Two recent events will redefine the Indian economy more than anything else – the Food Security Bill, and the shrinking trend in Indian GDP.
To begin with, Indian agriculture is great. Despite so many hurdles, India is the biggest producer of milk and pulses in the world, and leads in at least 10 other areas substantially. We have world-class research institutes, and sincere scientists, politicians and farmers.
However, the big challenges now are:
Issue 1. The successful passage of the Food Security Bill 2013 – Since more than 50% of people depend on agriculture for their direct incomes, and because 67% of Indian population will be directly covered by the handouts of this Law, it’s profound.
Issue 2. The central role of Indian farmers – The HUGE promises made in the Bill require massive procurement of foodgrains (wheat, rice, coarse cereals) which means our farmers need to work really hard to produce more (since imports are ruled out). Given the extremely low productivity of agriculture in India, this means that in a few months or years from now, the strains will start showing.
Issue 3. Why our farm productivity is not going to improve anytime soon – The table clearly highlights the structural problem with Indian farm productivity. Majority of the farmers are stuck with very small landholdings due to social, personal and family reasons. Consolidation is the crying need of the hour, but that entails huge social readjustments.
Issue 4. Skewing the farming patterns permanently – Grow more wheat, more rice and more coarse cereals is the implicit message in the new law to all farmers of India. So why bother with growing vegetables? Hence, erratic patterns of vegetable production and an inflationary push is likely.
Issue 5. Shrinking GDP growth rate – ‘7% plus annual GDP growth rate guaranteed’ period is gone forever. Fuelled in no insignificant part by large global fund flows courtesy easy monetary policies of the West, India enjoyed while the fun lasted. Now, we need to work hard at the basics to get to that level of growth. And that is easier said than done.
Issue 6. Borrow more, Print more – Since the food security commitments HAVE to be fulfilled always – there is no sunset clause, and no government dare take on 67% of the population of 1.2 billion (and growing) – this means heavy borrowing or heavy printing of currency may happen frequently. Both imply massive inflation in the short and medium term. That inflation will hurt everyone – even the poor.
All these together mean we are in for a long stretch of painful readjustment. Tighten your seats, ladies and gentlemen!