Agriculture needs a reforms package

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Context:

With rural economic anxieties acquiring a political voice, the expectation is that the Budget will focus on agriculture. For some time, the country has been in denial over the extent of the mess in the sector.

Farm incomes are unattractive:

  • The absurdity of policies features among them
  • The overriding objective of price stability, over time, has tilted farm policy in favour of the consumer, the numerically larger vote bank.
  • Trade and price controls are highly restrictive, and mostly anti-farmer
  • The farmer is forced to sell in the domestic market where prices tend to be lower than global agricultural prices
  • Incompetence and politics have ensured that policies are failing to serve even consumers

Agri-Markets:

  • Agri-markets are not free. Governments seek to influence prices, to smoothen them out.
  • In the absence of state intervention, prices soar in bad weather years and plunge in good weather years, hurting consumers and farmers.
  • The levers in governments’ hands are import and export controls, buffer stocks management and minimum support prices (MSPs).

Policy Need:

  • The MSP, the price at which the government offers to procure from farmers, is an economic policy tool which requires technical acumen.
  • 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. In the first scenario, if the MSP is pegged higher than the market price, the procurement will raise the market price, boosting farm incomes.
  • In the latter, by offloading its stocks at a price lower than the market price, government can cushion consumers against excessive inflation.
  • The buyers of the subsidised sales (an efficient Public Distribution System) are directly benefitted, but as the sales also lead to lower prices in the open market, all consumers gain.

Procurement Issues:

  • Procurement works effectively only if trade controls and stocks management are aligned with it.
  • How these tools tend to be deployed in a counterproductive manner was evident in the example of pulses in 2016-17.
  • Despite a bumper harvest, after a steep MSP hike and good rains, export controls and stocking limits for private traders were retained and a record volume of imports allowed to be shipped in.
  • The resulting glut sent the market price down, below the MSPs, rendering it pointless.
  • The looming losses set off farmer protests seeking even higher MSPs.

A bias:

  • Even after four years of systematically aggressive hikes, Indian MSPs of rice and wheat are less than support prices in China and other Asian countries.

Conclusion:

The bulk of agriculture is not sufficiently productive to be able to gainfully engage young rural Indians and so policy attention must be on building industry. The Budget presents an opportunity to revisit strategic choices. Nothing short of an overhaul of agriculture, resembling the industrial liberalisation of 1991, will work.

Source:TH