Thought for
the day
“If you can't explain
it simply, you don't understand it well enough.”
-
Albert
Einstein (German, 1879-1955)
Word of the
day
Novitiate (n)
The state or period
of being a beginner in anything, especially religion.
(Source: Dictionary.com)
Shri Nārada Uvāca
Do you find any similarity in the most popular prime time
English News show and popular TV show Big Boss?
Food inflation conundrum
The economic and political commentary in past few months has
emphasized a lot on positive impact of above average monsoon on the Indian
economy, especially food inflation. Most have hoped that bumper crop would help
bring down the persistent food inflation that would eventually lead to much
needed monetary easing.
In past one week, we made an effort to assess the validity of
this argument and found it thoroughly invalid in the current circumstances. After examining the economics of
Indian agriculture, we concluded that food inflation will only accelerate in
next many years, even if things start changing at fast pace from today.
We interacted with a number of farmers in Delhi, Haryana, MP,
Punjab, UP and Rajasthan to understand the economics of Indian agriculture. The
key highlights of our findings are as follows:
(a) In past one
decade, the rise in the price of agriculture produce has lagged the rise in
land prices significantly. Consequently, the yield on agriculture land has
collapsed in most areas. For example, in Delhi, Haryana, Himachal, Punjab,
Rajasthan, Western & central UP and many of parts of MP the yield in now
even less than fixed deposit rates.
Land priced at Rs5-10lac an acre yields less than Rs75000/year
for a medium and large farmer. For a small and marginal farmer the yield is
Rs25000 to Rs50000 per acre/year, excluding the cost of self labor. If we
adjust the yield for one crop loss every three year, lease rent and 24-30%
interest that small and marginal farmer pays, agriculture is completely
unviable business.
If we factor in rising labor cost and lower subsidy in input
prices (fertilizer, electricity, diesel and water) the viability gap will
likely only increase going forward.
(b) A large majority
of farmers in India are landless. Many of these farmers take land on lease. The
rent varies from Rs5000/acre to 50% of produce. A lost crop puts such farmers
in a debt trap that may take up to 5years to get out.
The next generation of landless farmer is therefore least likely
to prefer agriculture over construction or industrial labor. Availability of
agriculture labor is likely to shrink even further from the current alarming
levels.
(c) Given the low
returns, the current generation of medium and large farmers is also not much
interested in taking farming as occupation. Most would want to sell the land or
convert it into non-agriculture land.
Given the uneconomical holding size, low yields, unavailability
of formal credit, and lack of interest in large farmers, mechanization of
agriculture is not happening at desired pace.
In our view, to make agriculture a viable business and control
food inflation on sustainable basis one or more of the three things need to
happen, viz., (a) Substantial rise in productivity; (b) Substantial rise in
price of agriculture produce; and/or (c) fall in price of agriculture land.
…to continue tomorrow
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