Y V Reddy: Agriculture - emerging issues and possible approaches
Text by Dr Y V Reddy, Governor of the Reserve Bank of India, of the 40th Convocation
Address of the Acharya N G Ranga Agricultural University, Hyderabad, 5 June 2008.
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His Excellency, the Governor of Andhra Pradesh and the Chancellor of Acharya N.G. Ranga
Agricultural University (ANGRAU), Shri Narayan Datt Tiwari garu; Vice Chancellor,
ANGRAU, Dr. P. Raghava Reddy garu; Members of the Board of Management of ANGRAU;
Registrar of ANGRAU; Horticultural University Vice Chancellor, Dr. S.D. Sikhamani garu;
Members of the Academic Council of Agriculture and Home Science Faculties; dear students
and staff of this university, respected parents, distinguished guests, media personnel, ladies
and gentlemen.
It is an honour and privilege for me to be with you on this memorable occasion. This is a
convocation address, no doubt, but it is also an occasion to dedicate my address to the
memory of Acharya N.G. Ranga garu. His views on political economy and agriculture have
acquired great relevance and special significance in today's turbulent world of high food
prices and focus on farmers' well-being. You, my young friends, will have a critical role in
resolving the emerging issues relating to agriculture, both in India and globally.
Acharya N.G. Ranga, who was educated in prestigious institutions in the United Kingdom
and was a Professor of Economics at Pachaiyappa's College in Madras University, entered
the Guinness Book of World Records as a Parliamentarian with fifty years of service in
legislative bodies. He was a leading freedom fighter of national stature and a great
propounder, of international stature, of the importance of peasantry and agricultural labour.
His beliefs led him to found the Bharat Krishikar Lok Party and the Swatantra Party along
with Rajaji, which frowned upon the permit-licence Raj. The economic reforms in India since
1991 have served us well and these have, in many ways, followed one of Professor Ranga's
suggestions namely "liberalisation". However, only recently we have commenced realising
the significance of peasantry and rural labour that he had recognised decades ago. We now
realise how critical the situation in regard to agriculture, in particular food prices, is to all
sections of the people, all over the world. In fact, it is uppermost in the current agenda of
central banks around the world in the context of price stability and inflation expectations. I
believe that the distinguished faculty and the knowledgeable students of this university would
appreciate the contemporary relevance of Professor Ranga's ideas and they will commit to
play a historic role in resolving the issues that confront us today.
At the outset, my hearty congratulations are due to the Graduating Class of 2008, who would
be receiving their hard earned degrees and awards. I also compliment the staff members
who have received awards and the entire faculty for their efforts in imparting high quality
education and inculcating good values to shape the personalities of our young generation. It
is the endeavour of the students and the staff, I understand, that helped this agricultural
university in winning the ICAR's Best Agricultural Institute Award two times in quick
succession and also the ICAR Best Performance Award of Students in the ICAR All India
Competitive Examinations twice in the last few years.
Dear new graduates, the Reserve Bank of India (RBI) has an important stake in the subjects
that you have been trained in. Our main objectives relate to maintaining price stability and aid
the process of generating output and employment. Agricultural prices are really critical for the
household budgets of about a billion people in our country. About sixty per cent of our work
force in India is dependent upon agriculture and related activities. Though most policy issues
in this regard fall within the domain of governments and universities like yours, the RBI has to
monitor the developments and aid public policy through the financial system - especially in
terms of price stability, financial stability, financial inclusion and credit delivery. In this
background, while there are many issues in agriculture, I will confine to a few. I will briefly
explore the serious problem of food that is confronting the world today. This is followed by a
narration of the Indian situation. In particular RBI's approach to agriculture is described.
Food prices as a global issue
In recent months, there has been a phenomenal increase in food prices globally. To
illustrate, while the global food price index rose on average by 10.5 per cent in calendar year
2006 and by 15.2 per cent in 2007, it has increased by a substantial 40.8 per cent in the first
four months of 2008 compared to the corresponding period of the previous year. According
to the Food and Agriculture Organisation (FAO), 37 countries in the world are presently
facing food crisis, 31 of which are in Africa and Asia. Last week (end of May) the World Bank
unveiled a US$ 1.2 billion fast track funding facility to help combat the impact of rising food
prices on the poor. World leaders are currently (June 3-5 in Rome) meeting for a High-Level
Conference on World Food Security hosted by FAO. The summit comes at a time when food
prices have registered an increase of 55 per cent, in the last twelve months. The agenda for
the summit includes measures relating to augmenting crop production, trade, aid, diversion
to bio fuels and increasing investment in agriculture science and technology. The overall
purpose of the High-Level Conference is to address food security issues in the face of
soaring food prices and the new challenges of climate change and energy security. The
objective of the Conference is to assist countries and the internationalcommunity in devising
sustainable solutions to the food crisis by identifying the policies, strategies and programmes
required to safeguard world food security in the immediate, short and longer term.
Undoubtedly, the current global food situation is very serious and hence, we need to
understand the reasons for such dramatic increase in food prices in a short period.
First, it is said that rapid growth of China and India is lifting standards of living of millions of
people every year thus putting enormous pressure on global demand. It is also argued that
the food basket has changed and is contributing to higher demand. However, a closer
scrutiny would reveal that enhanced demand cannot explain a sudden spurt in prices in one
year since these two economies have been growing at elevated and accelerating levels for
over a decade, if not over two decades. Further, China has been a net wheat exporter and its
per capita meat consumption had reached western standards by 2005. India is an exporter or
an importer at the margin, except in regard to vegetable edible oils where it has been a
consistent net importer in recent years, and also to a small extent in regard to pulses.
Second, the drought conditions, possibly induced by climate change, in some countries like
Australia and Ukraine, may provide some explanation for price increases. It is also likely that
dwindling stock levels observed in several countries could have exacerbated the scarcity
conditions. Further, administrative measures in some countries to restrict or discourage
exports of food products might have stabilised prices in those countries but could have
enhanced the prices in some other countries. However, these reasons do not fully explain
the widespread global increases in prices of all the commodities at the same time.
Third, it is argued that increases in energy costs are resulting in cost push inflation but
contribution of energy costs to overall costs in agriculture may not explain the huge increase
in food-prices.
Fourth, related to the current elevated energy prices, there has been diversion of corn and
edible oils to bio-fuels, which are significantly influenced by policy mandates. Very clearly this
diversion to bio-fuel is a policy induced new reality which coincided with price escalation in
precisely those products and hence, is noteworthy.
Fifth, the financialisation of commodity trade and current extraordinary conditions in global
financial markets could have influenced the spurt in prices. The recent reductions in interest
rates in the U.S. and the injection of liquidity have resulted in investors seeking new avenues
such as commodity markets, in view of the turbulence in financial markets and the low
returns in treasuries. The relatively easy liquidity and low interest rates, by themselves, make
holding of inventories attractive and thus induce greater volatility to commodity markets. The
weakening of the U.S. dollar is also advanced as a reason for the recent volatility in
commodity markets, including food items. It is evident that this phenomenon is also now
coinciding with the across-the-board rise in food prices.
In brief, while there are demand and supply side pressures on food items, there is
considerable merit in the arguments that recent extraordinary increases in food prices are
closely linked to the public policy responses to high energy costs in advanced economies,
and the turbulence in financial markets and financial institutions. It is said that the impact of
such policy induced diversion of food to bio-fuels is significant at this juncture and reflects a
preference to fill the fuel tanks of automobiles rather than fill the empty stomachs of people.
Similarly, it is sometimes held that the weight accorded to financial stability in public policy
may now be at the expense of stability in real sector - especially of sensitive commodities
like food. At the same time, there is a general consensus that public policies in regard to food
in many economies around the world have not provided adequate incentives to farmers to
increase the supply of food and other agricultural products to comfortably match the growing
demand over the medium term.
As regards prospects for the near future, there are severe imponderables, especially relating
to the path of future prices of oil; progress in restoration of normalcy in financial markets,
especially currency markets; and the extent of slow down in the U.S. economy and its
consequential impact on the world economy as a whole. Further, public policies in regard to
food, especially diversion to bio-fuel; cross border trading; subsidies; and replenishment or
use of buffer stocks; would impact the evolution of prices globally. However, the redeeming
feature is that supply response in regard to food grains is possible in a year or two. As per
FAO estimates, wheat output is set to achieve a new record in 2008, though against the
backdrop of deeply depleted stocks. Global production of rice in 2008 is expected to be
marginally better than the previous year and hence, some depletion of stocks held may be
expected. Global output of edible oil is anticipated to fall by about three per cent in the
current year, and according to FAO, oil seeds and edible oil prices are expected to remain
firm.
What is the medium term to long term outlook for food prices at the global level? According
to the Agricultural Outlook from OECD and FAO, while agricultural commodity prices should
ease from their recent record peaks, they are expected to average well above their mean
level of the past decade. Two days ago (June 3rd) U.N. Secretary-General said, in a speech
at the High-Level Conference on World Food Security hosted by FAO that world food output
needs to rise by 50 per cent by 2030 to meet rising demand.
The implications of such a scenario in global farm outputs and prices for us should be very
clear. With rapid economic growth in our country, the food-consumption will rise in an
unprecedented fashion since we are over a billion people. The food basket will also change.
We have to augment food supplies within the country since marginal requirements or even a
perception of shortfalls in domestic supply in our economy can have significant influence on
world prices. As we have over half of the work force depending on agriculture, and as we
have scope for increasing productivity in agriculture, there is no reason why we cannot
ensure food security for our country, at a minimum. Indeed, India can become the
"Annapoorna" for the world and I feel that Andhra Pradesh can become the "Annapoorna" for
India.
In this regard, I can do no better than quote Dr. M.S. Swaminathan, one of our esteemed
agricultural scientists, "India has the technological and economic capability to demonstrate
how farming system can be adjusted to different weather patterns. It is hoped that at the
Rome Conference, Indian representatives will serve as a bright affirming flame in the midst of
the sea of despair we see around us".
Indian situation
Let us now focus on the Indian situation. At the outset, it must be recognised that increase in
food prices in India in recent months has been only a fraction of that observed in many other
countries. In particular, the global prices of wheat and rice had almost doubled between
January and April 2008, while in India the increase has been far less than one tenth of that.
In a sense, this vindicates the long-standing public policy of emphasis on a degree of food
security in our country, especially due to the vulnerability of large segments of the population.
Yet, the prices of food articles spurted in India also in 2006 and 2007. The average annual
increase in the Wholesale Price Index (WPI) of food articles was around 7.0 per cent during
that period. While increase in the food prices was led by wheat (13.0 per cent) during 2006,
rice (6.0 per cent) and edible oil (13.1 per cent) also joined in the price rise in 2007.
However, food prices have exhibited some moderation during 2008. The Wholesale Price
Index of food articles during 2008-09 (up to May 17, 2008) has increased by around 2.5 per
cent as compared with the corresponding period (3.1 per cent) in the previous year.
Of greater interest may be the current outlook for individual commodities, which appears
positive for wheat, with significant improvement in procurement. In regard to rice production
which stagnated since mid-90s, some turnaround is observed since 2005-06. The prices of
edible oil increased sharply in 2006-07 and spiked during 2007-08. However, some
moderation has been observed during the current financial year so far. Due to stagnant
levels of production in pulses the demand-supply gap is met through imports, but domestic
prices saw a spurt before seeing a decline during the last one year. Prospects for sugar, of
which India is amongst the largest producers, appear bright for the current year, since
production has risen substantially since 2005-06.
Overall, some abatement of global prices, indication of better domestic supplies and addition
to our buffer stocks, along with the series of measures already taken by the government, on
the supply side, are expected to yield results in the months to come. Over the medium term,
however, the National Food Security Mission launched about two years ago should yield
positive results.
RBI's approach to agriculture
RBI's major objectives are to maintain price stability and maintain growth momentum,
especially employment generation. In this endeavour, agriculture plays a critical role since
agricultural commodities have a relatively significant weight in price indices in our country
and also in anchoring inflation expectations. In terms of employment also agriculture
dominates, accounting for about sixty per cent of the total, while in terms of GDP its share is
less than a third of that. However, the policy space available to RBI is basically confined to
managing aggregate demand through appropriate stance in regard to growth in money
supply, interest and exchange rates and, to some extent, flow of credit through banks. Yet, in
view of the criticality of agriculture, RBI articulates its approaches to agriculture through the
Annual Reports. Let me summarise briefly, the analysis and the views as expressed by the
Directors of the RBI in their Annual Reports during the recent past - say last five years.
(a) Since the mid-1990s, the growth of the agricultural sector has not only been low, but
also volatile. The crop yields have shown an unstable trend in recent years. An area
of growing concern has been the continued incidence of localised droughts even in
good monsoon years. In recent years, the food consumption basket is getting
diversified towards value added food products such as meat, poultry, fish,
vegetables and fruits. It is important for production to respond to these shifts in
consumption.
(b) The share of agriculture in the total gross capital formation (GCF) in real terms has
been declining in recent years mainly on account of steady erosion in the share of
public investment. The inadequacy of private investment in fulfilling the capital
requirements of agriculture has raised concerns about the state of the rural
infrastructure, which could turn into a binding constraint on growth.
(c) Several initiatives have been taken in recent years to improve the agricultural credit
delivery mechanism. However, some bottlenecks continue to affect the flow of credit
to agriculture. To attain a higher growth in agriculture, the major areas requiring
attention in the financial sector are, inter alia, spread of insurance against crop
losses and facilities for meeting the needs of the rural economy. Newer forms of
credit assessment and risk management systems may also have to be put in place,
besides upgrading skills, and ushering in changes in attitudes and mind-sets.
Information technology has to be used to facilitate transformation in various
processes of rural credit.
(d) Efficient and well developed agricultural markets are necessary to enable farmers to
deal with inherent risks associated with the perishability of their produce, to get
remunerative prices, and to secure smooth access to input supplies. Towards these
objectives, the agricultural marketing system in the country needs to be integrated
and strengthened. Given the several risks that farmers face, such as future price
and monsoon conditions, there is a need to put in place appropiate risk mitigation
policies. Accordingly, a comprehensive public policy on risk management in
agriculture could promote a more efficient and commercialised agriculture that could
also provide relief to the distressed farmers. Rural infrastructure, which includes
agriculture research and extension, transport, electricity, and storage structures, not
only enhances the productivity of physical resources, but also helps in supply chain
management and value addition in agriculture.
(e) Greater focus needs to be placed on agricultural research in the coming years as
the success so far has been restricted to select crops. Efforts to modernise and
strengthen the agricultural research system, including the agricultural universities,
need to be intensified. The Green Revolution has been the cornerstone of India's
agricultural development, transforming the country from one of food deficiency to
self-sufficiency. The time is now ripe for a second Green Revolution which will lay
emphasis on diversifying the agricultural sector further in order to capture new
market opportunities.
As regards flow of credit, in which RBI has a role primarily as the regulator of banking
system, it has been the RBI's endeavour to enhance credit flow to agriculture by removing
the bottlenecks in credit delivery. The RBI, on its part, is intensifying efforts in revitalising the
rural cooperative credit system, strengthening regional rural banks, providing incentives to
commercial banks for investments in rural economy and ensuring an adequate and timely
delivery of credit at a reasonable price. The programme for financial inclusion initiated by the
RBI in collaboration with banks and several State Governments, by adopting modern
technology, is being intensified and expanded.
Andhra Pradesh
Before concluding this section on India and RBI, let me hasten to add that Andhra Pradesh
has shown a visionary leadership by putting irrigation and agriculture at the top of agenda for
public policy. Andhra Pradesh has anticipated the emerging criticality of agriculture and
designed a policy that is now being followed by many other states in India. RBI has been
having the privilege of very close cooperation and coordination with the Government of
Andhra Pradesh.
Conclusion
Let me conclude by reiterating that globally demand for agricultural products will be very high
for the next two to three decades. India will play a dominant role in contributing to both global
demand and global supply. Agriculture will be increasingly more diversified and not confined
to food crops. Scientific agriculture is and will be the key for the future. The path ahead is far
from smooth, and traversing this path requires constant efforts, vigilance and dedication. I
am sure that the knowledge gained from your education will help you in moving forward in
your endeavours in life, with determination and confidence.
My dear young graduates in agriculture and horticulture, you have a bright - a very bright -
future since India, indeed, the world beckons you. Make the best of it by working hard and
purposefully and at the same time being happy. Remember, the ultimate goal is your
happiness and the final judge of how you achieve it is your own conscience.
I pray that your continuing commitment to the cause of agriculture will be an inspiration and a
matter of pride to the future generations.
Thank you.