George Dubya Bush has often been credited with having made political statements that have lacked either intellectual depth or logical sense or, as in most cases, both. Hence, it came as no surprise that when he, in the recent past, made a political statement, and this time concerning India, he was again criticized from all corners and this time, including India.
While Dubya was primarily defending his decision to use food grains like maize for the production of bio-fuels like ethanol, the additional point he was trying to put across was that rising per-capita income levels in emerging markets like India and China had given rise to additional demand to quality food grains from that segment of the population. And while he should be kicked in the rear for converting edible foodgrains in fuels, he is quite right when he says that India and China are contributing in a large way to the global food crisis.
Closer home, its not just rising demand from the burgeoning middle class that is sole contributor to rising food costs; studies have shown that per capita food production has fallen to the 1970s levels. That is, indeed, an alarming statistic and what is even more incredulous is the fact that the downtrend is not an overnight turn of events; the stagnation in the agricultural sector has been prevalent for the better part of the decade. That is a sorry tale to say of a country that still boasts to be agrarian and whose populace is largely deemed to be dependent on the farming sector. So what caused this dramatic turn around?
Since the very nature of the issue forms a vicious circle, it is impossible to point out just a couple of factors. The primary reason for the fall is the lack of irrigation water supplies at grassroots level available to farmers and the ill use to technology to aid in crop yields. As a result, farmers have to depend on erratic monsoons and age old techniques to boost crop yields. Bonanza schemes like loan waivers end up being zilch down the road since the basic problem still exists; the only effect of such schemes is to worsen the fiscal deficit.
Down the road, further problems arise due to the sales from the yields. The Govt. of India is the largest buyer of the food grains from these farmers and the price is, of course, dictated by the Govt. Termed MSP [Minimum Support Price], these prices are usually lower than global market prices [though, they are revised every year]. The differential between MSP and the global prices deny the farmers the true market worth for their grains. Their problems are also compounded by the restriction on exports of essential food grains like rice and pulses. In such a situation, most farmers reserve vast tracts of their land for the production of cash crops like rubber, sugar cane etc., the prices of which are entirely market driven and have no export restrictions.
It only needs to put two and two together to understand this does not foster a positive enviroment for a farmer; however, incredibly the problems do not end there. The food grains procured by the Govt. is distributed by an archaic channel called PDS [Public Distribution System]. While PDS incredibly suffers from manpower concerns [due to migration of unskilled labourers to cities aided by opportunities in real estate sector] for acts as simple as loading and unloading of foodgrains, the actual problems start once these foodgrains are collected into the distribution warehouses. After the foodgrains pass through various levels of rampant corruption, the supplies lying around in the warehouses are subjected to waste by the single largest consumer of foodgrains: rodents!
With limited supply from farmers and a pathetic system to distribute whatever little does get filtered through, its no wonder that inflation is climbing to double digits. Artificial counter measures like tightening exports and banning futures trading on commodities serve no purpose than to artificially set prices to hold down inflation. These, in turn, causes an imbalance in the global markets since supply from India is minimal; most countries have used this approach to contain inflation as a result of which globally prices have increased.
Hence, you would now assume that the fault does not lie at the doorstep of the United States. Of course it does. The most important factor in all this is the suddenness in the rise of prices globally; that cannot be the fault of India’s archaic PDS. That is due to the weakness of the dollar against all other currencies.
The dollar is weak because the US Federal Reserve has been relaxing interest rates over the last few months; this makes investing in other countries with higher interest rates more attractive. Which in turn infuses a larger supply of the greenbacks versus the local currency, hence devaluing the dollar.
And why is the Federal Reserve reducing interest rates? Try searching for sub prime.