Column: Junk the old, embrace the new

Written by Shweta Saini | Ashok Gulati | Ashok Gulati | Updated: Jul 2 2014, 07:25am hrs
The high deficit of rains in June (42%) and the lurking fear of El Nio worry policy-makers as farmers incomes and food prices for consumers will be severely hit as a result. The government is ready with an action plan, in case there is a drought. For consumers, to keep the vegetable prices under check, it has called for a crack down on hoarders of onions, advised states to de-list fruits and vegetables from APMC Act; and has set the Minimum Export Price (MEP) for onions at $300/tonne (mt) and potatoes at $450/tonne.

Raiding hoarders: will it work

A big drive against onion hoarders in Maharashtra is planned. For potatoes, the chief minister of West Bengal has pronounced that the prices will not be allowed to exceed R14/kg.

But are onions and potatoes part of the Essential Commodities Act (ECA) of 1955 Are there any stocking limits imposed on traders of onions and potatoes Not really. On the contrary, government policy helps farmers and traders to build low-cost storage facilities for onions or cold storages for potatoes, with a view to ensure that stocking helps in smoothening demand and supply till the next crop comes to the market. So, if storage is a natural part of the activity in the value-chain of any commodity, and if there are no storage limits declared under ECA, how can these stockists be raided as hoarders It will only lead to higher rent-seeking by inspectors, or only cause a temporary dip in prices which could surge in the later months.

This is not to say that onions and potatoes need to be under ECA. If there is a cartel of, say, onion traders, the Competition Commission of India can step in. But the past experience shows it has not helped either. The new policy toolbox to deal with hoarders in a market economy would typically have the following measures in place.

*A vibrant commodity futures markets to discover and stabilise prices, promote investments in production and all along the value-chains. However, the current policy does not allow for onion to be traded in futures, creating greater uncertainty in the market. And in case of potatoes fresh positions for July-August-September are suspended.

*Negotiable warehouse receipt system under a well-regulated regime verifying receipts and stocks. This will promote investments in storage and save on wastages, helping to lower prices. Currently, this is almost missing.

*Keep imports and exports of these commodities always open. This will tame hoarders as open import policy will put a ceiling on prices. Currently, onion imports are open at zero import duty, but potato imports attract a 30% duty. This can be reduced to zero.

*Encourage processing of perishables. For example, onions can be dehydrated and kept for more than a year at one-tenth the space and at room temperature. Such processed items can be used by large scale consumers such as the army, in the mid-day meal schemes, etc, to relieve pressures on the fresh produce.

*The government can own some stocks, either through the use of the futures markets or even physical stocks of fresh or processed vegetables, to be offloaded to the market whenever it feels that prices are beyond the tolerance limits of consumers and it needs to step in.

These are standard tools for price stabilisation in a market economy. It is high time that government junks the policy tools from the 1960s and adopts those of the 21st century, which are in line with Indias fast globalising market economy.

De-listing from APMC is a necessary step but not a sufficient one

Now, consider the governments advice to state governments to de-list fruits and vegetables from the APMC Act.

But, even Rahul Gandhi had advised Congress-ruled states to do so before January 15, 2014. Did that happen What gives the confidence to the government that this time around, it will be done Even if it is done, will it lead to a sharp fall in prices of vegetables overnight Not at all. If just de-listing was sufficient, the prices of fruits and vegetables in, say, Bihar and Kerala should have been much lower than those in other states as these states dont have the APMC Act at all. But the reality is that the retail price of onion on June 24, 2014, in Delhi was R22/kg while in Patna it was R25/kg (source: NHB).

So, there has to be the realisation that de-listing from the APMC Act is a necessary condition but not an adequate one to achieve the ends of an efficient market and lower prices. It requires building efficient value-chains that reduce transaction costs (commissions at different levels, from commission agents to wholesalers to retailers, which amount to 30-50%), save on wastages and transportation, etc. This can be done when sourcing is directly from farmer groups, and the produce is aggregated, sorted, graded, and packaged in the village clusters and then directly taken to retail outlets through reefer vans. The construction of back-end infrastructure can be incentivised, given that it will create millions of near farm jobs. But those who work at the back-end need to link with organised outlets at the front-end, which means organised retail needs to be encouraged and one unified national market created. The question of vendors and kirana stores needs to be taken seriously and answer is to mainstream them in organised retail. This is where India needs to innovate in policy-making. Without this, very few players would be interested in streamlining the back-end. This needs to be supplemented by allowing private mandis to operate in competition with APMC markets. It is this competition and efficient value-chains that will bring down commissions and other transaction costs.

Are our policy-makers ready to launch this mega drive to build effective value-chains, and one unified national market for fruits and vegetables Without this, just de-listing fruits and vegetables from APMC Act will not go far enough.

MEP should be only temporary, else it is an implicit tax on farmers

One might understand the urgency of imposing an MEP of $300/tonne on onions and $450/tonne on potatoes only if the domestic prices were shooting up due to large gush of exports. But that has not happened in the case of potatoes and onions. Very marginal quantities have been exported. In any case, if this is imposed, it must be reviewed after 2-3 months, else, it is simply an implicit tax on farmers and would adversely impact the production next year. While using trade policy tools, it is always better to identify trigger points well in advance for imposing MEP when prices are on upswing and imposing import duty when prices are headed downwards. This requires identifying a comfortable price band. Is our policy-making ready for this We doubt it.

What all this indicates is that it is high time government learns the new policy tools for managing market economies, and junk the old, rusted toolbox of the socialist era of the 1960s. Unless that is done, we will keep blaming hoarders for our own policy failures for another 50 years!

Gulati is a Chair Professor for agriculture and Saini is a Consultant at the Indian Council for Research on International Economic Relations