The Pre-Weekend Rant a.k.a Why I Pay More For My Daily Dal-Roti

The BBC yesterday reported news of World Bank (“WB”) assistance to India in the form of a $600MM loan package aimed at improving [?] access to financial services by India’s poorest farmers. This was part of the WB’s “Strengthening Rural Credit Cooperatives Project” that supports our Government’s program to reform and revitalize India’s rural Credit Cooperative Banks (“CCB”).

Quoting extracts from the official bank release, “Since the early 1990s, India has introduced impressive financial sector reforms that have resulted in increased competition, diversification, openness, and depth. Yet, India’s rural population still has limited access to finance from formal sources, relying instead on extortionate money lenders. The problem is particularly severe for small and marginal farmers, who are among the poorest of India’s rural dwellers farming, respectively, less than one acre and between one and four acres of land. World Bank estimates suggest that some 87 percent of marginal farmers and 70 percent of small farmers have no access to credit from a formal financial institution.”

While at one level, I am extremely happy – after all $600MM translates into a little over Rs. 2,400 crores and at an average loan outstanding of (say) Rs. 500,000 per farmer (a gross overestimate by my account and I am happy to err on the side of caution here), that is like saving or at least improving the lives of nearly 48,000 farmers, not to mention cascading benefits that include not having to watch the likes of a Barkha Dutt wannabe mouthing uninformed platitudes off a teleprompter, reporting live from Kurnool or Mandya to boot.

However, this is not what this rant is about. Just this morning, I read about India planning to import an additional 1 million tones of wheat through our State Trading Corporation (“STC”). The STC has already tendered overseas for the import of 5.5 million tones of wheat – shameful is it not, considering we were once a net exporter of this grain. We have just taken a huge begging bowl for our collective national stomach!!!

On the other hand, we have food inflation, currently running at circa 20% according to recent Morgan Stanley research estimates, with food grain inflation at 10.1% compared with 1% in FY2004. Shocking is it not, a 10x rise in grain inflation in three years – and this was caused by structural demand and supply side problems including a clear deceleration in supply side growth.

Playing to the gallery, and I will give credit to the UPA government nonetheless, relief packages totaling over Rs. 16,000 crores have been announced by the government together with an increase in the budgetary allocation for agriculture and an additional Rs. 24,000 crore plan for the farm sector. However, I agree with a view that this pressure is likely to persist in the near-medium term.

The MS report also said food grain output has actually decreased by 0.1% y-o-y for the last 5-years compared with a 1.3% growth in the 5-years ended March 2002. Average growth in grain production has not kept with population growth. Vegetables and fruit growth has declined to 2.5% in FY2001-06 compared with 5.5% in the 1990s and milk production has declined to 3% from 4.3% in the same comparative periods. Food imports in calendar year 2006 have risen 32% Y-o-Y, a majority of it caused by wheat imports.

What has caused this? Firstly, complete apathy resulting in low spending for agriculture related infrastructure. In a country where 2/3 of the population subsists on a sector that contributes to 20% of GDP, this is criminal. The infrastructure I am speaking about are of course warehouses, distribution networks, etc – the lack of which lead to losses on account of wastage, pilferage, perishing, rodents, theft and a myriad other factors.

Next up is inadequate spending on irrigation – statistically, ~40% of India’s farm land is irrigated with average growth in land under irrigation declining to 1.5% in the 1990s and through 2004 compared with 2.4% in the 1980s and 2.7% in the 1970s.

Thirdly, agricultural land holdings are highly fragmented. About 60% of the farm land area is with marginal, small and semi-medium farmers (about 107 million land holdings). The average land size per farmer is only 0.005 square miles (1.4 hectares). As pointed out in the Fifth Report of the National Commission on Farmers, these resource poor farmers are unable to benefit from the power of scale at either the production or post-harvest phases of farming. These farmers are also more vulnerable to adverse weather conditions and high levels of indebtedness. Hence, they are unable to increase investments to improve productivity and growth.

Lastly, the government’s fertilizer policy has distorted the trend in fertilizer consumption and therefore the mix of soil nutrients. While the government subsidizes nitrogenous (N) fertilizer and has decontrolled phosphatic (P) fertilizer and potassic (K) fertilizers, the prices of decontrolled fertilizers are relatively higher than urea (controlled fertilizer). Farmers therefore use more urea, which has a higher nitrogen content. The result is that the NPK ratio in India has deteriorated resulting in low productivity. According to the Planning Commission of India, this is one of the proven and well documented reasons for stagnation in the productivity and production growth rate since the early 1990s. Hence, it is imperative that the imbalance be corrected. Although, the private sector players are trying to educate farmers, the government also needs to adjust the fertilizer pricing policy to encourage farmers for making this shift in fertilizer use mix.

Small wonder then – my taxes have pretty much been used up in domestic oil subsidy and the farming subsidy as well as paying interest on the government’s external borrowings that there is no money left for development expenditure including agriculture. Interestingly, the Government’s policy towards agriculture has proven to be ineffectual so common sense dictates that more private participation be encouraged. However, that also does not seem to be forthcoming.

And lest I forget, someone ought to remind the WB that access to credit was never the burning issue. Our farmers are unable to do anything productive with the credit that they availed and could not repay their loans. Probably rectifying the structural issues might help. Of course that’s just my opinion. . .

In the meantime, I will plan for a 5-10% Y-O-Y hike in my household’s annual grain and pulses budget.

Cheers
S

PS: In other news, defunct pop group Spice Girls announced their re-union tour. Fabulous, since in the absence of enough food, we could all get by singing ‘Oxygen’ (dubbed in 20 vernacular languages, of course)!!!