Can this tackle inflation and deficit?

Thu, 28 Feb Pre-Open

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Food scarcity is cited as the key reason for sticky inflation. Nothing could be further from truth, Take the case of wheat harvest for instance.

India, the world's second-biggest wheat producer, usually consumes most of its crop. But a government intervention scheme and favourable weather have boosted production and ensured surpluses for last few years. Last year, wheat production rose to an all-time high of 93.9 million tonnes (mt) while consumption stayed stagnant at around 76 mt tonnes.

As the country prepares to harvest another bumper wheat crop in 2013-14 season that starts from April, experts fear that another record harvest might push up foodgrain stocks to 100 mt by June. But, a bumper harvest does not necessarily mean that the farmers are getting benefit from producing more. A bumper crop is a curse for farmers. The increased supply depresses prices and the government cannot buy all the grains, which encourages hoarding by those who can afford to do so.

In fields along a northern Indian highway, mountains of grain have turned black with mildew after getting soaked in the rain. The millions of tons of wheat are rotting because India ran out of warehouse space to hold another bumper crop. Thus underlines the core problem of the nation's food crisis. The country can grow plenty of food but cannot store or transport it well enough to nourish its 1.2 bn people. Warehouses are overflowing and huge quantities of wheat and rice are stored in fields under tarpaulins and thin plastic sheets, risking decay.

In-spite of the bumper crop, the government has been reluctant to allow an increase in grain exports for fear of political protests at a time when it has been dogged by double-digit inflation of food prices. This would help the country in earning valuable foreign exchange which could bring down the current account deficit.

Inefficiencies in food distribution push up food costs even for those Indians who are not starving and is a major reason for high inflation. Efforts to attract private investment have foundered due to bureaucratic hurdles. The government should offer tax breaks to attract investors to build warehouses and other infrastructure. They should also revamp the broken public distribution system as soon as possible.

Good storage of surplus grains can not only resolve India's inflation problem, but the resultant exports could do away with the current account deficit problem. That is if the government stops placing all the blame on gold.