Agricultural Prices and Food Policy in India

SPANDAN System of Promoting Appropriate National Dynamism for Agriculture and Nutrition

June 2016

Agricultural Prices and Food Policy An interview with C.S.C. Sekhar

1

SPANDAN

Agricultural Prices and Food Policy An Interview with C.S.C. Sekhar

Dr CSC Sekhar is Associate Professor, Institute of Economic Growth. His areas of interests are agricultural markets (market structure, price formation, exports, and imports), WTO issues related to agriculture, agricultural growth, rural development, the political economy of development and issues related to governance. In this interview, Dr Sekhar discusses the issues in Agricultural Price Policy in India which is directed towards ensuring affordable food prices for consumers’ by providing food grains through Public Distribution System (PDS) and inducing adoption of the new technology for increasing yield by providing a price support mechanism through Minimum Support Price (MSP) system. The policy framework on agricultural price policy enables farmers to get sufficient profits, promote investment, technology and productivity and thereby to the food security of the country.

According to you, what are the primary reasons behind the current tipping scenario of agricultural prices in India? The fundamental reason for price movements is always the same – the supply-demand imbalances. When I say supply, I mean not just what is produced but what is brought to the market-place. Farmers may produce adequate quantity in one year but if the trader(s) decide to stock, say 10 per cent, then the supply in the market-place is less by 10 per cent. This is beneficial when there is bumper production and there is a glut in the market. Similarly, in a year of the shortfall in production, a trader can release from his stock, thereby augmenting supplies in the market. Therefore, smoothening supply through storage is key.

1

SPANDAN

Why can’t production be changed in accordance with the price? It cannot be because the farmer’s decision to produce is taken much before the price, which is only realized today. The farmer produces expecting a higher price. When all the farmers behave the same way and the weather is conducive, the production is way above the requirement and the prices crash. The prices spike when the reverse happens. Weather also plays a major role in these production variations. Therefore, removing these supply variations through storage is the key. This storage function can be done by a private trader, a public agency like FCI (Food Corporation of India) or by a joint entity such as a co-operative. The effect will be the same although the reasons for storage may be different. In the case of a private trader, it could be profit motive whereas in case FCI/co-operatives it may be to ensure price stability in the market. However, simple storage is possible only in case of storables like rice, wheat or corn. What about perishables like fruits and vegetables? In that case, advanced storage facilities such as cold chains are needed. Processing will also help but in India, we are not used to consuming stored or cut vegetables like in the USA or other places. This leads to frequent price spikes and crashes of onions, potatoes etc. An alternative to storage, for both storables and perishables, is imports and exports. However, this depends on the world market scenario and the quantum of our domestic requirement. Food prices in the international markets have been on the rise at a faster pace since 2007. Such increases have an impact on domestic prices directly or indirectly. What according to you are the possible solutions that may be adopted by India in this situation? There are several reasons for rise in food prices internationally–the long-run factors are the decline in investment in agriculture, degradation of resources like land and water, climate change etc. In the short-run, they are mainly related increased diversion of land to bio-fuels, reduction in global stock levels, adverse weather, export restrictions, import surges, speculation in commodity markets – all contributed to this upward movement of international prices. There is no single solution to this problem. The decline in investment in agriculture needs to be arrested. Conservation of land and water resources, more nuanced bio-fuel policies by developed countries, monitoring stock levels in major countries, more stable food trade policy are all needed. Regional food reserves and virtual reserves (in the form of funds as suggested by IFPRI (International Food Policy Researech Institute researchers) to counter speculation also merit consideration. In order to understand the implications of trade liberalisation, particularly import liberalisation, it is essential to examine the long-term movements of domestic and international prices and assess the degree of divergence between the two. Can you briefly throw some light on this?

2

SPANDAN

The important thing to remember about import liberalization is that it has implications for livelihood security, particularly the small farmer. When you import something at a lower price, small farmers producing domestically may get hurt. That is the reason why In agriculture, you don’t want imports to replace your domestic production but only augment it, as long as the domestic production is at a comparable cost. For example, in the case of edible oils and pulses where the supply has always been short of demand, imports are a good option. However, in the case of rice and wheat we need to be careful as these are crucial staples, and the cost of production in India is not high. Even in the case of pulses it needs to be noted that there are only a few sources of supply internationally – Canada, Myanmar etc. So there is a need to increase domestic production and also diversify to other The second issue in international trade is prices. There is a need to monitor the international prices continuously and, when the situation is favourable, lower the import tariffs (for private trade) and also make purchases through public agencies such as NAFED. Also, there is a need for a long-term engagement with suppliers for commodities like pulses so that there is no disruption of supplies. One of the main arguments against agricultural trade liberalization in India is that the markets are not sufficiently integrated. Do you agree with it and how in your view can this be addressed? Market integration is of two types – spatial and vertical. Spatial integration implies integration of similar markets across different geographical locations. Price movements of rice in Kolkata, Chennai, and Indore constitute this kind of integration. Vertical integration is across different markets in the same geographical location - movements of price received by the farmer, wholesale and retail prices, in say Chennai, constitutes this. When supernormal profits, or in simpler terms, more profits than seem justifiable, occur in any of these markets – spatial or vertical – the markets are said to be ‘not integrated’. In India, spatial integration is les s of a problem, as shown by a number of studies. The real problem is of vertical integration, that is, the retail (or consumer) prices are way above the wholesale prices which are way above what the farmer receives. Addressing this requires concerted action on several fronts – improving the rural infrastructure, particularly the rural roads and markets is the first one. The second one is to reform the agricultural market acts or the APMC acts to be specific. The third one is to allow competition in the markets by allowing private markets, direct sales by farmers etc. The fourth one is to encourage farmers to engage in marketing in groups so that they can have better bargaining power in the market-place. The focus of the original institutional structure as envisaged in the Agricultural Price Commission (APC) had been on price policy which aimed not only to incentivise agricultural production but also to provide remunerative prices to farmers, but over the years, the CACP 3

SPANDAN

(Commission for Agricultural Costs and Prices) and its MSP operations have been reduced to interventions only in rice and wheat. Do you find that focus misplaced? The problem is not so much with price policy or procurement per se but the way in which the price policy has changed over the years, particularly from the early 1990s. Traditionally, the MSP or the minimum support price has been, as the name suggests, the minimum price to support the farmer. This is a floor price below which all the farmer’s supply needs to be purchased by the government. However, if the market price rises above the MSP, the government can buy at a higher price than the MSP, called the “procurement price”. In this case, the quantities are not all that is supplied by the farmer but only those required for PDS and buffer stocks. This is because there is no need to support the farmer once the market price above his basic cost of production. Over the years, this distinction between MSP and Procurement Price has been done away with. Presently what is called MSP is, in effect, the procurement price, with open-ended procurement. This has resulted in large stock pile-ups over the years. Rice and wheat, and even there only a few states such as Punjab, Haryana, and Andhra Pradesh, have got the major benefits of this procurement because these crops are in irrigated pockets and the farmer lobbies of these states are much stronger. With the projected agricultural growth rate of just 1.1 percent coupled with structural problems ranging from irrigation to demand and supply situation to input provision to marketing, what positive implications can 2016-17 budgetary allocations bring when placed in the context of agricultural growth, food production, and food inflation? th

After an encouraging performance during the XI five year plan period, agricultural growth has stuttered somewhat, with a growth rate of 1.5 per cent in 2012-13, followed by growth rates of 4.2 per cent and -0.2 per cent in the next two years. The latest estimates from the CSO indicate that 2015-16 will be only marginally better with a projected growth rate of 1.1 per cent. Notwithstanding two consecutive droughts, structural problems ranging from irrigation to input provision to marketing are responsible for this deceleration. The present budget attempted to address some of these long-standing issues faced by agriculture. The positive initiatives proposed broadly relate to irrigation, rural infrastructure, and marketing. Major allocations for irrigation, operationalisation of a National Agricultural Market (NAM), formulation of a crop insurance scheme with lesser premium burden on the farmer and with larger coverage, massive increase in allocations for gram panchayats, FDI in food processing etc. are all positive steps and, if implemented well, should go some way in addressing the concerns of the agriculture sector. But implementation is the key!!

4

SPANDAN

There is a distinct slowdown in investment in agriculture in recent years in India’s Budget. But, after all, agriculture is a state subject and the states should step up investment to achieve growth in the sector. What do you think? The present strategy of agriculture falls short of expectations mainly on two aspects. The first relates to the incentives for states to invest in agriculture. After all, agriculture is a state subject and the states need to step up investment to achieve growth in the sector. There is a clear deceleration in investment in agriculture in recent years. Gross capital formation in agriculture, as a percentage of the gross value added in agriculture, has declined from 18.3 per cent in 2011-12 to 15.8 per cent in 2014-15. Such a fall in investment in the last few years is in sharp contrast to the rapid increase since 2004-05. Some of the deceleration in growth in the last few years could be because of this slowdown in investment. There appears to be no effective strategy at present to encourage states to invest more in agriculture. The second issue relates to the top-down approach. India is a heterogeneous country with large differences in agro-climatic conditions. The irrigation programs, crop insurance program or any other programs proposed in the recent Budget will need to be tailored to local conditions to be successful. The predominantly top-down approach underlying these major programs may not be conducive to the growth of the sector. The region-specific initiatives are needed. The district agricultural plans formulated during the 11th Five Year Plan may serve as useful benchmarks. Do you consider agricultural prices, or the deficit production, to be a bigger problem in India? As I have already stated, supply-demand imbalance at a given time is the main problem. Not much can be done with demand, as increase and shifting patterns in demand are normal with economic growth and urbanization. Stabilizing supply, within a range, is the key. Small fluctuations in supply are tolerable and even desirable, but large-scale fluctuations like in the case of onions, potatoes, and other vegetables need to be moderated. This needs to be done through a judicious combination of storage & distribution, processing, and trade. Also, this combination needs to be tailored to the type of commodity. In the case of important storable staples such as rice, wheat and to an extent pulses production increases and improvement in storage may be combined with marginal reliance on trade. Also, timely liquidation of the FCI stocks is needed to stabilize market prices, as large pile ups of rice stocks are one of the reasons for the increase in prices. In the case of vegetables, fruits, eggs-meat-fish advanced storage with cold chain facilities is required, along with processing to increase shelf life. There can be greater reliance on the trade of these commodities. Therefore, commodity-specific strategies are required to stabilize supply and prices.

5

SPANDAN