The overwhelming win by the Bharatiya Janata Party (BJP) in recent elections for India’s lower house of Parliament has the potential to substantially increase food demand. At the same time the pro-business party may reduce production subsidies in favor of a more market-driven farm policy. India’s recent role as an exporter of grains and sugar in good crop years when they run out of storage may change.
The change in policies should be unmistakably clear. The Indian parliament has been rule for most of the past 67 years by the Indian National Congress Party, either alone or as the major party in a coalition. The BJP last ruled in a coalition government from 1999-2004. The BJP won 282 seats of the 545 seats in the lower house of Parliament, enabling it to form a government without minor party allies, the first time one party has had a majority in the last 30 years. The next largest party is Congress with 44 seats. The BJP doesn’t have control in the upper house of Parliament where members are chosen by the state legislatures.
The BJP campaigned on promises of jobs and development after sluggish growth under Congress of less than 5 percent for the first quarter of 2014 compared to over 9 percent in 2011. Ten million young people join the work force every year, four times the recent growth rate of new jobs. The New Prime Minister, Narendra Modi, was quoted in the Wall Street Journal, “The lives of young people in this country won’t change without development.” The Congress party had a welfare approach to policy-making focused on laws that promised subsidized food grain to a majority of Indians and guaranteed rural employment.
Mr. Modi, the son of a tea seller, rose to be the chief minister of Gujarat, in western India. He will have to transition from being the head of an economically vibrant state to a relatively weak leader of a large and diverse country. His party won 52 percent of the seats in the lower House, but only 31 percent of the popular vote. Modi will have to use his considerable speaking talents to unify the country behind his agenda.
The government has to move quickly after the Prime Minister takes power. The new government has to prepare its first budget by July. The BJP pledged to streamline the government’s bureaucratic procedures to make make it easier to do business in a country known for burdensome and confusing regulations. Overhauling India’s labor laws, high on business’s wish lists, will likewise require cooperation with state governments that are more powerful relative to the national government than in the U.S. Mr. Modi’s rise to power isn’t likely to produce an immediate kick in food demand.
Agriculture and food policies are on most lists for change, but how quickly change will come remains in question. Agriculture and the rural economy are tied to industrial policy in many economic growth development plans. The previous government’s rural income supports discouraged resource-limited farmers from moving to more productive factory jobs in cities and limited industrialization. In rapidly industrializing economies, manufacturing usually accounts for 25 percent to 35 percent of GDP, but in India it accounts for only 15 percent.
Indian agricultural commodities that most impact international trade are rice, wheat and sugar. According to estimates by the Foreign Agricultural Service of USDA, India is expected to be the world’s second largest producer of rice this year, behind China, at 106 million metric tons (MMT) and the second largest consumer at 98 MMT. For the last two calendar years and the current calendar year, India has also been the world’s largest exporter of rice at about 10 MMT. Thailand had traditionally been the largest exporter, but in 2011 it adopted a domestic rice policy to hold the Thai rice price above the world market price and created an opportunity to move Indian excess supplies.
Those supplies were created by the government guaranteeing high internal market prices and buying rice when the market was below the price guarantee. If economic growth improves, upper income earners will probably not buy more rice, but lower income workers will buy more. Slowing the increases in the price guarantee for farmers or actually reducing the guarantees would reduce supply. The national government and state governments jointly share the management of farm policies and Mr. Modi will have to negotiate some arrangement with the states.
India is a less dominant player in the world wheat markets and exports are more variable year-to-year, ranging from almost no exports of wheat in 2009/10 and 2010/11 to 8.7 MMT in 2012/13 to 5.0 MMT this year and 2.0 MMT for the marketing year beginning July 1. Rising incomes will have a greater impact on wheat demand because higher income consumers demand more wheat in western style breads and pizza. As with rice, Mr. Modi will need to negotiate policies with state governments.
India’s sugar production, the world’s second largest after Brazil, has been variable at 20 MMT to 28 MMT over the last five years. India is the largest country in human consumption at 26.0 MT this year. Exports have varied in recent years from less than 1 MMT to almost 4 MMT. Domestic demand should grow as the economy grows.
Of course, much of what happens in agriculture is subject to weather. For example, the last time India had an El Nino effect, rice production was down by 10 percent, enough to just balance the current supply with demand without exports. Mr. Modi campaigned on change and agriculture has to be part of that change. He will need to balance a number of moving parts to bring about that change over time. Until then, he will continue to have to account for the needs of poor people who have not had the opportunity to ride the wave of economic development.
Immediately after the election, Indian stock markets hit a record high with the prospect of a stable government led by Mr. Modi. The Indian rupee also increased, strengthening to an 11-month high of 59 rupees to the U.S. dollar. That was in response to hope, not reality. Nothing has changed yet, except the realization that change is coming. As analysts look around the world at uncertainties of supply and demand for agricultural commodities for the next few years, India has to be higher on the worry list than it has been for the last few years. Traders will have to hope for the best, but prepare for the worst. That is pretty much business as usual.