our consumption. global food markets are notoriously thin, and even the mere signal of a large consumer like india entering the market can spike up prices. moreover, in some commodities such as wheat and sugar, indian prices have been higher than global prices ( chart - 8 ) suggesting that even if imports could improve domestic supply, they would not soften inflationary pressures. bis central bankers ’ speeches ( v ) financialisation of commodities – a new source of price pressure 23. some analysts contend that speculation in commodity futures has been a key driver of global food inflation in recent years. in general, there has been a marked increase in financial investment in commodity markets, relative to both global gdp and physical commodity production. do activities in commodity futures market reflect genuine needs of hedging? does speculation systematically influence the commodity prices and lead to increased price volatility? these are questions that are as yet largely unsettled in academic and policy discussions. at any rate, the financialisation channel is often perceived to have magnified the impact on prices of the disequilibrium between demand and supply, thereby weakening the role of fundamentals in the price formation process. 24. in india, prices of several commodities which are not traded on the commodities exchange, such as fruit and milk, have significantly increased in the recent period. moreover, certain commodities that were banned for trading in 2007, such as rice, wheat, tur and urad also exhibited price increases subsequently. even after the ban imposed on trading of sugar in 2009, sugar prices had increased considerably. evidence of any relationship between futures market activities in commodities and their spot prices is ambiguous. nonetheless, this needs close monitoring and certainly further research. iv. addressing the challenge of food inflation 25. having discussed the sources of food price pressures, let me now turn to how we may respond to the challenge of food inflation. ( i ) raise agricultural productivity 26. the green revolution, entailing adoption of high yielding variety ( hyv ) seeds in the mid 1960s and the use of the fertilizer - pesticides - irrigation package, resulted in quantum jumps in productivity ( i. e. output per acre ), especially of rice and wheat. by the early 1980s, productivity across all major crops had peaked, but the momentum had slowed thereafter. consequently, per - capita availability of food grains, especially of rice and wheat, has started declining ( chart - 9 ). a comparison of crop yields across g - 20 countries shows the extent to

which india has lagged behind others ( chart 10 ). bis central bankers ’ speeches 27. even our best productivity achievements in terms of yields of major crops are way behind world numbers. during 2010 – 11, punjab, with the highest yield in rice, produced 3. 8 tonnes per hectare as against the world average of 4. 3 tonnes per hectare. yield of oilseeds in tamil nadu, the highest in india, at 2. 1 tonnes per hectare is lower than the us average of 2. 7 tonnes per hectare. there are wide variations in productivity levels of crops across states. unlike food grains where the green revolution improved the food security situation, we are still not self - sufficient in pulses and edible oilseeds. the demand for other farm products like fruits and vegetables has also been rising significantly faster than supply, putting pressure on food inflation. 28. the growth of agriculture and allied sector was most impressive during the 6th five year plan period ( 1980 to 1985 ) when it peaked at 5. 8 per cent. the annual average agricultural growth rate moderated thereafter as shown in the following table. bis central bankers ’ speeches 29. how do we respond to declining growth and moderating productivity improvements? the overall policy framework for agriculture, driven primarily by remunerative prices and subsidized provision of inputs, needs to change ; the focus would have to shift to productivity and selective policy stimulus to items where the supply response has been weak. public expenditure needs to reorient towards building capital infrastructure for agriculture which in turn would “ crowd - in ” private investment and help realize the full potential of agriculture growth. there has been no major technological breakthrough in agriculture since the green revolution of the mid - 60s. there have been achievements in some specific crops such as cotton, basmati rice and maize, but that needs to be broad based. the green revolution also needs to penetrate the eastern region, where the yields have generally remained low. 30. management of climatic concerns is becoming increasingly important given the continuing dependence on rainfed farming, frequent floodsin eastern india, frost, particularly in north - western india, and heat waves and cyclones on the east coast. these climatic changes are likely to significantly increase volatility in agricultural production. recent large increases in prices of some items like onion, sugar, vegetables and cotton are, at least in part, a result of seasonal weather related factors, both domestic and external. ( ii ) rethink price policy interventions 31. paradoxically, in india