AGRICULTURE NEEDS A REFORM PACKAGE

Author: Puja Mehra

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The objective of price stability of farm products is tilted in favour of consumers, who make a bigger vote bank.

Following are the reasons for unattractive farm incomes:

1. Restrictive trade and price controls (e.g. farmers are forced to sell in the domestic market where prices are lower than the international market)
2. High input costs (e.g. high fertilizer costs)
3. Less policy attention on farmer’s economic viability

Methods used by government to influence prices of farm/agricultural products:

1. Import and export controls
2. Buffer stocks management
3. Minimum Support Prices (MSPs)

About MSPs

MSP is the price at which the government offers to procure from the farmers. A sensible policy would be to buy from farmers when market prices are depressed and sell stocks in the open market when prices are elevated.

If MSP is higher than the market price (i.e. when market prices are depressed), the government should buy from farmers which will raise the market price thus boosting farm incomes. If the prices are elevated, the government should sell the stocks in the open market protecting the consumers against excessive inflation.

MSPs would work effectively only if trade controls and stock management are aligned with it. For example, despite a bumper harvest and high MSPs of pulses in 2016-17, export controls and stocking limits of private traders were retained and high amount of pulses were allowed to be imported. This sent the market prices down due to high supply and the farmers started demanding even higher MSPs.

Conversely in 2009-13, poor management of food stocks led to price inflation. Raising MSP edged out private traders thus leading to an increase in prices. The government then should have used the stocks to ease out prices.

It is argued that selling the government stocks at a price lower than the purchase price (MSP plus carrying cost) would result in a loss to the exchequer. However, not selling the stocks implies even higher fiscal loss.

India’s MSPs of rice and wheat are significantly less compared to China and Asian countries showing a tilt in favour of consumers thus leading to a divide between farm dependent and rest of the population.

Policy attention must be on effectively engaging young rural Indians in agriculture and overhaul of agriculture. A learning example could be China where the result of decontrolling of farm prices and overhaul of agricultural/economic policies, resulted in reduction of poverty to half in 6 years (i.e from 1978-1984). After liberalisation in 1991, India took 18 years (i.e. from 1993 – 2011).

Agricultural liberalisation, on the lines of industrial liberalization of 1991 is the need to the hour.