Food-O-nomics II

In my previous post, I tried to explain the dynamics of food inflation in India and touched upon the factors that influenced food prices. In this post, I plan to wrap that up by looking at what could happen to food prices if some issues are vigilantly addressed. So without wasting any time, let’s look at what these elements are:



1.    Boost infrastructure.



Initially I thought it would be a good idea for the government to start developing farm-to-market infrastructure, especially cold storage and logistics network, but then on 2^nd thoughts, I think its best that instead of government trying to do it themselves (read: scam-alert), they let specialists do it, even if with a profit motive. With FDI in (100% in single-brand and 51% in multi-brand) retail finally being allowed, it is expected that international majors interested in setting up shop in India will heavily invest in setting up “back-end infrastructure.” In fact, the new FDI rules would require them to invest 50% of their total investment (US$ 100million minimum) in back-end infrastructure, including storage, processing, distribution, warehousing, logistics etc. What these heavyweights would bring to the table is not only the much-needed capital, but also technical knowhow that might not have been possible otherwise. What would be the result of this? Higher output of-course! In due time (don’t expect miracles overnight), thanks to unclogged bottlenecks (& minimal waste), not only will the quantity of output rise, but the quality of output will see drastic improvements.

2.   Encourage education among farmers to foster innovation and improve agricultural productivity.

Encouraging more participation in farming and agriculture is another way that the government can increase supply in the food economy. The condition of our farmers (thousands of suicides every year) is known to all (partially thanks to Bollywood). But instead of blaming and criticizing the government (which seems to be in vogue these days), I simply think that if the farmers’ children are given incentives to learn modern Agriculture, perhaps on a tertiary level, then we would have this new generation of farmers who will be technologically more advanced than their parents and will become the leaders of agricultural innovation. Such a trend (on a smaller scale) is already visible in some sections of the economy where individuals are catering to the demand for organic vegetables and fruits, and other niche food items. The key take-away here is that education will lead to development and innovation, and there is a strong case for encouraging education in the agricultural sector. The Indian Institute of Horticulture Research in Bangalore, an institute of the Indian Council of Agricultural Research (ICAR) has developed new techniques of improving the quality of output. Furthermore, innovative practices that enhance efficiency and boost yields have been recommended by the ICAR but due to the bureaucratic bottlenecks, these lab-innovations could never actually make it to the farmers' fields. That being said, it is only fair that I give the government due credit for the fact that they have supported R&D in horticulture in the last 25 years by increasing the R&D budget allowance in every Five Year Plan. That support however gets negated somewhere between the labs & the fields, and as mentioned already, most of the innovations never get to see the light of day. If this broken bridge is resurrected, and more of these innovations are implemented on a commercial scale, there will be a certain boost in output, both in quantity and quality. I personally believe that cultivating education, innovation & productivity should in-fact be among the prime areas of focus for the government because it is no longer just rice, wheat and course grains that are fueling food inflation, but higher protein-based items such as fruits, vegetables, dairy, poultry and meat.


Both the recommendations above, in their own ways, lead to an increase in supply of food. Lets look at a graph similar to the one used in my previous post (Food-O-nomics) and see how an increase in supply affects the demand-supply-price dynamics of the food economy. 

As you can see from the graph, an increase in supply from S to S1 causes the quantity of output to rise from Q to Q2 and also brings the prices down from P to P2. 


It is worth noting that considering the size of India's population and landmass available to farmers, a sizable rise in output can make India a much greater player in the global food economy than what it is today.