Fluctuating pork and inflexible onions

From Rahul Jacobs at beyondbrics, an FT blog.  Where factors affecting food price inflation in India and China are compared.

Pork prices are a proxy for overall food prices in China because pork forms an integral part of the Chinese diet.  The same holds for onions in India.  Indeed, rising onion prices often have sharp political fallouts.  The Shekhawat government fell in 1998 in Rajasthan in part part due to an unprecedented rise in the onion price.

Jacobs argues that hog price inflation in China is cylical and exacerbated by government policy, which amplifies the amplitude of the price swings. The policy resulted in significant over-investment in the hog sector in 2008, which caused a glut and price collapse 18 months later.  As farmers exited the market in droves, supply shrank and the hog price yoyoed back up.  Now the government is gearing up for another round of over-investment, and the pattern will repeat itself.

In India, on the other hand, the problem is more structural.  Factors include the low level of farmer education, abysmal or non-existent agricultural marketing and storage facilities, poor transport links, systemic underinvestment in irrigation and the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGA).

The MGNREGA guarantees 100 days of employment every year, at minimum wage, to all adults in all rural households.  The employment is typically unskilled manual labor on gonverment-funded infrastructure projects.  The MNREGA increases food price inflation in two ways.  First, it increases the cost of agricultural labor by giving the rural poor an outside option.  Second, it increases food demand, as the purchasing power of the rural poor rises.

The scheme makes for great populism, and will go a long way towards strengthening the Congress’s position in upcoming electoral battles.  But we should be not be unaware of its true function: to serve as a transfer mechanism from the urban to the rural sector.  The mechanism is probably warranted, given the fact that rural India has lagged behind the cities in all growth indicators over the last two decades.  I worry, though, that the money will not be well spent.  We don’t want construction of infrastructural white elephants dotting the rural landscape, paid for by MGNREGA money.


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