FOOD inflation may surge this year mainly because of the increasing cost of agriculture production. Economists believe that this Rabi and next Kharif seasons would have to absorb an additional financial burden of over Rs200 billion, assuming that there is no more increase in prices of diesel, fertiliser, electricity, agro-chemicals and implements.

This increased cost of production would be passed on to manufacturers or directly to consumers. In either case, the consumers would have to pay the raised prices of food items. The year appears to be tougher for common man than the last year.

The biggest rise in cost of production would come from increase in fertiliser prices. During this Rabi season, prices of both urea and di-ammonium phosphate (DAP) have increased. The urea price, which was Rs850 per bag in December, has gone up by almost 50 per cent. Currently, a urea bag is selling at Rs1,250. The manufacturers increased the price to Rs1,040 citing gas loadshedding and its cost for the industry. But market forces have added another Rs200 per bag, thanks to the receding writ of the government.

The total increase thus stands at Rs400 per bag. In cumulative terms, Urea usage would cost farmers an additional Rs48 billion if 120 million bags, which farmers use during a year, are taken as a benchmark.

Similarly, a DAP bag, which cost Rs1,770 per bag till October last year, saw its price spiraling to Rs3,300. The farmers use around 40 million bags of DAP, and ended up paying over Rs48 billion on this head alone. The total additional cost on fertilisers’ head, which farmers would pay over and above 2010, would be around Rs100 billion, if the current prices sustain.

The second biggest burden is from diesel prices. During 2010, the average price of diesel was around Rs70 per litre. Had the price increase of January 1 this year not been withdrawn, it would have jumped to Rs82 per litre. The farming sector runs around 900,000 tractors and 700,000 tube wells on diesel, and roughly consumes 3.5 billion litres of diesel. They would have had to pay Rs42 billion additional on this account. What is in store for the farmers is not yet known.

The electricity tariff is another area of increasing expenditures for farmers. During the last one year, electricity charges have gone up by almost 100 per cent, if the taxes are included in the tally. In all probability, there would be another increase of about 25 to 30 per cent in 2011. Around 200,000 tube wells run on electricity, and their bills have swelled from Rs30 billion to Rs40 billion, the farmers say. This load of Rs10 billion, at the current price factor, would also be passed on to consumers.

The farming sector also consumes Rs100 billion to Rs150 billion on farm machinery and agro-chemicals. If they increase with the normal rate of inflation, which is reaching close to 20 per cent, they would be taking another hit of Rs20 billion to Rs30 billion.

The government has reportedly, and quietly, imposed a withholding tax of 3.5 per cent on all agriculture commodities that come to market. The notification was issued on December 31 and is currently in force. The farming sector brings around five million tons of rice, seven million tons of wheat, three million tons of maize, 50 million tons of sugarcane and some 12 million bales of cotton to market. The total cost of these commodities is around Rs750 billion and the government would be collecting around Rs26 billion of withholding tax on these commodities.

Put together the total financial burden on the agriculture sector, it would be around Rs200 billion. The farmers would naturally pass it on to manufacturers and consumers, increasing the prices of all commodities correspondingly.

Can the consumers sustain that kind of price pressure? In all probability, they cannot.

The other emerging scenario could be farmers reducing usage of fertiliser, tube wells, agro-chemicals and farm machinery, which would certainly reflect on production of food items and force the government to import them spending precious foreign exchange.

Both these scenarios are equally threatening, both in economic and social terms. One can only hope the government is alive to these issues, and preparing some remedial measures.

The government needs to realise that inflation imposes ‘ indirect taxes’ on almost all possible heads. In order to compensate the hurt party, it increases prices where it matters or let the cartels rule where it does not hold any sway. The vicious circle is going on for the last many years, particularly last three years. The result is hyper inflation.

It must do all it can to break the vicious circle. To begin with, it should create regulatory regime that could bring transparency in prices of agriculture inputs. Currently, all these prices have been de-regulated, without any regulatory authority. The manufacturers increase prices at will. They might be justified in those increases, but since the process is not transparent, it gives way to lot of allegations and vitiates business atmosphere in the country.