The failed harvest of food policy

A spectre haunts India, that of stagflation. But if, as appears increasingly true, globalisation has triggered the problem, it also offers a possible consolation: the problem is global. Certainly, the rest of Southasia is in the same situation, since food and energy prices worldwide show no signs of falling. And given how much pride Indians take in repeating the mistakes of the West, even as they suffer from the same problems, it will perhaps pacify some to know that the larger world shares their fortune. Stagflation is the name that economists give to an economy that is slowing down at a time of rising prices (stagnation + inflation). For the first time, certainly since the liberalisation of the early 1990s, economic growth in India is decelerating just when record inflation is ripping through the budgets of the poor and the salaried classes alike, giving painful headaches to the ruling coalition in this election year. This is not what economists are typically trained to expect: normally, prices rise with growth and falling unemployment, and they fall with a recession and rising unemployment. Even in the West, to get both rising inflation and growing unemployment simultaneously was long an anomaly, at least till the oil-price shocks of the 1970s.

According to the latest data released by the Indian government, inflation is currently at almost eight percent per year – the highest in four years. Retail prices have risen much more, though it is important to remember here that services – including health and transport – are not included in calculations of the Indian inflation rate. The rise in food prices is even more serious. The retail price for rice, for instance, has gone up by 20 percent over the past year alone, and the prices of certain pulses have risen by the same percentage. Most disturbingly, prices of edible oils – in which India was self-sufficient a decade ago, but which it now largely imports – have gone up by 40 percent during that past year. In all, the ruling coalition currently has good reason to be anxious, especially in this election year. Few statistics are helping out the mood. Recently released data indicates that industrial production increased by just three percent between March 2007 and March 2008; the corresponding period the previous year enjoyed a rate as high as 14.7 percent. The slowdown in the capital-goods sector – through which investment is made in heavy machinery and machine tools involved in the production of other machines, and which is always an early warning signal since it most accurately indicates business expectations – has been quite dramatic: from 16.3 percent growth in 2006-07 to just 2.1 percent in 2007-08. Almost as portentously, the consumer-durables sector, growing at 5.3 percent in 2006-07, has decelerated to -3.1 percent this year. Finally, there is a perceptible fall in the rate of growth of all of the key infrastructure industries, including coal, electricity and petroleum-refinery products. Against this backdrop, Finance Minister P Chidambaram's repeated reassurance that "the India growth story is here to stay" has a hollow ring to it.