Friday, January 07, 2011

Food crisis threatens India

In a country where cost of onions has toppled two governments, Singh has to act fast.

By Jason Overdorf
(GlobalPost - January 7, 2011)

NEW DELHI, India — Alok Kumar, a 30-year-old father of two, is worried. Though the monthly salary he earns as a chauffeur in New Delhi amounts to about half the sum the average Indian earns in a year, high prices have forced him to stop giving his children their allowance and eliminate essentials from his family's diet.

"We used to live on 3000-4000 rupees a month, and that has gone up to as much as 13000," Kumar said. "At home we don’t even use onion and garlic now. Not at all! That has made the food bland and tasteless. Yes. But what else can we do? We have no way out. We are helpless.”

Kumar is hardly alone. The specter of another food crisis has the whole world nervous. But in India, skyrocketing food prices threaten to send the entire economy into a tailspin, as the government struggles to balance growth and inflation — and create a safety net for the millions still mired in poverty.

Government data revealed on Thursday that India's food inflation topped 18 percent for the week ending Dec. 25, with vegetables prices up more than 50 percent from the same period last year. The steep increase came as a surprise to economists, who had predicted a moderation in prices due to last year's good monsoon.

For India, a spike in food prices means real suffering. But a prolonged and seemingly unstoppable rise in the cost of basic commodities like the one India has witnessed over the past two years could have farther reaching effects.

"If food prices rise, wages go up because workers will demand high wages," said Dharmakirti Joshi, chief economist at Crisil, the Indian arm of Standard & Poor's. "Wages going up make cost of products go up, and manufacturers will try to pass it on to the consumer. It's called a wage-price spiral."

That's grim news for Prime Minister Manmohan Singh's United Progressive Alliance (UPA) government, which has already seen its approval rate plummet. According to a recent India Today/AC-Nielsen poll, the UPA has since August fallen behind the opposition in nearly 20 percent of the parliamentary constituencies it won in 2009. In a country where economists track inflation every week, instead of every month, and the cost of onions has brought down two governments, that means Singh has to act fast. The trouble is, there may not be anything he can do.

“We are not sure whether we have all the tools in our hands to control food inflation,” former Finance Minister P. Chidambaram, who is now the home minister, said earlier this week.

Since coming to power for its first term in 2004, the UPA has sought in vain for "inclusive growth" that will bring the rural poor out of poverty as rapidly as it creates wealth for the elite and middle class. The stopgap answer has been social welfare programs like the Mahatma Gandhi National Rural Employment Guarantee Scheme (NREGS), which ensures that rural laborers get 100 days of work per year. But economists argue that the NREGS has only driven up prices, especially for items like milk, eggs and vegetables, as the poor begin to buy better food and change the ratio of demand to supply.

Now, to avert a crisis, the government has no choice but to increase the wages paid under the scheme, even while the central bank tightens monetary policy to rein in inflation. Essentially, India's politicians are driving up demand at the same time that its fiscal authorities seek to curb it. Thus, the same day that the gaudy inflation numbers came out, Rural Development Minister C.P. Joshi announced wage increases of 17-30 percent for NREGS workers, and economists pushed the Reserve Bank of India (RBI) to add another hike to the 150 basis points it has boosted its benchmark lending rate since mid-March.

The bottom line: India will have to sacrifice growth to stave off inflation. But tightening money supply to slow demand for fuel and concrete may not be enough to avert a food crisis.

"It's going to be a very difficult balancing act for the government to maintain growth expectations over 8.5 to 9 percent," said Shubhata Rao, chief economist at Yes Bank. "Some growth will have to be compromised in its focus toward inflation management."

Complicating matters, the very reason that India was able to weather the global financial crisis may make it more vulnerable to the food crisis.

India's economic growth is driven by domestic demand — not exports — so India didn't blink when the United States hit the skids. But that same domestic demand, fueled by the rising incomes of the middle class and government spending on the poor, has put new pressure on the supply of oil, steel, cement and everything else. And the meltdown elsewhere has pushed hot money into India, further feeding the fire.

In agriculture especially, economists say, supply has not kept up with demand.

The core problems are poor supply chain management, stagnating investment and diminishing returns from the green revolution's prescription of chemical fertilizers, pesticides and heavy irrigation. But some agriculturalists argue that these issues are exacerbated by the current attempts to solve them — by dismantling government-regulated pricing, creating a commodities futures market and encouraging industrialized agriculture. Thus, while pro-market and anti-industry experts alike blame middlemen for exaggerating the price rise by hoarding items like onions, there are deep divides over what action should be taken.

On one hand, market reformers argue that big retail — and foreign players like Walmart — must be allowed a freer hand in Indian agriculture to encourage investment and streamline the supply chain. On the other, left leaning farmer advocates say that the government's "market mantra" and politicians' dependence on traders for campaign financing has prevented timely and efficient moves to curb profiteering.

"The country does not face a constraint on the supply front," said Devinder Sharma, a farm policy analyst. "If it is happening it is because the middleman is making a killing."

Whoever is to blame, no country fears skyrocketing food prices more than India, where some two-thirds of the billion-plus population lives hand to mouth.

“We are barely managing because of the price rise," said Jai Chand, a 32-year-old security guard. "My children have become thin because we can’t give them enough milk. We eat vegetables once a day and sometimes not even that."

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