Column: Govt action offers little succour

Written by Madan Sabnavis | Updated: Jul 10 2014, 07:32am hrs
There is considerable concern on the progress of the monsoon and understandably so. An adverse monsoon has the potential to retard the growth process as a lower farm performance this year would not just mean lower GDP growth, but also higher food inflation. High inflation, in turn, would not just further deplete the already low financial savings as households strive to protect their consumption levels by saving less, but also hold back RBI lowering policy rates. Therefore, while the government is striving to put the growth process back in motion, high inflation can upset calculations. What can the government do now

The view in this column is that in the given situation, there may be little that the government can do in the short run to stabilise supplies and prices, which covers the rest of the fiscal year. To understand why this argument is being made, let us look at some inferences that can be drawn from our experiences in the last decade or so.

First, the monsoon patterns have changed. While officially the monsoon season is supposed to be between June and September, we have observed that invariably it starts towards the end of June and goes into October. Further, a normal monsoon, which is considered to be 96-104% of the long-term average, is a number that is only broadly indicative of the performance as it does not tell us about the spread across geographies, which is critical in affecting prospects of specific crops. Next, while the arrival is important as it affects sowing pattern and migration to other crops in case of a delay, the progress of the rains and the withdrawal are equally critical as crops require different amounts of moisture at different points of the crop cycle. Similarly, a late withdrawal of the monsoon, which has been the case in the last three years, tends to damage specific crops like pulses and vegetables that have impacted food inflation. Therefore, there is ambivalence in the concept of a normal monsoon.

Second, farm prospects are linked quite nebulously to the monsoon. Around 70% of the kharif crop is susceptible to monsoon winds with irrigation penetration being low in case of oilseeds, coarse cereals and pulses. Again, normal monsoon does not necessarily lead to a good kharif harvest as in the past output has fluctuated quite erratically. Also, at times, an adverse monsoon means lower kharif crops but better rabi output, especially if the monsoon withdraws later. Therefore, while monsoon is a necessary condition for a good harvest, it is not sufficient.

Third, government intervention is normally through the release of foodgrains it holds. However, the common misconception is that the government can alleviate any scarcity in overall supplies while actually its power is restricted to only rice and wheatthe two crops for which it holds buffer stocks. Invariably, the shortages in supplies have been in oilseeds, pulses, coarse cereals, fodder, etc, where the government cannot step in. Therefore, the ability of the government to bring down prices by augmenting supplies is limited. In fact, for edible oils and pulses, where India imports 50-55% and 15-20%, respectively, of its requirements, any news of imports increasing pushes up international prices given the sheer size of imports. Further, any increase in the MSPswhich, at 4%, was of a lower order this timewill prevent prices from dipping even in case supplies are good.

Given these facts, what can the government do to augment supplies and control prices Let us examine the arguments normally put forward. The first is that the trade policy can be formalised with respect to farm products. While worst-case scenarios can be drawn up based on the progress of the monsoon, export curbs need to be imposed in advance to ensure that there is no diversion of anything broadly defined as essential commodities. Besides, imports must be made earlier than when it is actually required by picking up market signals for potential supply shortages. Hence, if there are signs of the monsoon failing in areas that produce, say, tur or urad, imports should be calibrated in a manner to ensure that supplies build up. To the extent possible, the government should rely on the futures prices provided by exchanges like NCDEX for this.

The second measure would be curbing hoarding of commodities. This has been mentioned by the government but the implementation of this is fraught with issues. One has to understand that, typically, most crops in the kharif season are grown once and stocked for the rest of the year. Therefore, it is hard to distinguish between normal stocking and hoarding. And as per perishables, there are fewer hoarding possibilities given that we have limited cold storage facilities. Hence, while potatoes and onions have become vulnerable products given their relatively longer shelf life, this does not appear to be possible for other produce. Also, identifying hoarding and taking punitive action is difficult given the logistical issues involved and jurisdiction stretching to state and local governments where there could be vested interests.

Third, there is talk of the APMC Act being modified. This would enable free flow of trade. But it should be understood that this does not increase supplies if there are shortfalls. It is a way to cut down on intermediation costs. But, in the past, it has been seen that this does not work as smoothly as expected, even when these laws have been revoked, as in the case of Bihar. The reason is that we have not built systems to bring the farmer closer to the consumer, and thus the arthiya (intermediary) still performs the important functions of providing the farmer with seeds, fertilisers, finance and buy-back, and hence remains indispensable. We have not really worked through contract-, corporate farming or organised retail to build these bridges.Therefore, dismantling the APMC Act will not work much.

Putting all these pieces together, it does appear that there is little that the government can do if there is a serious setback. Working hard on the backend in the next three years and taking a more open view on private and foreign investment in the sector are measures that need be considered. We need a comprehensive solution to increase acreage and productivity (a second Green Revolution so to speak) and a sustainable backend covering post-harvest logistics. More importantly, we should be more open to ideas that have worked in other countries.

The author is chief economist, CARE Ratings. Views are personal