The pressure on the ruling United Progressive Alliance government to announce populist policies aimed at farmers in the run-up to a late-2008 or early- 2009 election could result in a mismanagement of the agricultural economy, according to Abhijit Sen, member, Planning Commission, and a noted agricultural economist.
Sen is against an automatic annual increase in minimum support price (MSP), or the floor price at which the government purchases foodgrain such as wheat and rice from farmers.
“As of now, there is no plan to give a bonus on the (minimum support) price announced for wheat,” he said, “but this being an election year, there would be a pressure to succumb to the various lobbies working for higher prices and imports.”
Sen also downplayed the significance of indications by the government that foodgrain production would be lower than expected in the rabi or winter season harvest. India has two corp seasons, kharif and rabi. According to the agriculture ministry, the prevailing dry weather spell may actually result in lower wheat production at the level of 74.8 million tonnes (mt)—one mt lower than last year. A shortfall, it is feared, would put pressure on the government to import more grain at a time when international prices, due to a global shortfall, have surged by 50%.
Plan panel member Abhijit Sen warns the government of succumbing to lobbies working for higher prices and imports
While conceding that rainfall has been less than normal in the wheat growing regions, Sen said that the crop “is entirely irrigated. At any rate, farm growth rate will definitely not be less than 3%”.
“The ministry is just being conservative,” he said.
India’s farm output grew 3.8% in 2006-07, after a low advance estimate of 2.6%. In 2007-08, the government is expecting a total foodgrain output of 219.3mt, marginally higher than the previous year’s 217.3 mt.
Presenting the Union Budget on 29 February, finance minister P. Chidambaram had cautioned that supply management of foodgrain would be the key to managing domestic inflationary pressures.
Food inflation, as measured by the wholesale price index, rose to 4.8% at the end of February, from around 2.5% in November.
“Foodgrain prices have been quite low this year except in edible oils and pulses,” said Sen, “and inflation is actually more in manufactured goods. But there could be a catch-up effect that is partly political, partly agricultural and partly global.”
Arguing similarly, Ashok Gulati, director (Asia), International Food Policy Research Institute, said: “In Punjab, the farmers are already saying that there will be so much wheat this time that the government won’t be able to handle it (purchase it). Even the stock situation is exactly the same as it was last year, when we produced more than 217mt. The way I see it, there would be absolutely no need for imports.”
However, while the kharif crop of rice and coarse grains has been good, the major kharif pulse crop, pigeon peas (tuar dal), and the major kharif oilseed crops, groundnut and soyabean, have been affected by dry weather. Prices of these have gone up by 20-25% over the past one year, according to the monitoring committee of the department of consumer affairs.
However, Sen maintained that the two major rabi oilseed and pulse crops of mustard and gram could turn out to have a positive impact on the prices of edible oils and pulses, respectively.
Pronab Sen, chief statistician of India, said farm output would match projections. He added that various factors can fan retail prices, apart from imported inflation, which is very much the case in oilseeds, where 50% of India’s requirement is imported, and in pulses, where the country has a standard shortfall of 3mt. “Every year, a month-and-a-half before the rabi harvest, we see price spirals, especially in wheat, because the traders start contracting,” he said.
According to Abhijit Sen, the actual production differs from the projections because of the manner in which estimates are made. In the case of wheat, for instance, the calculation is done entirely on the basis of area sown, which is down to 27.73 million ha from 28.21m ha, while what is important is the yield, he said.
The lack of dependable estimates as well as trading in futures by farmers often leads to a mismatch between supply and demand in the market, causing sudden spurts in inflation and last minute imports to ensure adequate public distribution to protect the poor.
In 2007-08, the government has so far imported 1.79mt of wheat at prices that are up to 40% higher than the prevailing MSP.
A higher MSP, said Gulati, also contributes to inflation. This season, the wheat MSP is up 33% to Rs1,000 a quintal, while the paddy MSP was raised only 11% to Rs645-675.
“This will impact wheat prices now. But my studies indicate that so far in the year, contrary to the global situation, prices of all commodities went up by only 5-6% in India,” he added.
A similar situation may well be playing out in rice. Despite a record high kharif crop of 81.52mt, compared with 80.17mt in 2006-07, rice prices have gone up by 20% over February last year. There is significant demand from Bangladesh, where the rice crop was hit by a cyclone in November and “a large part of the rice price rise is because of the large-scale across-the-border movement”, Pronab Sen said. “The government’s recent decision to raise the minimum export price of non-Basmati rice will increase the diversion of common rice from India.”
The Commission for Agriculture Costs and Prices (CACP) has already recommended an MSP of Rs1,000-1050 for rice in the 2008-09 marketing season, bringing it on par with wheat.
Grain stocks with the state-owned Food Corporation of India (FCI) are low, Abhijit Sen said. FCI needs about 15mt every year for the public distribution system and emergencies, and its chairman said recently that he hoped to procure 13.5mt of wheat after April, as stocks are at a low of 5.3mt compared with the minimum norm of about 8mt.
In 2006-07, FCI managed to procure only 9.2mt, 40% less than the previous year. Global inventories of wheat are expected to fall to 110.4mt by 31 May, a 12% drop over 2007, and the lowest since 1978, the US department of agriculture had said on 11 March.