Financial crisis and agriculture - Its impact on Indian Economy

• Author: D.Amutha M.A.M.Phil
• Position: Asst.Professor of Economics - St.Mary's College - TUTICORIN

Introduction

Agricultural growth is a crucial element in resolving food price crises, enhancing food security, and accelerating pro-poor growth. After decades of policy neglect and underinvestment in public goods such as agricultural science, rural infrastructure, and information and monitoring, high food prices have provided some positive incentives for policymakers, farmers, and investors to increase agricultural productivity. The variability of food prices, however, has been an obstacle to long-term planning. At the same time, farmers in developing countries who took advantage of rising agricultural prices to invest in expanding production may now find themselves unable to pay off their debts because of falling output prices. As banks cut lending because of the financial crisis, it is harder for small farmers to make new investments. Broader plans for investment in agriculture especially in low-income and emerging economies are also at risk of being scaled back.

High prices and favorable weather encouraged agricultural expansion in developed countries in 2007 and 2008, but the production response in developing countries remained slow. Cereal output grew by 11 percent in developed countries between 2007 and 2008 and by only 0.9 percent in developing countries. If Brazil, China and India are excluded, cereal production growth in developing countries actually fell by 1.6 percent. Even before the crisis hit, global cereal stocks had been at their lowest levels since the early 1980s. Just to bring stocks back to these very low levels, cereal production would have to increase at a much higher rate - by 40 percent in 2008. This paper try to answer the following questions: How did this global crisis come about? How severe is it and how long might it last? What has been its impact on the Indian economy? And against the backdrop of this world crisis, what are some of the priorities for India’s agricultural sector?

Causes for Global Crisis

There are several underlying causes of the current global crisis. Scholars will debate the importance of each of these causes for many years. Most people believe that the major causes of the crisis include the following:

• The United States and some other European countries enjoyed prolonged boom in house prices since the early 1990s right up to end of 2006. People began to believe that house prices can only go up; they would never fall. This led to massive amounts of lending by banks for home purchases, often to borrowers who did not have jobs or steady incomes.

• This housing bubble was part of a massive borrowing binge in the United States and some European countries by households and financial institutions that was fuelled by the easy money policies of their central banks and huge inflows of funds from capital surplus countries such as China, Japan, Germany and oil exporters. These big exporting nations sold their products to American and European consumers and then parked their surpluses (over and above their imports) in American and European government securities. As an indicator of this huge borrowing binge, the...