Denying farmers access to markets was a key and routine element of India?s food and agricultural policy for many decades. Whether through procurement levies at below market prices or zoning regulations that prevented free movement of grain, monopoly exports through commodity boards or a plain and simple prohibition of exports, the policy object was to acquire commodities cheaply.
With the economic reforms of the 1990s, the government became less brazen. Reforms under the compulsion of WTO agreements opened up agricultural trade as well. Now the government does not resort to curbing agricultural markets as often. But this still remains an option at hand, to be deployed whenever it perceives a threat.
That is what happened with the latest episode of bans put in place in 2007 and 2008. As the government struggled to match its procurement prices with the boom in commodity prices, procurement fell?putting the public distribution system in peril.
A coalition government that was constantly in election mode was not willing to take any chances.
Wheat was imported at record prices and exports were stopped. In 2008, procurement prices were also raised to induce farmers to sell to the government. Large companies and traders were ?informally? asked to keep away from the mandis of Punjab and Haryana. To make sure they understood the government?s predicament, these companies were required to report their grain purchases. The Essential Commodities Act was invoked, limiting the stocks that could be held by private traders and giving the government wide powers to inspect and raid their premises.
In a search for scapegoats, the futures markets came in handy. First, wheat futures were banned. As the clamour grew, other commodity futures also suffered the same fate. What was particularly striking was that the prohibition was applied without distinction. It included soya oil?an uncommonly successful futures contract?as well as commodities with very low volumes. What was presumably considered important was to make a statement, and making fine distinctions would have been rather untimely.
Commodity prices started declining towards the end of the first quarter of 2008. The global recession further weakened demand and pricing sentiment. At home, the suppression of demand from foreign buyers and large domestic private players displaced private storage and boosted government stocks. A healthy stock situation discouraged private procurement this year. With open market sales likely later in the year, it can?t be profitable for private players to buy in the harvest season. So, the stock situation is no longer healthy?it is plain uncomfortable.
It is in this context that the government has turned market-friendly. Easing bans is a practical response to the challenge posed by excess stocks. And political pressures have cooled off too.
For these reasons, the situation seems ripe for immediate removal of all restrictions on private trade (storage limits and reporting of purchases) and removal of the ban on wheat exports. Similarly, there is no longer any justification for continuing the ban on futures trading of wheat. It should be remembered that even when the ban was imposed, the committee that enquired into it did not find any clear-cut evidence that futures trading contributed to a rise in wheat prices. It is now well known that global shortages (droughts in Australia coinciding with average or below-average harvests in US and EU) along with demand for biofuels were the primary factors.
There are two lessons from this episode. First, food prices are determined not by economics alone, but also by politics. This is very noticeable when the farm lobby manages to get higher procurement prices than warranted. But, not many take note when farmers are denied access to domestic and world markets. Second, policy flip-flops are not without cost. Agricultural markets are starved of investment. Private players will be unlikely to risk investing in storage, transport and markets if a government order can put an end to these activities. The government, on the other hand, is sensitive to high food prices because our food safety net is full of holes. The public distribution system is in tatters and all the tinkering and tampering has not achieved much. It is wasteful for the government to procure, store and transport grain to deliver food subsidies to the poor. It is far more efficient for the government to distribute cash subsidies to be used for food purchased.
The only long-lasting way of balancing producer and consumer interests in food policy is to have an effective food safety net for the poor. Otherwise, agricultural reforms will always be reversible, and end up arresting the gains that farmers can make off expanding markets.
?The author is a professor at the Indian Statistical Institute, New Delhi
