The Great Onion Crisis and Other Agricultural Red Flags

As my colleague Madhavi Bhasin noted, Indian consumers are in tears and government officials are juggling a political hot potato as food prices climb sharply.  The increase is particularly evident in the cost of produce, lead by onions, the country’s most widely-eaten vegetable.  Onion prices have doubled over the past year, while the overall annual food inflation rate hit 17 percent earlier this month.  Rising food prices, in turn, are driving the general inflation rate, which reached 8.4 percent in December.  The specter of runaway inflation has caused foreign investors to pull out some $900 million from Indian equities this month alone, and has led the central bank to raise interest rates seven times over the past year.

The spiraling of food prices poses a serious blow to the legions of poor in the country, who typically spend half of their meager income on food items.  It has also put Prime Minister Manmohan Singh’s already beleaguered government further on the defensive.  Blaming the food shortages on crop damage due to unseasonal rains, the government has sprung into emergency action by banning the export of onions, lentils and non-basmati rice, while expediting onion deliveries from Pakistan and China.  A crackdown on price gouging and hoarding has also been launched, and the supply of heavily-subsidized food increased to the public distribution system.  The crisis also claimed its first political casualty when Food & Agriculture Minister Sharad Pawar was stripped of part of his portfolio two weeks ago.

Short-term measures, however, will not address the roots of India’s food crisis.  Long in the making, the real problems extend far beyond a spike in spot prices caused by variable weather and their resolution will require much more than changes in the Cabinet lineup.  Indeed, the public’s outcry over the price of onions and other vegetables has overshadowed two more fundamental issues: 1.) At a time when India is a growing technology power, why is the national economy – and indeed the very livelihood of so many Indians – still so heavily dependent upon the vagaries of climate?  2.) Why does one of the world’s top agricultural producers – not to mention a country that is becoming a key link in globalized supply chains – have such difficulty in effectively distributing output?

To be sure, India is not the only emerging economy wrestling with serious inflationary pressures; price levels also have risen markedly in the BRIC siblings of Brazil, China and Russia.  Earlier this month, the UN Food and Agriculture Organization announced that its global food price index surpassed the peak set in 2007-2008, when sharp price increases led to violent unrest across the developing world.  One expert foresees spreading global food shortages and political turmoil.  And world prices for other commodities, like oil and raw materials, are climbing, too.

India, obviously, is not immune from these external forces.  Yet its inflation trends are substantially higher than in other emerging countries; moreover, much of its food problems are home grown.  The agricultural sector is a tale of unrealized potential.  As the New York Times noted a few years ago, “with the right technology and policies, India could help feed the world.  Instead, it can barely feed itself.”  In terms of overall farm output and the supply of arable land, the country is second only to the United States.  It is the world’s largest producer of milk and milk products, and the second largest grower of wheat, rice, sugar, corn, onions and cotton.  It is also Asia’s largest supplier of soybean meal. 

During the famed “Green Revolution” of the 1960s and 1970s, the introduction of high-yield varieties of wheat and rice greatly increased crop output, enabling the country to achieve self-sufficiency in food grains and reduce rural poverty.  Yet India is once again struggling to feed its growing numbers.  Approximately a quarter of the population is malnourished and annual per capita food consumption has been declining for years – a real oddity for such a high-flying economy.  In the past decade, the country has more often than not failed to meet annual food grain production targets, and the government spends almost twice as much on food imports than it did less than a decade ago.  Tellingly, Punjab state, India’s granary, ranks “seriously low” in the Global Hunger Index that was just released by the International Food Policy Research Institute.

Agriculture is a chronic underachiever vis-à-vis the rest of the economy.  More than half of the workforce is engaged in farming, yet the sector generates only one-sixth of total economic activity.  While productivity climbs in the manufacturing and services sectors, it has lagged considerably in the agricultural field for the past two decades.  Moreover, the sector does not compare well internationally.  Per-hectare rice yields are half of China’s level; they are also lower than in the country’s less prosperous neighbors in South Asia.  As Prime Minister Singh acknowledged last year, the country’s “agricultural productivity still ranks far below the best in the world.”

For a country that is making its mark on the 21^st century in a variety of fields, much of the national economy still disconcertedly depends upon a millennial-old climatic pattern.  About 60 percent of irrigation needs are provided by unpredictable monsoon rains – the arrival, intensity and distribution of which are obsessively tracked during the summer months by farmers, traders and government officials alike.  The monsoon’s singular economic importance was underscored last year when the head of the central bank revealed that a poor monsoon would wreck havoc with the monetary policy measures he was trying to effect.

Both Dr. Singh and his Cabinet Secretary, K.M. Chandrasekhar, argue that doubling agricultural productivity from its current two-percent annual clip is a prerequisite for achieving double-digit economic growth.  Yet public spending on agricultural infrastructure was neglected in the 1990s, and though government expenditures have increased in recent years they are focused more on subsidies and welfare schemes than on productivity-enhancing investments such as irrigation systems and agricultural research and extension.  For example, Singh’s headline initiative for the rural economy is a costly program ($8.5 billion in current annual expenditures) that guarantees a hundred days of annual employment for adult members of rural households who are willing to do public-works related manual work at minimum wage.  And 20 years ago, when Singh was India’s history-making finance minister, he tried to end the government’s expensive program of providing heavily-subsidized urea to farmers.  But the program has continued to survive even though he is now prime minister, leading to such an overuse of the fertilizer that the soil in many areas of the country has been seriously degraded.

India’s agricultural problems also extend to the back end of the supply chain.  The country has an elaborate but grossly inefficient and corruption-riddled food procurement, storage and distribution system.  Due to inadequate storage facilities, nearly a third of fruit and vegetable output and a tenth of the grain harvest is destroyed each year by rot and rodents.  According to the government’s own estimates, 1.3 million metric tons of grain rotted in storage between 1997- 2007.  Last August, the Supreme Court issued a strongly-worded ruling critical of the government’s food management policies and ordering it to distribute food grain reserves to the poor rather than allow them to spoil in storage.  Beyond building increased storage capacity, real reform will only come about when the government dismantles its “food raj” and allows greater private-sector involvement in the agricultural sector.

Surging prices for onions and other agricultural commodities have laid bare long-festering problems in the farm economy.  Prime Minister Singh would cement his legacy if he were to devote his remaining time in office to transforming the agricultural sector in the same way he energized other parts of the economy while he was finance minister in the early 1990s.  Back then, he had the strong support of Prime Minister P.V. Narasimha Rao.  Singh now occupies the Prime Minister’s Office himself, but one wonders whether he can call upon the political support of his own Cabinet (let alone Sonia Gandhi) in effecting the massive reforms that are presently required.  Much of India’s prospects will hinge on whether he can.