India's foreign trade
increased from 5% of GDP (1990-91) to 18% of
GDP (2011-12) .
•Coupled with exchange rate depreciation ,it
results in increased import costs for raw
material ,which is again results in cost push
• Uncertainty in agri-trade policies result in lost
market opportunities .
• AoA with WTO limits ,tariffs ,subsidies ,and
import and export restrictions .
Soil Fertility Rate in India
Source: Soil Nutrient Balance sheets in India: Importance, Status, issues and concerns, 2007
Fertilizers are taking nutrients from the soil more than they are adding
Productivity of fertilizers has plunged from 150 Kg of food grains per Kg of NPK in
1970 to 5 Kg of food grains per Kg of NPK in 2005
Consumption of Urea has increased over other fertilzers resulting in soil deterioration
due to subsidy on Urea
Green Revolution: India’s path to selfsufficiency
The green revolution started around 1965 in India, especially in states of Punjab
India became self-sufficient in food grains
od grain production more than doubled to million tonnes in FY86 from 72.4
million tonnes in FY66
Dependence on monsoon decrease
Food grain production (million
FY66 FY71 FY76 FY81 FY86
Source: Handbook of Indian
Statistics, Aranca Research
Extending Green Revolution
The Bringing Green Revolution in India (BREI) started in 2011, with special focus on
production of rice and wheat
The government used a clustered-based approach, private sector participation and strategic
interventions relating to crop production, water harvesting and recycling
Rice production in Eastern states increased by about 20 percent to 487.6 lakh tonnes in FY12
from 403.2 lakh tonnes in FY10
As population increases, need for innovative schemes like contract farming needed
of High yield
Companies provide R &
D and agricultural
implements to farms
Stable and steady
supply of quality farm
output for companies
Lesser logistics cost for
both, farmers and
Regular and timely
payments to farmers
and credit facilities
Reduces the price risk
fluctuations and saves
land investments for
Food Inflation and Growth
Consumer Inflation in India has returned to
double digit of 10.09% compared with 9.84% a
In response RBI has increased its
policy lending rate by a quarter
percentage each in Sep and Oct
sentiments and growth
Surplus Food Production Wasted
• India produces around 250 million tonne of food grain in a
year, against its annual consumption at 220 million to 225 million
tonne, that means surplus
• Still more than 250 million people go to bed hungry each day
• 61.3 million tonnes of coal storage requirement in the country
against the present capacity of around 29 million tonnes
• Due to lack of adequate storage infrastructure, fruits, grains and
vegetables worth Rs 44,000 crore goes waste every year
• FDI in retail expected to help in developing back-end cold storage
National Food Security Bill
• Currently spending Rs 67,310 crore on
• National Food Security Bill will
increase this by Rs 30,000
crore, which is 4% of the corporate
• The added expenditure will mean a
subsidy of only Rs 3.25 per person per
• At nearly Rs 1.31 lakh crore a year, it
will raise spending on food aid by
nearly a third or 31%
• India’s annual food subsidy burden
could rise to an estimated 1-1.2% of
GDP from 0.8% currently