The Hindu Business Line : Food inflation and response

For a country such as India, buffeted by food inflation and stagnating farm output growth, the recently released “Agricultural Policies in OECD Countries 2008” should provide food for policy thought. The compulsion to augment internal supplies and rein in prices is greater in the context of ongoing global trade negotiations that demand better market access and tariff reduction. Although agriculture is still a difficult chapter in the WTO’s Doha Developmen t Agenda alongside non-agricultural market access and services, some progress has been achieved in working out modalities for further commitments on agriculture. Amid the slow-moving multilateral process, many countries including India are engaged in new bilateral and regional trade agreements. So, the policy context demands a judicious reconciling of conflicts between domestic compulsions and international obligations.

Global agricultural markets saw strong price increases in the past two years as food demand grew in such emerging economies as China and India and energy prices also moved up. The temporary tightening of supply is the result of a combination of factors: drought in key producing areas, diversion of traditional food-crops (grains, vegetable oils) for production of bio-fuels and increased speculative activity. High prices have surely hurt consumers; but growers have indeed benefited. This has led to a decline in producer support in the developed countries (OECD group) during 2005-2007, the lowest since 1986. Yet, total support (including consumer support and for ‘general services’), actually increased in 2007 to $365 billion from $362 billion in 2006. Notably, in the OECD area, the most recent reduction in support levels has been not so much the consequence of policy changes as of the global price rise. Once prices decline from their current extremely high levels, border protection and price-related domestic support measures might well take a stronger hold again, leading to higher support and more production, and trade-distorting transfers.

High food prices do provide an opportunity for further reform and, importantly, much-needed investment in the farm sector. If farmers are granted greater freedom to respond to market signals, they can become more innovative and competitive. But this pre-supposes a vibrant marketplace for both inputs and outputs. In the absence of such an environment, the OECD report says, it is essential to have policies sharply targeted to address specific low-income issues, as also environmental, animal welfare and other societal concerns in agriculture, which will generally be more effective and equitable than broad-based market interventions. Clearly, we need strong non-price and non-trade policy initiatives and investments to put agriculture back on a growth trajectory.

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