Mechanisation of Agriculture: Insufficient understanding of its Impact?

An often but extremely interesting facet of rural socio-economic life (at least in AP) is the increased mechanisation of agriculture. A clearly discernible, albeit recent appearance in agricutlure is the mechanical harvesters. They increasingly dot the rural landscape. Since May 2012,when we first pointed out this trend, their use has increased exponentially. Each harvester costs Rs.1.4 million to Rs.1.6 million with a prospective owner investing about Rs.500,000 to Rs.600,000.

The rapid use mechanical harvesters has very interesting consequences, most of which do not seem to be well understood. Some of these issues are highlighted below:

Firstly, A number of these harvesters are operated in a manner similar to the lorry business. 

Secondly (most important but often overlooked), it reduces the time cycle for the farmer - they now facilitate completion of harvesting about one month earlier than in the past; 

Thirdly (at least in AP) there is an increased adoption of the harvesters in dry regions of the State rather than in the more irrigated (and more prosperous regions). In these dry regions, labour costs are lower but, there is greater investment in mechanised harvester - mostly to operate as a business rather than for own use. 

Fourthly, their use saves substantail amount of money to the land owner: they harvest about one acre in one hour and the cost varies from Rs.1200 to Rs.2500 (depending on the demand). 

And, Lastly, Needless to say, nobody seems to knows its impact on the rural labour markets, other than the conventional stereotype that mechnaisation leads to job losses. 

Time for a rethink?

Fighting Food Inflation in India: Attempting the Impossible?

Almost everybody claims that they are worried about inflation. It is likely to be a major issue in the forthcoming election in 2014. But, there are not many satisfactory explanation for where the demand is coming from, especially food inflation. 

1. There is an increase in money that people are earning and money that people are accessing by assuming new debts or through remittances. 

2. Wages are up, so is the Minimum Support Price (MSP) for various agricultural commodity prices is up so there is some increase in inflation that is bound to increase - everybody knows that. 

3. Oil prices are up - everybody knows that. 

4. High levels of consumer lending by the banks. 

5. What may be missed is that over the past few years there is a huge amount of money that is going directly into the hands of lower half of the population, if not lower quartile. Undoubtedly, one of the important items that the lower middle classes and the poor do is to spend a lion's share of their earning on daily household expenditure and items like housing, debt repayment and education. A large part of their daily household expenditure is going into food. Where are people getting so much money to spend ever increasing amounts on food:

(a) There is a large number of money flowing in through Remittances from other countries - nearly $60 billion (at present value: Rs.360,000 crores) flowing into India through formal channels. Assuming that at last another US$10 billion comes through hawala route (i think it could be double that). Hence, the total money flowing in through remittances could be in the region of Rs.500,000 crores annually. There is a major correlation between increasing remittances and rising food inflation since most of the money goes into funding expenditure related to daily needs, education or housing. There are whole villages where large sections live on remittances. 

(b) Internal Remittances - unknown amount but since that is a consequence of rising wages, we know it is already factored into present day thinking.  

(c) Borrowings by the lower middle classes and those below poverty line: There is a sharp jump in lending through SHGs and MFIs. Interestingly, both these have jumped over the past three years - years when inflation, especially food inflation has gone up. MFIs have ramped up lending over the past two years in other parts of India. Assuming that together (govt supported SHGs and MFIs) have lent Rs.50,000 crores it is quite high. Our studies indicate that most of these borrowings go into consumption loans. 

(d) Add to the above list loans by Gold Loan companies: wheret 30-40% of the gold loans may be to the poor earning less than Rs.100,000 (about US$1500) a year. Assuming that they have combined portfolio of Rs.100,000 crores and 40% is to the poor, then it would add another 40,000 crores. 

(e) Money from informal lenders - we have no idea about how much is going to the lower sections. So best leave it. 

(f) Add to this some welfare programmes like NREGA which is again directly flowing into the hands of the poor, who are most likely to be spending the monies within a week of receiving it. 

(g) Add to this other borrowings by the bottom 50% of the populace - a lot of which may be going back to purchase food and other daily needs. 

To these may be added other supply side factors and also the whole issue about land use and a new addition - export of food grains. 

In other words, there is about Rs.500,000 crores (more than US$79 billion) of "new" money that is chasing food items and most of this is invisible on the policy makers radar - at least till now. I think they are highly correlated to periods of rising food inflation. This is what i am assuming. Considering that i am usually very conservative when making an estimate (because i would like to err on the side of caution), it is bound to be far higher. Assuming that my estimate is correct it is still large. 

The point that we are trying to underscore is that people now have a lot more money in their hands, due to a variety of reasons. This is money that is going directly into the hands of those who are more likely to spend it immediately - and on food. In contrast, the remedial measures are geared at monetary policy, which take a long time to feed through to the system (say 6-9 months). Hence, the solution that is being tried out by the the Reserve Bank of India (monetary policy related) is not exactly very useful. Therefore, there is a need to reclabirate policy on the part of the Central Government and the RBI. Therefore, liquidity tightening may have only a limited role or even an adverse impact in controlling inflation because the underlying dynamics may not be working as well as they did in the past.