Economist and member of the Planning Commission Abhijit Sen has been in the news for the controversial and inconclusive report on futures trading submitted to the government by a panel he headed. Sen himself would rather talk about agriculture. The professor at Jawaharlal Nehru University wonders in an interview with Mint why people are more interested in the futures market which is a “dud” than appreciating that in a world riven by food crisis, India is the only country that has successfully managed both food security and prices.
Like a true economist, you seem to have made everybody, including the Left, unhappy with your report.
Firm stand: Planning Commission member Abhijit Sen says India should never have allowed futures trading in rice and wheat as it is more suitable for commodities such as spices, seed and some oils. Photo: Madhu Kapparath / Mint
Obviously, because we haven’t said a damn thing. Since 2003, one knew the difficulties and that these were really to do with the underlying spot markets—that they are extremely poor, not very well integrated, with large intra-market differences. Yet, there was a feeling we should just go in this direction.
If we really wanted to have a market and create products to help people other than those who participated in the market, the evidence that we have found, given in the appendix of the report, is that hardly any farmer participates (in the futures market) and hardly a trader actually hedges on it. The only guys who hedge a little bit are the big processors (of oilseeds) and I have nothing against them.
Second, it is very clear that in well over half the commodities, more than half the contracts cannot be hedged. So you don’t have contracts that lead to risk-sharing. So, on the one hand, we have a situation where inflation was high, though we can’t really say it was because of futures, and on the other, you didn’t have risk mitigation and reduction in volatility. Where does then the balance sheet lie? If you were somebody like me who gives marks to students, I couldn’t give it high marks. But there were others in the committee who wanted to do so, probably because it was the thing to do.
So if it is not serving the farmers, be selective and for heaven’s sake, don’t get into a stop-go situation and don’t get into a situation where there is a huge disconnect between the spot and the futures (markets). That’s the wrong way to proceed. Before 2003, all committees listed a number of commodities that were to be kept out. We’ve gone further and said if you want futures, concentrate on the spot side, consider a national spot market and use the commodities transaction tax to get the spot right. Then as things develop, you can have simple options, over-the-counter products. Right now, for people scared of inflation, it’s not a great thing. It’s a dud if ever there was one.
From what you suggest then, rice and wheat futures have no future at all.
We should never have been in rice and wheat. There are certain commodities where there is a good case for futures, such as spices, guar seed, some oils, even if farmers don’t participate, but where imports or exports form a large part of the trade, and people are simply trying to get into the trade benefits or losses. It was (a) very bad (idea for the government last week) to have banned soya oil, even potatoes where prices were falling, and rubber. Here is a situation when you have a total inability of a lot of people to take a sensible view even on the pluses.
Do you think the steps taken by the government so far will help cool inflation?
We should stop talking about all these bans and stuff and say, what a marvellous job has been done by our farmers and the FCI (Food Corporation of India) and we are very secure right now. We have 9 million tonnes (mt) more wheat procured than last year and 5mt more rice, whereas the world is talking of food crisis. Our existing food security system rather than that sattabaazi (gambling) has delivered. We’ve got record cereal production, pulses, oilseeds.
On the agricultural side we still have problems because inflation doesn’t come down easily and also because we have raised minimum support prices. Wheat output is only 1mt more and we have procured 20mt, so the market has 8mt less and that could lead to inflation. So unless the government raises the PDS (public distribution system) supplies and open market sales, it will ensure that inflation takes place—and that would look very silly.
But if procurement is higher by 9mt, clearly farmers have been sitting on their stocks and watching the global wheat prices?
Clearly, we couldn’t have had such huge procurement unless there were private stocks since last year and the year before, though a lot of these stocks are held by farmers for others.
There could be least 3mt of old grains...expectations are important. The surest way to kill that is to make sure prices are not going up.
You’ve got to allow for people not believing you for some time, but a period of stable prices for three or four months should help. That is the great comfort that these food stocks will give you. The news has cooled down world wheat prices and I expect something similar to happen to rice.
Do you expect world food prices to stabilize and the panic to subside?
A whole lot of people in the world got into a bubble (stock market) that has been pricked. So funds are going around like headless chickens, getting out of dollar and getting into gold and oil and other commodities where there are no secure returns. When long-term funds flow in, it would be better but that has to do with American recession, oil stocks...those are big problems. Our problem is that Indian prices are much lower and if I was a speculator, I’d bet on them going up. The rational thing to do would be to let them rise but you can’t do it in an election year.
So how will the catch-up effect play out—soon or over some time?
It could happen the other way round. In every situation that I studied, the world prices have come down by the time we were ready to catch up. These prices are atrocious.
But isn’t domestic inflation actually more about products and metals and minerals?
The big ones here (contributing to inflation) are oilseeds, cotton, minerals and metals, all of these are related to world prices. Except for petroleum, we are exporters of all the minerals. But we are simply allowing a few mining companies to profit from the world prices. If we can impose a high export tariff..., immediately the cost of the steel sector will go down. The vested interests won’t like it but these are clearly windfall profits that are eating into the cost structure and pushing up prices.
Subsidies will touch a record figure this year. Isn’t that untenable?
Food subsidy will clearly end up larger than in the Budget. But in nominal terms, it is lower than what it was even in 2002 (at Rs32,667 crore, it is 46% of total subsidies compared with 55% in 2002-03). So it is obviously tenable.
I think both subsidies will have to stay. If you did away with fertilizer subsidies, you’ll suffer a fall in (farm) production...
Is there a case for genetically modified foods in the backdrop of the global food crisis?
GM foods is like the futures market—do you want to run before you can walk? The world over, there are only two successful GM food crops: maize and soya bean. On maize, we are doing pretty well with our hybrid varieties, and we will be hitting 18mt this year, up from 10mt 10 years ago, and that’s partly because our poultry industry is growing hugely and generating the demand. Soya bean is a similar story. In GM, it’s a matter of convincing people, whichis why Europe has still not tried it, and backlashes can happen.
There’s no case for it unless we are in a situation of great famine or insecurit.
And we are in no way near that?
Not at all. In the last three years, we’ve raised foodgrain production by 30 mt. So (we’ve grown by) 5% every year, while population is growing by 1.5%. We had a terrible situation between 1996 and 2004, when output fell, and we are coming out of it brilliantly and are at a cusp. Our systems—and that’s not just FCI—are doing well, and we’ll get 4-4.5% last year (in 2007-08). Certainly 4% plus.
There’s a real revival in agriculture (but) we are at a cusp. A lot of things can go wrong—monsoon is one worry—but the food security mission, despite problems, is delivering.
This year’s wheat is a good example. It was a bad year for wheat—area (under cultivation) was lower, winter rains were poor—but we will get 2mt more in wheat and a little bit more than forecast in bodo (winter) rice. The enthusiasm is huge in the Rashtriya Krishi Vikas Yojana (national agriculture development plan), which involves farmers having their own plan and putting their own minds to it and not doing routine stuff.
The real simple thing is that we’ve done a lot better than the rest of the world, on prices and output, and if there’s a normal monsoon this year, we’ll deliver another 4%.