1. Column: Modi’s window of opportunity

Column: Modi’s window of opportunity

With global food prices crashing, govt can restructure the MSP regime, move to cash transfers

Updated: November 6, 2014 9:11 AM

When the BJP was promising “acche din” under the leadership of Narendra Modi during its election campaign, the focus was on good governance, controlling corruption and taming food prices. Nobody at that time could have guessed how domestic food inflation could have been tackled within 100 days. RBI had been trying tight monetary policy, while finance ministry had been promising tight fiscal policy. The ministry of consumer affairs, food and public distribution had been raiding “hoarders” of onions and potatoes. It only gave the indication that the government is serious to tame prices, and the only success it achieved in the first 100 days was that the situation did not get worse.

But come September-October, and much of the talk on high food inflation is disappearing. That is a big respite to the government. But what caused this? Was it tight monetary and fiscal policies, or raids? Maybe only partially. An important factor behind falling food prices is the major drop in global commodity prices—between May and October 2014, global wheat prices dropped by 27%; corn prices by 25%; palm oil by 19%; soya oil by 14%; cotton by 24%; and Brent crude by more than 20%.



This a great news for consumers the world over, including in India. But what made these prices fall so abruptly? The global corn production had two successive bumper crops in 2013-14 (988 mmt) and 2014-15 (991 mmt), up from 869 mmt in 2012-13, with ending stocks rising by almost 40% in two years. Similarly, wheat crop is up by 9% compared to 2012-13, with ending stocks rising by a little more than 10%. Almost similar story is there behind other commodity prices that are tumbling, be it crude oil, cotton, or palm or soya oils. The notable exception, however, is rice. Rice production has not increased much while its global stocks are declining by 5%, putting an upward pressure on its prices.

One thing is now clear: India is not insulated from the developments in the global commodity markets, and sooner or later, through direct or indirect routes, domestic prices are aligning with their global counterparts. Food inflation is likely to be under check for some time, thanks to global factors.

But what happens to the producers? The producers are clamouring for government intervention and compensation, having experienced bullish trends during 2007-08 to 2013-14. Governments around the world are facing these demands, and India will also face so as its exports of corn and wheat are no more viable, creating a glut in domestic markets. Having lost the opportunity of exporting 10-15 mmt of wheat at a price of $300 pmt or so during January to March 2014, no one is to be blamed but the government itself. And now they will have to carry the stocks for two years. The lesson: government decisions have to be fast and the bureaucracy needs to move faster. Markets will not wait for them forever.

Large-scale intervention is not justified as market prices are still hovering around MSP levels, and the government should let the markets find an equilibrium.

Falling wheat and corn prices indicate lower export earnings in the current year but it would also save on the import bill of edible oils and crude oils. On the net, India may not be a loser.

This situation will test whether the government can bring in market orientation to the agriculture markets of the country. The government could freeze the MSP at the current levels for most of the crops and let the market forces determine the interplay in the market. One should not forget the advantage of lower production costs being delivered to the farmers in the wake of falling diesel prices. In fact, lower diesel prices will reinforce the current trend of mechanisation and will also help in raising productivity.

It is time to take major policy changes in food and agriculture space: pruning the MSP regime as well as moving towards cash transfers for the consumers. Lower market prices give this window of opportunity for a year or so. As diesel prices were deregulated when diesel prices fell, so should be the restructuring of MSP regime and consumer food subsidy schemes. As they say, iron is hot, strike it, and get agriculture and food sector moving towards efficiency and growth path, in line with the markets.

By Ashok Gulati & Shweta Saini
Gulati is Infosys Chair Professor for Agriculture and Saini is a consultant at ICRIER

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