Cracked farms and bent forks
The late economist, Abhijit Sen, tried to help reform India’s farm to fork policies. It remains unfinished business. If unchanged, the dining tables of both farmers and consumers will remain frugal
Good morning! A big hello to readers who signed up this week. Welcome to The Intersection, The Signal's weekend edition. This weekend we talk about why we pay through our noses for food but most farmers who grow it remain poor. Also in today’s edition: we have curated the best weekend reads for you.
Political expediency often trumps economic sense. It is particularly so in the mottled Indian agrarian landscape where the urgency to balance the interests of the farmer and consumer, both “food price-sensitive” voters, leads to absurd outcomes.
In the most recent instance, a sudden reversal of export policy wiped out all competition, leaving the field with unencumbered pricing power to just one company.
Earlier, the government withstood a politically costly farmers’ agitation for over a year in the hope that it could push through reform in agricultural policies designed for another era. But in the end it merely rolled over and took the easy way out to stop food prices from rising: banned exports and banned futures trading in agricultural commodities. That was to assuage inflation-wary middle-class consumers. To please farmers, it raised the Minimum Support Price (MSP) for a variety of crops.
The policies were so warped that domestic prices of cereals were almost always higher than international prices. That meant that even if India had excess production, it was never able to export wheat and rice. That changed when Russia invaded Ukraine and the world’s most sought-after wheat disappeared from global markets.
Indian wheat is of inferior quality compared to Ukraine’s and fetches a much lower price. But it was suddenly in demand because of the shortage created by war. It was a rare occasion when Indian wheat commanded a better price globally than in the local market. No other commodity, except Basmati rice, has that distinction. Last year, India paid ₹10 per kg of sugar to exporters just to make the sweetener competitive in the international market.
The MSP Wringer
The political balancing act of keeping prices low for consumers but high enough for farmers to cover their costs is primarily based on MSP. It was introduced in the 1970s to lure farmers into adopting lab-developed high-yield varieties of grain. The MSP was meant to overcome farmers’ hesitancy in trying out the new seeds for fear of losses. That did lead to the Green Revolution and new records in food production and the shortages turned into surplus. But what was an incentive turned into a politically-guaranteed sinecure for farmers and a millstone on the government’s neck. It merely encouraged more farmers to cultivate cereals while ignoring oilseeds and pulses, which the country ends up importing. The value of imported cooking oil is second only to crude oil.
Unfortunately, the debate on MSP has been limited to determining the cost of farming and what should be the mark-up allowed to farmers. The National Commission on Farmers headed by agriculture scientist MS Swaminathan recommended covering all input costs, including the labour put in by the farmer’s family and rent for her land and interest on capital employed by her and then adding a 50% profit to it. Not very different from an entrepreneur determining the price of his product, including the profit he has to make. It is a good sell for political parties to make for votes but neither is it good for consumers, nor for the government. For consumers, it will jack up the prices of a range of foods. The government will end up with a bloated food subsidy bill which anyway gets paid from taxpayers’ money.
The Swaminathan commission also found that India’s productivity in food production is low. It produced less than half the amount of rice per hectare compared to China. Wheat productivity was about two-thirds that of the neighbour and maize’s was one-third. The Commission recommended several steps, including heavy public investment in farming, land reforms, soil testing, loans and insurance for farmers and futures markets. None of it has happened at scale. MSP has eroded farming efficiency and competitiveness.
Had an efficient market developed, the food retail competition unleashed by the likes of Reliance, Amazon and Big Basket would have egged on farmers to increase production and lower costs. Direct purchases would have reduced intermediation costs and hence prices of food on shop shelves and online shopping carts. Instead, the taxpayer ends up paying for the subsidies that help feed fellow citizens.
Food subsidy in India is the difference between the Food Corporation of India’s costs and its revenues. It spends most of its money buying grain at ever-expanding MSPs. Its costs also include food handling, storage, pilferage and spoilage. It also pays mandi fees and other levies to states as well. It paid out more than ₹11,300 crore just under these heads in the most recent crop year, 61% of which went to Punjab and Haryana, where most cereal procurement takes place. The advice of a 2001 high level committee headed by economist Abhijit Sen, which was tasked with evolving a long-term grain policy to not reimburse state taxes on food purchases, remains unheeded.
Is there a way out of this conundrum? Can productivity be benchmarked to global standards? One way is to abolish the assorted subsidies on irrigation, power, fertiliser, cost of interest and insurance, and abnormal procurement prices and pay the amount in cash to farmers. It leaves the farmer with the incentive to identify the crop best suited for his soil and water availability, factoring in the prevailing and likely future prices in the market. Many farmers now growing rice because water and power are free and fertiliser is cheap would likely switch to growing fruit, flowers or edible oil crops, buying the best seeds, other inputs, expertise and insurance.
It would incentivise large retailers and agri-startups to find technology solutions to develop productivity tools and information sharing systems to improve productivity. New go-to-market strategies could evolve. The government must buy only enough grains to maintain its buffer stocks. Exports and imports must be rid of quantitative restrictions and subjected only to predictable tariffs variable within a range to ensure domestic availability at reasonable prices.
Farmers must have access to physical markets, forward markets and climate-controlled storage where standardised quality produce can be converted into warehouse receipts that are already recognised as negotiable instruments. Linking the farmer to the end consumer with minimal layers of intermediation, including food processing and swift transport of perishables, would allow farmers to get a larger share of the final price paid by consumers.
This is not just doable, but also an inevitability as more Indian workers move from farms to other industries.
(TK Arun is a Delhi-based journalist and formerly Editor, Opinion, at the Economic Times.)
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