Why blame George Bush for stating something obvious when our governments have failed to increase farm output to meet demand, which is undeniably rising By Shivshankar Verma

When George Bush cited the growing middle class in India and China for rising global food prices, he should have known that he was asking for it. The Chinese generally do not react, unless the remarks somehow seem linked to Taiwan or Tibet, and wisely chose to ignore Dubya's latest efforts to explain economic theory. We Indians are way too sensitive to remain silent; our parliamentarians are always ready to sense a perceived slight and wadee in with an indignant response.

George Bush has visited this country only once as US president and was apparently impressed with what he saw – a country which is growing at a fast pace, where consumer demand was rising. When consumers in developing countries get more affluent, they start consuming more food. That means demand for food grains will go up. When more consumers enter the middle class, they may reduce grain consumption but will take to more of 'superior' foods like meat. These days most of the meat is produced in industrial farms and the animals are fed mostly grains. Every kilo of meat takes eight kilos of grain to produce, so the demand for grain increases much faster when there is higher demand for meat.

This is basic stuff and doesn't need a Harvard MBA to comprehend. He did not 'blame' Indians for higher food prices, as widely reported in the media. He just mentioned increased consumer demand in countries like India as one of the factors behind the price rise. Bush didn't say Indians eat more than Americans and never suggested that we should eat less. Then what were our netas and commentators shouting at?

We have failed ourselves

Since the advent of reforms, every government has claimed credit for the rise in average income levels and the increasing middle class population. No government has spared any effort in trying to prove that poverty levels have steadily come down. Even a school child will know that reduction in poverty means people are eating more food and the country should produce more food. Yet, every politician in this country has chosen to ignore the fact that growth in food production has lagged population growth for many decades now.

Successive governments have not bothered to come out with a comprehensive reforms initiative for the farm sector. When food prices rise, politicians find convenient scapegoats like external factors, poor monsoons, or even neo-liberal policies if they happen to be from the left parties. They refuse to admit that current policies have failed miserably and the sector desperately needs a new vision. Instead, they shed copious tears when farmers kill themselves and announce liberal debt waivers that never address the farm sector's ills.

To make it worse, continued neglect of our farm sector has started having serious consequences globally. Last year, the government of India targeted wheat procurement of 15 million tonnes. Because of poor crop, it ended up with just over 11 million tonnes. Fearing shortages, the government decided to import wheat and floated international tenders. We entered the market when supplies were strained because of the ongoing decade-long drought in Australia – a major wheat producer and exporter.

The very news of a large buyer like India entering the market pushed up international wheat prices. That scared our decision makers. Wary of allegations, they decided to wait until prices reverted to the earlier levels. But, traders knew that India would have to enter the market at some point and prices continued to rise. Finally, our government was forced to bite the bullet and import at higher prices. In short, the primary reason for the more than 50 per cent jump in international wheat prices last year was India's entry as a large buyer and our bureaucrats' pathetic attempt to beat the market.

This year, it is unlikely that India will need to import wheat. Against a target of 17.5 million tonnes, the country is likely to procure up to 20 million tonnes. That should go a long way in rebuilding wheat inventories and stabilising prices.

Rs2 per kilo rice and the food shortage

The Rs2 per kilo rice is very much a South Indian phenomenon, and it is somewhat surprising why North Indian politicians have not yet copied it. If memory serves right, it was N T Rama Rao who introduced this ultra-populist policy a couple of decades back in Andhra Pradesh. Currently, rice is distributed at that price in Andhra Pradesh and Tamil Nadu and, going by the election promises, will soon be a reality in Karnataka as well.

When rice, which costs an average of Rs10 per kilo is distributed at one-fifth that price, it is natural that a substantial quantity will find its way to the open market. As the price, and quality too – some say, is so low, the biggest customers of this 'rice for the poor' are reportedly the poultry and cattle farm owners in Andhra and Tamil Nadu. Economists say goods priced very low lead to wastages. Can we blame the poultry and cattle farm owners who would gladly overfeed their animals at public cost?

Our policy wonks are glad to blame Bush and his asvisors for diverting all the corn in this world for bio-fuel production. Why do they keep silent when government subsidies lead to wastage of food grains? Why not the finance minister Chidambaram, who called the Bush administration's ethanol promotion policy inhuman, urge his party men and coalition partners in Andhra and Tamil Nadu to stop this state-sponsored wastage?

This is just the beginning

John Holmes, the UN co-coordinator for emergency relief, is reported to have stated that the world is only at the beginning of the food crisis. Food prices, hunger and the unrest that ensue are likely to keep rising for a while. Why? Because, the attractiveness of bio-fuels will only rise as long as crude oil prices remain high.

Unless there is a major technological breakthrough in developing alternative energy sources, demand for hydrocarbon fuels will not decline. Yes, engines will become more efficient and wastages will come down as fuel gets pricier. But, that will only help in reducing the growth in demand. Absolute demand will continue to rise as global economic growth adds more consumers.

High fuel prices are increasingly becoming 'embedded' in our consciousness because the world has accepted 'oil is scarce and we will run out of it' theory. As long as the theory is not proven wrong or until we have access to another affordable and readily available alternate fuel, consumers will be willing to accept high oil prices.

Oil exporters, big oil companies and commodity traders know this and they have no reason to bet against higher oil prices. As the market behavior is 'conditioned' thus, prices will remain firm until there is a fundamental or structural shift like an unexpected discovery of huge hydrocarbon reserves or the invention of an alternate fuel that can readily replace conventional fuels.

Even at the current oil prices, not all bio-fuels are commercially viable. Ethanol produced from sugarcane – like in Brazil and India – is viable even at lower oil prices. But, bio-fuels like ethanol produced from corn or bio-diesel from other vegetable inputs are still not commercially attractive without subsidies. If oil prices rise further, bio-fuels from costlier inputs like corn will become attractive even without subsidies. At higher prices, it may be more lucrative to produce bio-fuel from grains than use as food.

What we must do

The first step is to accept that the current global food crisis is not due to short-term supply shocks like a crop failure. The rise in food prices is because of long-term structural increases in demand – increase in food consumption with rising income levels and improving commercial viability of bio-fuels being the important factors. This realisation should help the government to stop behaving like the proverbial ostrich with its head buried in sand, as if this is a problem that will soon disappear.

Given the sorry state of our public distribution system, it will be challenging to execute effective short term responses. Even while administering more of the old medicine – essentially market intervention through export restrictions, stock controls and increased subsidies – efforts should be made to make the system more efficient and plug leakages. As there will be less opposition from vested political and commercial interests, given the seriousness of the situation, the government should also attempt to try out better targeted subsidy delivery and distribution mechanisms.

In the long term, the government should see higher food prices as an opportunity to revitalise the farm sector. It is undeniable that the farm sector has been largely left untouched by reforms. Forget about reforms, the sector has not seen a decent, wholehearted policy initiative since the green revolution which helped the country exorcise the painful memories of the last major food crisis in the seventies.

With the help of proactive policy initiatives, our farm sector has the potential to emerge as a major global food supplier and help ensure food security. That is the view of none other than M S Swaminathan, the father of green revolution and the voice the government should be listening to the most in matters related to farm policy. When he says we can increase production quickly with small investments, as the country has a rich diversity of secondary food crops and huge base of rural workers, policy makers should listen.

Given the structural shifts in demand and the declining availability of farm land, it may be that food prices will not decline in future. In such a scenario, the best we can do is building supplies to prevent food crises and ensure that the price increases are contained.

Blaming Bush will not get us there!