The world is sliding rapidly towards a recession. The Covid-19 pandemic will shut down large parts of the world economy for at least a few months more. IMF managing director Kristalina Georgieva stated on March 23, 2020 that the outlook for global growth in 2020 was “negative.” Recovery, if any, is expected only in 2021. According to the International Labour Organisation (ILO), the rise in unemployment because of Covid-19 could be up to 25 million worldwide.
When the crisis began, it was thought that the slowdown would be restricted to China. Under such an assumption, the OECD countries expected that their growth rate for 2020 would be down by only about 0.5 percentage points. Considering the possibility of the slowdown spreading out of China also, it was estimated that the growth rate of OECD countries would fall from 2.9 per cent in 2019 to 1.5 per cent in 2020. All those scenarios are now out of date. OECD countries can expect negative growth rates in 2020.
As India moves from regulations and controls to a total lockdown, the impact of the Covid-19 pandemic on the economy is becoming ever more acute. The Indian economy, which was already facing a sharp downturn by the end of 2019, will surely record an extraordinarily poor growth rate for the months of March, April, and May 2020 (though they technically fall into different quarters of the financial year). If the lockdown continues beyond a month, the impact is likely to be even more severe — on the working people and on the economy as a whole.
What does a lockdown mean? In practice, it means that all economic activities are shut down, which means, in turn, that the production and supply of goods and services are disrupted, if not halted. Goods and services are not supplied in adequate quantities to meet existing demand. But at the same time, as economic units are shut down, people lose jobs and wages. In addition, because there is a lockdown, people do not venture out to purchase goods and services. Thus, as a result of reduced consumption, overall demand also falls. Recent crises in the global real economy have been caused by either demand slowdowns or supply shocks or financial crises. The Covid-19 lockdown is unique in that both demand and supply have fallen. This is not a normal circumstance; rarely in history does such a convergence of decline of demand and supply occur, and for a non-economic, external reason.
Disruption of economic activities in the real sector spills over into the financial sector and external trade. Most global economies today have high levels of debt, particularly private corporate sector debt. Most of this debt is also of poor quality.
The Covid-19 pandemic hit a fragile financialworld.
In India too, the banking sector was reeling under high levels of NPAs and little demand for fresh credit even before the pandemic erupted. Lower economic activity implies that most debt repayments stop. A prolonged lockdown would certainly lead to a banking crisis as well. Sectors of the economy highly dependent on exports, such as the spice and plantation sectors in India, will face a fall in export demand and prices. Sectors of the economy dependent on imports of intermediary goods or raw materials will see imports halted and production stopped. Above all, remittances fall, adversely affecting the nation’s foreign exchange reserves. The fall in oil prices is a cushion, but the fall in domestic demand for oil counteracts this effect.
Economic Impact on Agriculture: World
Globally, the Food and Agriculture Organisation (FAO) expects shifts in the supply of and demand for food. It warns of a world “food crisis” if countries do not protect vulnerable people from hunger and malnourishment, and de-clog food supply chains. Similarly, the United Nations has warned that the Covid-19 crisis could trigger “food shortages” around the world. The World Food programme (WFP) has noted that the Covid-19 crisis is “threatening to affect millions of people already made vulnerable by food insecurity [and] malnutrition.” The Ebola outbreak in Sierra Leone (2014-16) led to a major rise in hunger and malnutrition. Small and marginal farmers will also be badly affected if they are unable to continue working their land, earn remunerative product prices, and gain access to markets for purchase or sale.
World agricultural prices show signs of a rise from the third week of March 2020 (Figure 1). The increases are marked for rice and wheat (Figure 2). One reason for this rise has been the stockpiling by households of rice and wheat, and the restrictions imposed by different countries on food exports. For instance, Vietnam, the world’s third largest rice exporter, has stopped exports, which may reduce the global rice exports by 15 per cent. If India and Thailand too ban exports, world rice prices may rise sharply soon. Russia, the world’s largest wheat exporter and the largest wheat supplier to North Africa, is expected to restrict its exports. Kazakhstan, one of the world’s biggest sources of wheat flour, has already banned its exports. Similar trends are noted in other crops too. Serbia, to cite an example, has stopped the export of its sunflower oil. Commentators have wondered if these policies indicate the onset of a “wave of food nationalism” that would disrupt the nature of trade flows that have existed after the 1990s.
Figure 1 Global commodity price indices, January to March 2020 (Source: Capital Economics.)
Figure 2 Year-on-year change in the export prices of rice and wheat, April 2019 to March 2020 (Source: Reuters.)
Quite to the contrary, in some crops like corn, prices have crashed in the USA. This has been the result of low oil prices and the sharp decline in driving across the country, which together have sharply reduced the demand for ethanol. Corn is the most important input in the production of ethanol (see Figure 3).
Figure 3 Prices of ethanol in Iowa, monthly, 2019 and 2020, in $ per gallon (Source: USDA-AMS Livestock, Poultry & Grain Market News.)
At the same time, estimates also show that the world supply of rice and wheat are satisfactory. According to USDA data, the total world production of rice and wheat will be a record 1.26 billion tons this year. This is more than the total combined annual consumption of rice and wheat. There is also likely to be an increase in the year-end inventories of rice and wheat to a record 469.4 million tons. These estimates, however, assume normalcy in the supply chains of these goods. USDA data also show that many countries, with variations, have inventories of rice enough to feed their populations for about 1 or 2 months (Figure 4). If the lockdown continues beyond 2 months, these countries, mainly rice importers, will be in trouble.
Figure 4 Number of months of rice inventories available in top rice importers, March 2020 (Source: Reuters)
Let us now take the case of egg, milk, and meat prices. In the USA, there are supply shortages and a sharp rise in retail egg prices. The wholesale prices of eggs are estimated to have risen by 180 per cent since the beginning of March 2020, as customers were purchasing 44 per cent more eggs in the week ending March 14, 2020 than at the end of the corresponding week in 2019. Retailers are reportedly ordering six times the quantity of eggs to fulfil rising demand. Figure 5 shows how the inventories of large eggs in the USA have been rapidly shrinking in March 2020.
Figure 5 Inventories of large white shell eggs and retail feature activity in the USA, weekly, February 2020 to March 2020, in ‘000 30 cases and 1000 stores (Source: USDA.)
In milk, China is a major importer. According to Rabobank, Chinese imports of milk are likely to fall by 19 per cent in 2020. At the same time, the growth rate of milk production is increasing in exporting regions such as New Zealand, Australia, and the EU. Covid-19 is not expected to reduce the production of milk in the exporting countries. In the circumstances, expectations are that global milk prices will tend downwards. This had led to major worries among milk producers in these exporting countries. At the same time, local supply chain bottlenecks are likely to keep upward pressure on the retail prices of milk in most countries.
The meat sector has been in crisis for a different reason. The crisis is partly because of widespread safety fears related to meat consumption despite scientific clarifications that meat consumption is safe. Two factors at play here are China and the African Swine Fever. By the end of 2018, the African Swine Fever had hit large parts of China, killing about 50 per cent of all pigs in the country. This led to a spike in pork prices in China, and a major shift of consumers from pork to beef consumption. Beef prices rose. The Covid-19 pandemic has led to a reduction in beef consumption in China, as well as in other major markets such as the USA.
Yet, there has been heightened retail demand and panic buying of beef in March 2020; in the week ending March 15, 2020, retail beef sales in the USA rose by 77 per cent on a w-o-w basis. This is leading to a rise in the prices of beef and live/feeder cattle (Figure 6). This rise in beef prices has, however, not benefited farmers much and much of the gains have been cornered by the meat processors and packers. This is the reason why meat farmers in the USA have been asking the government to intervene even as retail beef sales and prices have been rising.
Figure 6 Different indicators of global prices of meat and cattle, March 2020 (Source: Wall Street Journal and CNBC)
Globally, agriculture has also been hit hard by labour shortages. There are heightened fears that the absence of the seasonal migrant labour force may disrupt harvests in USA, Europe, and Australia. France estimates that its agriculture would need 200,000 people in the next three months to compensate for the absence of migrant seasonal labour. French minister of agriculture, Didier Guillaume, is quoted as saying: “I am calling on the men and women who are not working and locked indoors to join the great army of French agriculture,” and that “we need to produce to feed the French population.” Germany wishes to address the labour shortage in agriculture by encouraging unemployed catering workers to shift to agricultural work. Germany faces a shortage of about 300,000 seasonal workers who annually migrate to the country to harvest fruits and vegetables. In Poland, it is the Ukranian workers who undertake much of the agricultural labour; the unions of Polish farmers have requested their government to allow these workers to stay back in Poland. Norbert Lins, the Chair of the European Parliament’s committee on agriculture, has exhorted member countries to allow safe passage of seasonal migrant workers. A report states that Lins “‘called on the agriculture ministers and the commission to introduce ‘laissezpasser’ [access passes] for seasonal workers’ to ensure the right to travel to the seasonal workers using special busses or trains or even planes.”
In the UK, the shortfall of seasonal workers is estimated to be 80,000. Farm unions in the UK have demanded that the government grant them a £9.3m support package in order to pay for a “land army” of workers in fruit and vegetable production. Others have demanded that the government should encourage workers thrown out of other jobs to shift to agricultural seasonal labour on farms.
In the USA, seasonal farm workers, largely from Mexico, are employed intensively from March-April onwards. These workers come in on an H-2A visa; estimates are that the H-2A visa workers constitute about 10 per cent of the crop farmworkers in the USA. New visa processing rules after Covid-19 may lead to a shortfall of about 60,000 H-2A workers. The current effort is to allow the existing H-2A visa holders to extend their stay in the country for work in the farms, but it is unclear whether this number would be adequate to meet the farm needs (see Figure 7). There is some news that the US government is currently considering liberalising visa rules in view of the labour crisis.
Figure 7 Importance of seasonal farm workers in the agriculture of USA (Source: Economic Policy Institute)
Economic Impact on Agriculture: India
Let us first start with the question of prices. It is important to note that even before the Covid-19 pandemic began, Indian economy was facing a rise in food prices. Data show that food inflation had begun to rise from the middle of 2019, reaching, by January 2020, levels previously attained in 2013-14 (Figure 8). Data on the wholesale price indices (WPI) for selected crop groups, available only till February 2020, show that while WPI for food articles has been rising from August 2019 onwards, the rise was driven by a rise in the prices of vegetables; within vegetables, the price of onions, followed by potato and tomato, drove the WPI up (Figure 9). While onion prices have come down, vegetable prices remained high even in February 2020.
Figure 8 Food inflation rates in India, January 2012 to February 2020 (Source: Tradingeconomics)
Figure 9 Percentage change in the WPI of important agricultural commodities, y-o-y (Source: MOSPI)
According to the RBI’s 7-th bimonthly monetary policy statement, dated March 27, 2020: “as regards inflation, the prints for January and February 2020 indicate that actual outcomes for the quarter are running 30 bps above projections, reflecting the onion price shock”. However, the RBI’s assessment is that food inflation pressures will fall, since aggregate demand is likely to weaken because of the Covid-19 crisis. Consumer price indices (CPI) for food also indicate a similar trend of a rise after August 2019, with some weakening in January and February 2020 (Figure 10). The point is that if inflation rises in March 2020 and later, it will be on top of an already rising price curve.
Figure 10 Consumer Food Price Index, India, January 2017 to February 2020 (Source: MOSPI)
The satisfaction of the RBI also stems from the fact that India’s food grain output is projected to be at 292 million tonnes in 2019-20, up by 2.4 per cent from 2018-19. According to reports, the stocks of wheat and rice with the Food Corporation of India (FCI), as on March 1, 2020, was 77.6 MMT. This quantity is more than three times the specified minimum operational buffer-cum-strategic stock of 21.04 MMT. With the rabi wheat harvest, which should come in by April 2020, the situation is expected to ease further. Similarly, for pulses, the National Agricultural Cooperative Marketing Federation of India (NAFED) is reported to have stocks of 2.25 MT as on March 19, 2020. Between 2014-15 and 2018-19, NAFED has made an unprecedented record procurement of 91.1 lakh MT of oilseeds and pulses (61.3 lakh MT of pulses and 30.3 lakh MT of oilseeds) under the Price Support Scheme, up by 1205 per cent from the 7 lakh MT procured between 2009-10 and 2013-14. Here again, the inflow of rabi pulses into the market in April 2020 is expected to ease the situation further.
In the case of milk, AMUL has noted that its procurement from 36 lakh farmers across India is proceeding smoothly. In terms of quantity, this amounts to distributing 1.50 lakh litres of milk every day across India. As the lockdown proceeds, AMUL expects milk demand to decline. In an interview, R. S. Sodhi of AMUL stated:
In the first 3-4 days [of the shutdown], there was a panic sale and our sale increased by 15% or 20% as people started buying more. And after that, around Thursday, our sales declined by 30%. The reason is very simple that people had done the panic buying and the second reason for the reduction in sales is the closure of hotels, restaurants, tea shops, etc. We also started feeling the impact of migration of workers from the big cities to rural India. Our average sales will be 10-12% lower than the average.
In other words, the overall supply situation of essential food items does not appear to be too worrisome in India at this point. However, if the lockdown proceeds beyond a month, the supply situation will become tighter. Coupled with supply bottlenecks, prices may begin to rise. Here, the price curve may begin to look like a U-shaped curve, with a sharp fall in prices in the initial days of the lockdown replaced by a sharp upturn in prices in the later days.
Regardless of the apparently comfortable situation with respect to overall supply, it is important that we underline some concerns that exist at the ground level, particularly with regard to the supply chain and the smooth organisation of farm operations.
First, harvesting and marketing crops at the farm level is in crisis across the country, because are (a) disruptions in the procurement of food grains by government agencies; (b) disruptions in the collection of harvests from the farms by private traders; (c) a shortage of workers to harvest the rabi crop; (d) a shortage of drivers in the transportation sector; (e) blockades in the movement of agricultural commodities across the major highways; (f) closure or limited operations of APMC mandis; and (g) shutdowns in the retail agricultural markets. These factors have led to a crisis in a range of crops too: wheat, grapes, watermelons, bananas, muskmelon, chana, cotton, chillies, turmeric, cumin, coriander, onion, and potato.
Secondly, these bottlenecks have led to a fall in the farm prices of a range of commodities in agriculture. Tomato growers in Maharashtra are reported to be receiving not even Rs 2 per kg. Grape growers are reported to be facing an aggregate loss of Rs 1000 crore because of the crisis, as demand has fallen. Wheat prices in Madhya Pradesh are reported to have fallen from Rs 2200/Q to about Rs 1600/Q by March 25, 2020. For many crops, these prices are also below the Minimum Support Prices announced. In Punjab, vegetables that were sold at Rs 15/kg are reportedly being sold at a mere Rs 1/kg. In Delhi’s mandis, the price of broiler chicken has fallen from Rs 55/kg in January 2020 to Rs 24/kg in March 2020. In Tamil Nadu, egg prices are reported to have fallen from Rs 4/egg to Rs 1.95/egg over the same period.
As the lockdown proceeds, these prices can be expected to rise, just as in the Western economies, the rise driven by panic buying and supply bottlenecks. Despite such price rises, farmers are unlikely to be the beneficiaries; most benefits are expected to flow to wholesale and retail traders as well as other middlemen.
Thirdly, the return of many migrant workers to their homes has meant that harvest operations are not taking place smoothly, and many farmers are being forced to leave the crop in the field. Losses to farmers will be the highest in such cases. While mechanical harvesters can be used, lockdown regulations disrupt their free movement. Further, in some places, a shortage of drivers/operators for these harvesters has also been reported. As machine repair shops are closed and mechanics become unavailable for work, spare parts are not easily available, leading to many machines being left unused. In the rice mills of Kerala, reports indicate a shortage of migrant workers, which has led to these mills not procuring adequate supplies of paddy from farmers. Farmers have either not harvested at all, or have harvested and left the product near the fields. Labour shortages are also being experienced in most milk processing plants, cold storage units, and warehouses. According to the Chairperson of AMUL, most milk processing plants are currently operating with half of the labour force. Many workers are not reporting for work or have returned home also because of the fear of police atrocities.
Fourthly, supply chains have been disrupted across the country for a range of commodities. The first official notification on lockdowns appears to have been ill-thought out, leading to the exclusion of a number of activities from the list of essential items (this included even soap and sanitary pads till March 28, 2020). A second notification has corrected this, at least partially. Yet, major highways and entry points to States are seeing a pile up of trucks unable to move forward. Lorry transport is in major shortage at many places, leading to the extremely slow movement of goods across the country. APMC mandis are not functioning every day; while some have closed down, others are operating only twice or thrice a week. In Figure 11, I have attempted to summarise the supply chain impacts using a generic flowchart of the marketing channels of food grains/vegetables in rural India. The bottlenecks due to the lockdown are marked as crosses at the appropriate locations. The information for this purpose has been sourced from news reports and are hence to be considered preliminary. Also, the presence or absence of bottlenecks may differ widely across States/regions.
Figure 11 Representative marketing channels for vegetables in India, with potential bottlenecks (Source: Author’s estimates from news reports)
Fifthly, the shortage of livestock feed and their availability is raising the costs of production in many animal husbandry units. This is despite the fact that poultry has been declared as an essential item. This is leading to the death of many birds at the farm, or farmers undertaking panic selling at very low prices.
Response of the Government of India
The response of the Indian government in agriculture has involved three policy measures.
1. It has announced that most agricultural activities will be in the essential list. It has exempted farm workers in the fields, farming operations by farmers, agencies engaged in procurement of agriculture products including MSPs, mandis notified by the State Governments, inter- and intra-state movement of harvesting and sowing related machines and manufacturing, packaging units of fertilizers, pesticides, and seeds among others.
2. It has announced that the first instalment of the PM-Kisan payment to farmers, i. e., Rs 2000, will be paid up front to farmers. It has also announced that the wages under MGNREGS will be raised from Rs 182 to Rs 202 per day.
3. The Reserve Bank of India (RBI) has announced a moratorium on agricultural term loans (including crop loans) for a period of three months.
If we consider the responses of governments across the world, these interventions appear insignificant. In fact, the up front payment to farmers from the PM-Kisan scheme is not even worth calling a package, as this money was anyway going to be paid to the farmers between April and June.
The US Congress has passed a Covid-19 stimulus package of $2 trillion, of which $9.5 billion is earmarked for the agricultural disaster fund. In addition, there is a $14 billion funding for the Commodity Credit Corporation (CCC) that can be used by the US Department of Agriculture (USDA) to assist producers. These packages will assist livestock and dairy producers, growers of fruits, vegetables and nuts, and small businesses related to agriculture. Other key components of the package relevant for rural areas are:
- “$15.5 billion for the Supplemental Nutrition Assistance Program to cover an expected increase in demand as a result of the pandemic.
- $8.8 billion for child nutrition programs.
- $450 million for The Emergency Food Assistance Program, or TEFAP, which funds food distribution to food banks.
- $100 million for additional rural broadband grants through USDA’s ReConnect program.
- $33 million to the Food Safety and Inspection Service to cover the cost of temporary and intermittent workers, relocation of inspectors and overtime costs.
- $25 million for the Rural Utilities Service to support telemedicine and distance learning services in rural areas.
- $4 million to cover the cost of repatriating Foreign Agricultural Service staff.”
In my view, the intervention of the Government of India will have to be considerably enhanced in the following ways. These are immediate measures to be considered. As and if the crisis grows, these measures will have to be updated.
1. The payment to farmers through PM-Kisan should be raised to at least Rs 12,000 per year, and 50 per cent of this amount (Rs 6,000) should be paid immediately. Tenant farmers should be included as beneficiaries of the scheme.
2. There should be an immediate expansion of the Pradhan Mantri Fasal Bima Yojana (PMFBY) to ensure compensation payments to farmers affected by the Covid-19 pandemic.
3. Holders of all MGNREGS job cards should be provided an unemployment allowance or assistance, worth at least half the payments to be received by them, assuming 100 days work/year.
4. The Government should take steps to ensure that food grain is distributed to all households outside the priority list also for a period of three months at the rate of 5 kg per capita per month.
5. There should be efforts to arrange food, shelter, and clothing to all migrant workers in villages. Steps should be explored to provide migrant workers with cooked food by the government agencies.
6. The Government should consider waiving the interest costs of all outstanding crop loans and ensure a fresh flow of credit to small and marginal farmers for the kharif season of 2020.
7. MSPs for farmers in the 2020-21 seasons should be substantially raised to 1.5 times the C2 cost of production. Procurement should also be significantly expanded.
8. In case the crisis prolongs to beyond two months, the government should prepare itself for the take-over of large parts of the procurement and supply of essential food items from the private sector, including trucks, warehouses, go-downs and establishments.
R. Ramakumar is NABARD Chair Professor, Tata Institute of Social Sciences, Mumbai
First appeared on FAS