Hue and Cry for increasing agri product prices – Balassa Samuelson Effect?

Balassa Samuelson effect explained by Mr.Raghuram Rajan, the Reserve Bank Governor of India in his speech on “Dosa Economics” was quite convincing. The effect states that, in an economy which is growing and with its sectors improving technologically, the price of goods manufactured by those sectors which are not improving technologically will go up faster.

My view is – when a particular sector fails to grow technologically due to capital inadequacy or due to the inability of the incumbents / promoters in the sector to infuse more capital due to historically low margins or due to the lack of commercialization, and when there is a larger control on the prices of the goods and services provided by these sectors from the part of the government in a socialistically skewed mixed economy, those sectors will have to move to a more commercialized mode of productions or will have to perish over a period of time.

Given that the agriculture sector and dairying in India has been historically dominated by marginal farmers, the ability of the individual farmers to infuse more capital in to the business remains limited. Coupled with the indirect/direct control of the prices of agricultural and dairy products by the government, the price of the produce has not gone up historically in line with the increase of the cost of inputs. The government is also not left with any choice than to directly or indirectly keep a control on the pricing of these products as they are bound to control the inflation especially for the food items.

So over a period of time the cost of inputs has gone up manifold and the technological developments though happened, remained unaffordable, and the price of the output from these activities has not grown in line with that; a contrast to the Balassa Samuelson Effect.

In a market driven economy the sectors which are having lesser operational margins will not attract a huge influx capital investments which enables the adoption of modern technologies to increase productivity as the investments can only give returns over a long run.

This has result in the hue and cry from the producers of agri and dairy products to increase the price of the commodities while the government is always bound to limit it to the maximum possible extent. The government always tries to mitigate these worries and supports the sector through various measures like the declaration of minimum purchase price of the produce, declaring support prices, subsidising the inputs/controlling the price of inputs and raw materials. But these measures historically have not proven to be very effective in bringing increase in the cost of input in line with the increase in the cost of output.

Taking the example of dairy industry, the major production of milk in the country is from marginal farmers. As per the tenets of a capitalistic economy, as labour is cheaper or more affordable than capital, more labour-intensive methods of production is used in this industry. But over a period of time, the labour got costlier and the marginal nature of the production made infusing of capital unaffordable to the farmers. Moreover government directly or indirectly controls the milk prices through their strong grip in cooperative bodies and through other regulatory authorities.

The dairying in our country is also highly depended on climatic factors leading to a fluctuation in the quantity, quality and price of the major inputs like the fodder and feed. This has ended up in lower operational margins in this industry as a whole and has always acted as a deterrent factor for major investments from the private players, with very few exceptions, to equip the means of production with high end technology to improve the productivity, though it is available.

Over a period of time, as the other sectors can afford for a better wages due to its growth in productivity and technology, these marginal farmers tend to migrate to other industries as skilled or unskilled labourers which will in turn end up with a drastic decline in the productivity of the milk. To the best of my understanding this trend has already started. This may lead to a demand supply gap in the market which will end up in a drastic increase in the price of the milk based commodities and in turn to a major food inflation. This situation may be exploited by the corporates who can make huge capital investments and meet the supply gaps at the same time earning huge profits as the operational margins will be high at that time.

As the dairy industry falls under the list of essential commodities, in a mixed economy like ours, the government is striving hard to help the producers by various ways and means of direct and indirect subsidies. The cost of inputs like the cattle feed is always kept at a check by the government by investments from the public sector in the feed manufacturing industry, a major example being the Kerala Feeds owned by Government of Kerala. Another aspect is providing the animal health care and breeding services to the farmers across the country through a chain of government owned veterinary and para veterinary institutions across the country, supply of mineral supplements to augment the production through these institutions, supply of free fodder seeds, and various other measures to help the farmer to improve the productivity through better management practices and also by improving the genetics. The minimum support price of agri products and subsidy of fertilizers are also indirectly helping the industry.

But the question here is with the increase in the expendable income of the citizens in the country which results in increased demand and widening of the demand supply gaps, are the measures taken by the government sufficient to ensure that the food inflation is curtailed at a widely acceptable levels? Any measure in the regard of advancement of technology to improve productivity at the same time made affordable to the marginal farmers through cooperative or community farming or through the modern machineries like the farmer producer companies will be highly appreciable at this moment so that we remain self sufficient in terms of our food products at the same time the basic needs of a common man can be met at an affordable price to him.

Picture Courtesy: http://www.hangthebankers.com/wp-content/uploads/2012/08/Food-Inflation.jpg