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Agricultural price policy’s failures
Failure to rein in prices of essential food items for last 5 years a clear indication of the lack of food price stabilization mechanism
The wholesale price inflation at minus 2% may be music to the ears of the government but not to the millions of farmers who have seen prices of most agricultural commodities decline. In fact, most of the decline on a year-on-year (y-o-y) basis in the wholesale price index (WPI) may be attributable to the sharp decline in petroleum prices, which fell by 48%, along with minerals, which fell by 26%. Some of this has also been passed on to lower input costs in manufacturing, with the manufacturing price index increasing marginally by 0.3% y-o-y.
While this may be good news for monetary and fiscal management, the story of farm prices tells an interesting story. Inflation in food articles continues to hover around 8% per annum, with fruit and vegetable inflation remaining stubbornly high at 16%.
Since a large part of the food inflation in recent years has been on account of high fruit and vegetable inflation, this may continue to be a cause for concern. It’s more so because of the untimely rain last month, which may aggravate the already serious concern on account of the bad monsoon last year.
The low production coupled with the failure to control fruit and vegetable inflation may turn out to be difficult to handle if petroleum prices start rising.
But a far more serious concern as far as agriculture is concerned is the trend in prices of a majority of cash crops as well as foodgrains, which provide livelihood to millions of small and marginal farmers.
While it is well-known that most agricultural commodity prices, particularly cash crops, mirror the trend in petroleum prices, this has now spread to foodgrains as well, with wheat prices lower by 2% compared with prices last year. On a y-o-y basis, most cash crops have seen a sharp fall in prices in the domestic market: tea (minus 8%), cotton (minus 28%), safflower (minus 20%), soybean (minus 13%), guar (minus 16%) and rubber (minus 15%). This is also the case with sugar, with many mills struggling to maintain production.
These crops together account for a significant share of traded commodities as far as international trade in agriculture is concerned.
While high food inflation at 8% and fruit and vegetable inflation at 16% continues to remain a cause for worry for consumers, a significant section of farmers continues to suffer from the sharp decline in agricultural commodity prices. What is obvious from this mess is the failure of the agricultural price policy regime of the country. It has neither benefited consumers by keeping down the prices of essential items in the food basket, nor served the basic objective of providing remunerative prices to farmers as producers.
The failure of the agricultural price policy is as much institutional as much it is political. The failure to rein in the prices of essential food items, including fruits and vegetables, for the last five years is a clear indication of the lack of any price stabilization mechanism with the government as far as consumer food prices are concerned.
Not only have the prices remained stubbornly high for a sustained period, lack of clarity on reforming the agricultural produce marketing committees (APMC) have meant the market for these commodities continue to be controlled by cartels, politicians, speculators and traders, with farmers gaining little out of this. This is now obvious from many studies but there appears to be no clear roadmap to reform the APMC.
Nor has the policy of providing support prices to farmers done any good to a majority of them. The Commission of Agricultural Costs and Prices (CACP), which is supposed to announce the minimum support price (MSP) for more than 20 crops, has not led to farmers benefiting out of these except in the case of rice and wheat.
While the original institutional structure as envisaged in the Agricultural Price Commission (APC) set up in 1965 had the clear vision of a price policy which used different price instruments such as the MSP and procurement prices not only to incentivize agricultural production, but also to encourage the efficient use of natural resources along with providing remunerative prices to farmers, over the years, the CACP and its MSP operations have been reduced to interventions only in rice and wheat.
But even for these crops, the MSP has very little to do with the original objectives that should have guided the price policy. Not only is the MSP reduced to being the procurement price for the public distribution system (PDS) operations of the government, the excessive focus on rice and wheat has come at the cost of neglecting other crops, particularly pulses, oilseeds and many other cash crops.
The story of mismanagement, as seen in rice and wheat procurement and the political interference in these decisions, is now an old story with foodgrain stocks remaining in excess of requirements for the sixth year in a row. While it certainly did not favour the PDS or the consumer, it did occasionally contribute to price inflation in these commodities by mopping up supply from the market.
While the failure of an effective price policy for agriculture is a story of the failure of various institutions entrusted with the task of maintaining price stability, it is also a failure of government policy, which has failed to take into account the changing nature of agricultural production.
With Indian agriculture open to international trade, the prices of agricultural commodities are not only vulnerable to domestic pressures of demand, supply and marketing bottlenecks but also to international price fluctuations.
The Bharatiya Janata Party-led government, which came to power on the promise of providing remunerative prices following the Swaminathan formula, has not only gone back on its word, but has also reduced procurement.
At a time when the decline in international prices is threatening the very livelihood of the majority of farmers in this country, what is needed is not only a sound price policy but also effective institutional mechanisms to deal with the twin objectives of remunerative price to farmers along with cheaper food to the consumers.
Himanshu is associate professor at Jawaharlal Nehru University and visiting fellow at Centre de Sciences Humaines, New Delhi.
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First Published:17 Mar 2015, 11:55 PM IST
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