Agrarian and food crises in India Jayati Ghosh
The global food crisis • 2008 was last recent peak of food prices when global crisis was announced. • When prices declined in second half of 2008, international attention wavered. • Revival of concern after global food prices started rising again from early 2010 in particular. • Intimately connected with financial speculation which affected global trade prices. • Massive – and unprecedented – changes in global trade prices of basic food grains and important cash crops especially over past four years.
Some supply factors are and will continue to be significant • Short-run factor • diversion of both acreage and food crop output for biofuel production • Medium term factors • rising costs of inputs • inadequate credit to cultivators • falling productivity because of soil depletion • inadequate public investment in agricultural research and extension • impact of climate changes on harvests
Price movements since 2007 could not have been created by real supply and demand changes • Scarcely any change in global supply and utilisation over this period • output changes were more than sufficient to meet changes in utilisation in the period of rising prices, while supply did not greatly outstrip demand in the period of falling prices. • Stock holding has remained stable at around 23 per cent of utilisation. • Claim that increased demand from China and India has led to rising prices is completely unjustified, because both aggregate and per capita consumption has fallen in both countries.
Supply (production) and demand (utilisation) cannot explain price movements
Speculation and commodity futures markets • Function of speculators isto predict future market patterns and thereby reduce the intensity of change - that is, reduce volatility and stabilise prices! • Similarly, commodity futures markets are supposed to reduce risk for cultivators and purchasers: • allow better risk management through hedging by different layers of producers, consumers and intermediaries; • enable open-market price discovery of commodities through buying and selling on the exchanges; • and therefore lead to lower transaction costs.
Financial deregulation and commodity speculation • In 2000, the Commodity Futures Modernization Act deregulated commodity trading in the United States, by exempting over-the-counter (OTC) commodity trading (outside of regulated exchanges) from CFTC oversight. • Unregulated commodity exchanges allowed all investors, including hedge funds, pension funds and investment banks, to trade commodity futures contracts without any position limits, disclosure requirements, or regulatory oversight. • The value of such unregulated trading was around $9 trillion at the end of 2007, more than twice the value of the commodity contracts on the regulated exchanges.
Financial deregulation and commodity speculation • “Swap-dealer loophole” in the 2000 legislation allowed traders to use swap agreements to take long-term positions in commodity indexes. • Emergence of commodity index funds that were essentially “index traders” focused on returns from changes in the index of a commodity, by periodically rolling over commodity futures contracts prior to their maturity date and reinvesting the proceeds in new contracts. • Such commodity funds dealt only in forward positions with no physical ownership of the commodities involved.
Financial deregulation and commodity speculation • As US housing finance market imploded, finance searched for other avenues of investment to find new sources of profit, like commodity speculation . • By around June 2008, when the losses in the US housing and other markets because intense, it became necessary for many funds to book their profits and move resources back to cover losses or provide liquidity for other activities. • Commodity markets became like other financial markets, prone to information asymmetries and associated tendencies to be led by a small number of large players.
Very recent tendencies in commodity derivatives markets are of concern once again • Financial regulation has been halting, inadequate and ineffective. • In US, swap-dealer loophole persists, position limits set very high, etc. • Crucial provision in Dodd-Frank bill in US has been struck down by US Court
Assets of financial speculators in commodity markets have increased from $65 bn in 2006 to $126 bn in March 2011
Implications of financial speculation on global food markets • Inherently “wrong” signalling devices became very effective in determining and manipulating market behaviour. • The result: excessive price volatility of commodities over 2007-10 – not only the food grains and cash crops, but also minerals, metals and oil. • Continuing denial among the international institutions that “count” like OECD, IMF – but UNCTAD has noted significance and even World Bank now accepts it.
This had very adverse effects on both cultivators and consumers of food • Confusing, misleading and often completely wrong price signals to farmers that caused over sowing in some phases and under cultivation in others. • Because of global food value chains, direct cultivators do not get the benefits of higher prices. • High pass through of rising global prices on consumer prices in developing countries, but low pass through of falling prices on consumers. • So both cultivators and food consumers lose out through extreme price instability. The only gainers are the financial and marketing intermediaries who are able to profit from rapidly changing prices.
Domestic food output has been affected by agrarian problems in India • Prolonged crisis of viability of cultivation, with rising input prices, falling productivity of soil and volatile output prices. • Inability to repay debt or access fresh debt has led to spate of farmers’ suicides across the country – more than 200,000 since 1996. • Shift to cash crops from food crops. • Lack of institutional credit, so farmers forced to use higher interest informal credit sources • Inadequate public research and extension relevant for farmers, so they are dependent on MNCs and local companies for knowledge, inputs, etc. • Public procurement to ensure adequate prices for food crops has been run down, farmers are affected by market conditions that are very volatile, with little power over purchasers
India’s nutrition indicators are worse than many Sub-Saharan countries • In 2005-06, • 33 per cent of women and 28 per cent of men had Body Mass Index (BMI) below normal • 46 per cent of children below 3 years were underweight • 79 per cent of children aged 6-35 months had anaemia, as did 56 per cent of ever married women aged 15-49 years and 24 per cent of similar men • 58 per cent of pregnant women had anaemia. • This refers to period before global and Indian food prices really started rising – no major survey of health conditions since then. • Some states like Madhya Pradesh, Bihar and Jharkhand have even worse indicators close to bottom of African table.
Inequalities in Calorie Intake Percapita Calorie Intake Rural, 2009-10 Percapita Calorie Intake Urban, 2009-10 Source: Compiled from NSSO Reports, Various Rounds All India average per capita Calorie intakes for both Rural and Urban Sectors are lower than the minimum levels required (2400KCal in Rural Sector and 2100KCal in the urban Sector).
Inequalities in Calorie Intake Fall in Rural Calorie Intake from 1993-94 Fall in Urban Calorie Intake from 1993-94 Source: Compiled from NSSO Reports, Various Rounds In 1993-94, Punjab Haryana and Rajasthan had over 2400Cal per capita Calorie intake for the rural regions while Rajasthan Haryana West Bengal were some of the states that had over 2100Cal per capita Calorie intake for the urban regions. By 2009, all states have come under the minimum requirement levels.
Inequalities in Calorie Intake Average Per Capita Expenditures (Total And Food) Over Time Source: Compiled from NSSO Reports, Various Rounds Expenditure on Food has increased at lower rates than total Expenditure, leading to a fall in the proportion of the former to the latter. Rural Sector has higher proportion of food expenditure out of total expenditure, and has witnessed lower reduction as well.
Policies required for food security • Ensure viability of food cultivation of small farmers and reduce the pass-through of volatile global prices in domestic market. • Increase role of public procurement and distribution in an accountable way. • Food Security Act with universal public provision of minimum quantities of affordable food for every person. • Targeted scheme are not enough – they have too many errors of unfair exclusion and unjustified inclusion. • Cash transfers cannot be a substitute for food provision, they should be an addition.