Sunday, February 20, 2011

Food Security and Agriculture Budget in Karnataka

Today a study by Ficci-Yes Bank  published in Deccan Herald has indicated that Karnataka offers the best investment option for food sector in India. Karnataka government is also on the brink of providing to the people its own Agriculture Budget separately from the state general budget. This has some huge implications if handled properly. The government of Karnataka may be providing a budget as a vote catcher however it is providing certain market signals inadvertently.

In India, budget is provided each year as a general budget by the finance minister and the railway budget by the railway minister. Railway budget was conducted separately for several reasons and it is the relic of the British Raj where the budget was presented since 1924 as it was almost a third of the national budget. The British started the railways in India not for the people of India but for the transport of its army. It was hugely important for the British Raj to have an efficient network of railways to transport its army in the quickest possible time to quell any ruler who disobeyed its authority. The British also cunningly separated the railway budget so that they could fund it as an army expenditure rather than as a civil expenditure although they did not mention it as such. There are documents to show that the British spent on whole of India as much as they spent on the City of Manchester. Indeed their own army officers and accountants wrote several documented letters to the Queen Victoria's government complaining  about the lack of money in the civil budget.

Railways gained importance later as it became the sole national transport neural network of India. Today it has over 63,000 km of network with 18 million passengers (that is 0.001% of the population) and 2 million tonnes in freight yet has its own budget.  Agriculture, sustains not just the middle class to above middle class income populations but also 13.5% of the Below Poverty Line (BPL) population. India is spending over INR~15,000 crore annually however has no separate national agriculture budget. This situation becomes even more significant when one considers that off a labor force of 478 million people, over 52% of the Indian population is employed within the agriculture sector while industrial and services sectors employ 14% and 34% of population receptively (as per information provided by CIA-World fact Book 2011). However, GDP wise agriculture accounts for only 16.1% of GDP while industry and services sectors account for 28.6% and 55.3% respectively.  These figures clearly show that however much one wants to project India as the Silicon Valley of the Southern Hemisphere or as "future Global super power" etc., it is still an agrarian country in need of serious investment in all sectors of Agriculture to ensure food security and continued initiatives in rural poverty alleviation. Hence a separate agriculture budget by the Karnataka government is highly significant in various ways.

Agriculture Budgets and Markets

If the Karnataka budget is presented not just as a farmer friendly one offering all manner of subsidies but as a investor friendly budget it would have a significant impact on the market signal that the government would be providing for investments in food sector. Karnataka needs investments not just in rail and port networks but also to increase its domestic consumption and more importantly the production. If farmers are provided with incentives to use water at night and not during the day it could have a serious impact on both water and energy consumptions. This model has been successfully used in Gujarat currently. If Karnataka government allows farmers and private companies to build silos, chillers and other storage systems on-farm and near railway tracks it would have huge impact on food security by allowing farmers to store grains and produce on-farm when the market prices are poor and sell it when prices are good. This would increase their profitability which in turn would have significant impact on migration of rural youth, employment and other socio-educational benefits. The market would determine the price for over 85% of the population and competition would drive the prices and stabilise the price structure rather than at the whim and fancy of the government. The central government of India has already signalled that it would remove octroi, mandi taxes and other archaic taxes.

The government need not provide much financial investment but needs to provide right market signal for agriculture investments which is languishing in a policy black-hole and a bureaucratic quagmire sinking farmers daily in a debt and despair ridden environment. But the fact that this step is taken by the Karnataka government is in itself will be seen by the markets as a signal where importance is being finally given to food and agriculture. At the least it will be seen as a stepping stone for correct food policy development to cater for whole population food needs rather than conduct crisis management and render food as a social welfare and election currency. 

To wring ones hand constantly and blame the large population as the problem is a cowardly lazy cop out. Today India need not languish in the food inflation and poverty as it has reasonably good production despite crop failures due to drought and floods, has a reasonable foreign exchequer nearing $USD 300 billion (China has 3 trillion) to purchase food if necessary. What is truly lacking is the will to allow private sector to run the food economy while government providing the necessary support through policy and governance infrastructures. It is well known now through studies that alleviation of poverty and income generation opportunities will usually reduce population there by cost to the government treasury for welfare programs. Kerala government has shown this through various policy initiatives. India is called as a "reluctant urbanizer" due to the fact that unlike China India has not made any concerted effort to modernize its bigger towns and regional areas leave alone villages.

Karnataka has over 71% of its population living in rural areas and depending on rural income. It is glamorous to chase the mighty dollar for IT and BT sector however, that does not mean to say it should be at the cost of agriculture or industry sectors. It is not a zero-sum game.These sectors are interlinked as IT and BT sectors can feed into technology transfer to agriculture and industry sectors as it is happening in the west. Rural engineering industries need to be promoted and prioritized similar to urban industries as they can generate socio-economic benefits. Educated rural population when provided the right infrastructure and access to technology will remain in rural areas to a large extent and this will reduce pressure on the urban areas. Indeed in the west migration to regional areas has commenced due to cost of living pressures in the cities.

I do hope Karnataka government will make the right noises to encourage farmers and markets. This can reduce food inflation and increase food security not just in Karnataka but in India as competition will drive market investment in other cities as well. Mere provision of subsidies will not provide adequate growth required in the sector although growth rates of 4-5.4% is being mentioned. However one needs to note that growth when coupled with high inflation will erode the beneficial effects of growth. Most western countries aim for 2-3 % growth rate and below 3% inflation rate as they are saturated markets.

I commend both Kerala and Karnataka governments for taking the policy initiative to ban Endosulfan and I also commend the politicians who took the fight. This is the kind of policy that farmers need. I do hope the government will send right market signal. Agriculture budget is a very good start in itself what ever the reasons provided by the government, markets will read differently. A new trend will be set in policy.


Reading for interested

1. David. S. Landes. The wealth  and poverty of Nations: Why some are so  rich and some are so poor. 1999.

2. Philip Smith and Eric Thurman. A Billion Bootstraps: Microcredit, Barefoot Banking, and The Business Solution for Ending Poverty.

3. Ela Bhatt. We Are Poor but So Many: The Story of Self-Employed Women in India 

4. C. K. Prahlad. The Fortune at the Bottom of the Pyramid, Revised and Updated 5th Anniversary Edition: Eradicating Poverty Through Profits

5. Paul Polak. Out of Poverty: What Works When Traditional Approaches Fail

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