Inflation in India has shot up to 7.4%, and food prices are skyrocketing. To control prices, the government has banned the export of wheat, pulses and all rice, save the luxury basmati variety. But all those measures are at best beside the point and at worst counterproductive. The real solution is to reform the faulty policies that have led to stagnation in food-grain production for almost a decade.
That India finds itself in this position at all is embarrassing. The 1970s Green Revolution, a joint success of government investment and farmer entrepreneurship, made India self-sufficient in food. The government invested in research and development, irrigation, rural electrification and rural roads, and provided seeds, water and transportation. Farmers responded well, and by the 1990s, India became a big rice exporter and an occasional exporter of maize and wheat.
But the steady increase of yields ground to a halt by 2000. Government scientists failed to deliver new, more productive seeds for grains like rice and wheat – which the private sector tends not to research because farmers can reuse seeds crop after crop, thus cutting into demand for the private companies' products. The emphasis of the government's rural agricultural spending shifted from investment to subsidies, providing palliatives instead of increasing the production base.
Reliance on government also put agricultural policy at the mercy of politicians, with predictable results. For example, in many states, politicians offered to have the public sector pay for canal water, driving the cost down to almost zero. As a result, canal revenues are insufficient to maintain existing canal systems, which are deteriorating.
This kind of interference creates a vicious cycle of market distortion. Political competition has also made rural electricity free, or almost free, so farmers often grow ecologically inappropriate, water-guzzling crops like rice and sugarcane in states like Punjab, Haryana, Rajasthan and Maharashtra, where rainfall is not enough to recharge aquifers. Similarly, free electricity provides a massive and rising subsidy for excessive pumping.
As a result, with the exception of the eastern part of the country, the water table is falling all across India, causing wells that have traditionally yielded drinking water to run dry. Small farmers' shallow tube wells have also run dry, leaving only rich farmers, with deep tube wells, able to get water. Investment in deep tube wells is rendering useless shallower wells that earlier irrigated millions of acres. But no political party dares restrict pumping, fearing the wrath of rural voters.
India also provides a huge subsidy for nitrogenous fertilizers, whose prices have been frozen for years, but it provides very limited for phosphoric and potassium fertilizers. So Indian farmers use too much nitrogen relative to phosphorus and potassium, and this has steadily reduced soil quality.
Nor is what we'd think of as "agricultural policy" the only culprit – plenty of other government programs also hurt agriculture. Rural roads are highly correlated with buoyant agriculture. But the government's use of road building as a form of rural employment guarantee led for decades to construction of labor-intensive dirt roads to create more jobs. Unfortunately, the dirt roads are washed away each monsoon. Only now is a new Prime Minister's Rural Roads Program starting to build high-quality paved roads which will be durable. Huge waste and inefficiency in the delivery of government service has compounded the problem. Former Prime Minister Rajiv Gandhi estimated in the late 1980s that of the billions spent on rural schemes, only 15% reached the intended beneficiaries.
Then there are the ways government increases food prices on the way to the table from the farm.
During the Green Revolution, central and state governments created an extensive network of mandis, or government-run markets, which included private traders as well as government purchasing agencies and which supplied the national network of ration shops providing grain to urban dwellers, with highly subsidized prices to the poor. State governments banned the direct purchase of produce from farmers, supposedly to protect the farmers from rapacious traders. As a result, large food-processing corporations and retailers cannot buy directly from farmers, seriously reducing net prices to farmers while increasing prices for consumers.
New Delhi has urged the states to abolish this marketing law, but progress has been spotty because of the political power of trader lobbies. And New Delhi creates problems of its own – the central government does not allow foreign investment into retail markets, save for single-brand chains such as a Nike store. In developing countries like Indonesia, foreign-owned supermarkets have provided farmers with high-quality seeds and advice, and sold their produce at good prices. But in India, left-wingers who hate multinational corporations and Indian middlemen who fear losing business have joined forces to block the entry of foreign investors.
India's current food price problem isn't a market failure. Rather, it's a government failure to allow markets to work. The only sustainable solution is to pull back the subsidies and protections. But sustainability is the last thing on the minds of politicians competing to win the next election with ever-higher subsidies.