Can high food prices win votes?

Some brave souls in the Congress Party want to go for an early election this November-December, rather than wait till May 2009. Most analysts regard this as very risky. Inflation is running at over 12%, and high prices have historically caused large-scale deprivation and led to electoral defeats for incumbent governments.

However, Cristina Savescu of World Bank provides another viewpoint. She has used an econometric model to estimate the impact of high wheat and rice prices on poverty. High prices benefit farmers but hit consumers, especially landless labourers. The net outcome – surprise, surprise – is a decline in the poverty ratio by 0.8 percentage points, according to her projections.

In urban areas, high food prices will increase poverty by 1.6 percentage points. But in rural areas, poverty will fall 1.5 percentage points. Since 70% of the country is rural, the national impact turns out to be poverty reduction of 0.8 percentage points.

Rural areas will have losers as well as winners. Costlier foodgrains will tend to worsen the poverty of rural consumers by 2.9 percentage points. But they will also cut poverty by 4.6 percentage points among farmers. On balance, rural poverty will decline, and so will national poverty.

Many analysts will jeer at this analysis. The left claims that high prices benefit only traders, not farmers. This, however, is false. Small farmers sell their produce immediately after harvesting, and so do not gain from off-season rises in prices. But the sharpest price rises have been at harvest time in the last few years, thanks to rising government procurement prices.

The procurement price of wheat has risen from Rs 700/quintal in 2006 to Rs 1,000/quintal in 2008, up almost 50% in two years. The procurement price of paddy was raised from Rs 570 to Rs 745/quintal over two years, an increase of 31%. These huge increases clearly benefited farmers.

Today, wholesale prices of cereals are just 6-7% higher than a year ago, thanks to export curbs and rising food subsidies. This means that traders have not made a killing through off-season price increases. Nor have consumers been really hard hit. So, it seems plausible that the benefit to farmers outweigh the burden on consumers.

Critics will ask, if rising food prices can cut poverty today, why did they cause such savage impoverishment in past inflations? The answer is that 2008 is truly different.

Through history, high food prices in India were caused by droughts. Production fell sharply, and the resulting scarcity raised prices. Droughts greatly reduced employment. A smaller crop meant less labour was used for harvesting and post-harvest operations. Falling farm incomes translated into falling demand for other kinds of labour. So, labourers were hit twice over, by rising prices and falling employment.

Farmers suffered too. A few lucky farmers benefiting from decent rain gained from high prices, but drought wiped out millions of others. So, distress was acute among farmers no less than labourers. This was a recipe for impoverishment.

What’s new about 2007-08 is that this is the first time that food prices have shot up despite a record harvest. Foodgrain production is a record 230.7 million tonnes, up from 217.3 million tonnes and 208.6 million tonnes respectively in the previous two years. Wheat production has risen from 69.4 million tonnes to 79 million tonnes over the last two years, even as the procurement price has risen almost 50%. So, farmers have reaped a double bonanza, from higher production and higher prices.

Labourers have gained too, from high employment. Bumper crops increase the demand for labour in harvesting and post-harvest operations, and the increased farmer spending produces a second round of increased demand for labour. We won’t get official wage data for a long time. But news reports highlight labour scarcity and rising wages in Punjab-Haryana. The employment guarantee scheme has provided a separate boost to wages.

Vishwanatha Prasad is head of the Bellwether Fund, which funds microfinance institutions. Disclosure: I myself am a co-promoter of three microfinance institutions along with Bellwether. When inflation rose, Prasad asked me whether this would affect the ability of borrowers to repay micro-loans. No, i said, economic theory showed that inflation was actually a blessing for debtors, since it reduced the real value of their debts. So, in theory anyway, repayment of micro-loans should not be affected, save temporarily.

Prasad’s grassroots information confirmed economic theory: repayment was not affected. Labourers, who earlier earned Rs 50/day, were now getting Rs 70/day. Tea-shop owners, who used to charge Rs 2 per cup, now charged Rs 3. So, higher incomes compensated for high prices.

Now, it is dangerous to generalise from such anecdotes. Unquestionably inflation has hit many people in some parts of India, especially in urban areas and districts where the monsoon has failed this year. Yet, there is cause for overall optimism. The current monsoon has been rather spotty. But two record harvests in preceding years may indeed offset the impact of higher prices on poverty.

This does not mean that the Congress will win the next election. Incumbents tend to be voted out in the vast majority of elections. But inflation may not be a key determinant of the outcome.

What do you think?