We need to uproot some of India’s agricultural policies

Food inflation has become frequent, especially for wheat and rice, and also act as a disincentive to grow better crop varieties and move up value chains.
Food inflation has become frequent, especially for wheat and rice, and also act as a disincentive to grow better crop varieties and move up value chains.


We should end support prices, export bans, stock limits, etc, and empower farmers with modern options

Agricultural policies in India are probably the most complex. Political economy considerations often play a major role. While there has always been talk of increasing the income of farmers, the obverse is that it has to be paid by consumers. This creates dissonance, as political economics would like to see the former happen without distorting retail prices. There is an argument for a complete relook at all agriculture-based policies, as several conflicting situations have arisen in the past few years.

First, the concept of Minimum Support Price (MSP) must be reviewed. While procurement largely takes place for rice and wheat, it is less significant for other crops, though pulses and oilseeds have been picked up in bulk at times. Since MSPs tend to only rise and not fall, one can argue that benchmark prices in the market tend to increase irrespective of output, and so the theory of prices being determined by supply-demand conditions no longer holds. On an average basis, MSPs increase by 4-8% across crops , lending market prices an upward bias all the time. This may explain why the prices of wheat and rice have risen continuously even though the country has been registering new production peaks year after year. Clearly, our pricing policy needs to change. Also, the MSP system attracts farmers to grow mostly fair-quality produce, for which there is a price guarantee. Moving to better varieties is fraught with price uncertainty.

Food inflation worries, in turn, lead to a policy of export bans. These have become frequent, especially for wheat and rice, and also act as a disincentive to grow better crop varieties and move up value chains. While basmati is usually less likely to face export curbs, general embargos come in the way of such migration. This is why the typical farmer’s average quality of produce tends to converge to the lowest acceptable level. For better outcomes, the policy of banning exports needs a review. It may appear to serve a near-term need, but can be detrimental to commercializing agriculture. Bans are also viewed negatively at the global level, as they reduce overall supply and push up world prices. Indonesia’s halt of palm oil exports after the Ukraine war, for example, spooked markets across the globe. In a globalized world, inflation is a global worry.

The third policy in need of a rethink relates to stock limits. Such caps have often been placed on pulses and sugar when production has fallen, but pose a conundrum. Normally, every crop is grown once a year (with the exception of rice to an extent); it gets categorized as kharif or rabi depending on its harvest season. Crops harvested in both seasons have to be made available to the entire country throughout the year. Until the next cycle begins. Who does this job? Food Corporation of India enables it for rice and wheat at the government level, buying output for its buffer stocks as well as public distribution system. For other crops, it is done by farmers and traders.

Farmers must monetize their harvest to earn an income. Some have a two-crop regimen, with a rabi or horticulture crop as the second one. Either way, farmers must access money and hence need to sell their produce right after harvest. This is a point that the government tries to address with its MSP system, ensuring that prices do not crash as vast quantities of supply take place together. At any rate, farmers cannot stock their crop, given their limited access to finance and warehousing facilities.

This is where intermediaries like traders are required. We need players ready to buy crops and make it available to satisfy demand across the country all through the year. Therefore, logically, someone must hold these crops, stocks of which will gradually diminish as the next harvest season approaches. In this context, imposing stock limits seems illogical. If traders are unable to play their role because of such restrictions, then they would not be able to ensure continuous supply.

Traders and other such intermediaries perform the crucial function of buying and transporting the crop, supplying it to various places through other intermediaries, storing it in warehouses, taking the risk of deterioration in quality, loading trucks, and so on. There is a cost involved that has to be covered by the final price. After all, there is value being added by active operators at both the wholesale and retail ends of this market.

Any news of a monsoon failure or market intelligence indicating shortages can lead to prices going up in anticipation. In fact, India’s last two policy interventions had negative announcement effects. They exacerbated the price situation, as all participants in the value chain, from farmers to various intermediaries, got affected. In circumstances like these, such shortages can become self-fulfilling, should extra hoarding take place. Households frequently also join the bandwagon of hoarding the commodity in question, pushing up demand further.

Farm-related policies have generally been progressive over the years, with a distinct shift towards the market, helping commercialize agriculture. However, mindsets have not quite adapted yet, as seen by India’s ban on the futures trading of commodities like cereals, pulses and oils, etc. Futures trading needs to be restored, for it can address to a significant extent the price-volatility problems of farmers. The latter could learn to use options, with premiums paid by the government. But suspending exports and imposing stock limits are certainly counterproductive and should be eschewed.

These are the personal views of the author.

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