The current agitation of farmers on cereal, oilseeds and vegetables has attracted a lot of analysis with regards to the causes.
The current agitation of farmers on cereal, oilseeds and vegetables has attracted a lot of analysis with regards to the causes. Many such analyses have converged on low hikes in MSP in the last three-four years as the major cause, and the general public also believes so. Stocking limits, poor warehousing facilities, export bans, lack of a properly developed food processing industry and free trade in commodity exchanges are all proffered as the next lot of key reasons. Some have endorsed the logic that higher production has led to price crash. Another popular rationale being cited is that a cash-squeeze, thanks to demonetisation, has made disposal of produce difficult for farmers. Let us examine some of these factors and their import for farm distress.
The government of the day is being accused of failing to increase MSP “suitably”, thus diminishing profits for farmers. This does not paint the correct picture. Except for wheat and paddy, MSP is a notional value for all other commodities. For wheat and paddy, too, approximately 30% of the produce procured by government, at MSP, and the rest is traded in the market. There is no MSP for onions, potatoes and tomatoes. The short point is only 8% of the total agricultural produce (including horticulture) is supported by public procurement—the rest 92% is sold at market-determined prices. That is why the MP government’s attempt to get all traders to buy agri-commodities at MSP proved futile. After realising its irrationality, the proposal now appears to have been discarded.
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For various reasons, whether drought or any other, India’s reliance on import of agri-commodities is rising every year. For instance, annual import of wheat totalling 3-5 million tons (mt), pulses totalling 5-6 mt, and edible oil totalling almost 14 mt have almost become the norm. Recently, import of 0.5 mt of duty-free raw sugar has been authorised. Last year, 0.5 mt of corn import had been permitted. Import prices also have a bearing on domestic prices and the volumes that are traded. Now, market price of wheat in India may also depend on the landed cost of Australian/Ukrainian/Russian wheat.
Similarly, for pulses, prices will be dictated by the landed cost of tur/urad (from Myanmar/ Ethiopia/Tanzania), chana (Australia) and yellow peas (Canada). Soybean prices are influenced by the quotes of the Chicago Board of Trade, imports from Brazil and Argentina. Indonesia/ Malaysia influence palm oil prices in India. Sugar prices will likely fluctuate depending on contracts awarded in the New York and London exchanges. Raw sugar
that was 22 cents a pound in November is now at 13 cents/pound in the New York exchange—or down by $235/tonne.
International volatility cannot be forecasted and built into MSP or FRP (for sugar), especially when imports are imperative. Though the merits of MSP-fixing itself are debatable, linking farmers’ profits/losses to MSP is erroneous because 92% of the produce is dispensed at market-determined values. Should we raise the tariffs to such a high value that imports are effectively blocked? No. Instead, India needs to educate itself on how exporting nations are able to produce cheaper and sell with a landed cost (including freight and handling expenses) plus reasonable custom duty that is still competitive despite international volatility.
This means that we have macro- (including infrastructural) and micro-economic inefficiencies of production. If the case being made is of raising import duties, it implies that domestic inefficiencies are encouraged. To get out of the vicious cycle of ascending imports and rising prices, domestic output has to go up by use of appropriate technology, both at the level of seeds and farming practices. Other factors that have been mentioned here earlier—stocking limits, poor warehousing facilities, export bans, lack of a developed food processing industry and free trading in
commodity exchanges—have all pushed prices downward. But these factors have always prevailed during last 60 years. All governments took knee-jerk decisions to tame rising prices and control inflation. All governments targeted intermediaries/ middle-men directly or indirectly, but farmers seldom agitated.
Each government so far has claimed sufficiency in agri-production and still undertaken ad-hoc imports or allowed imports to narrow down supply-demand gap. The paradox is that this government too has been speaking of rising production of wheat and pulses, but has simultaneously facilitated imports, thus setting back the goal of achieving higher domestic production. Imports filled the demand-supply gap and kept inflation in check; but they acted against farmers’ aspirations of realising the promised 50% profit above the cost of production.
The only factor that is now emerging is the lack of informal financing. Ashok Gulati, in his article in this paper on June 19, has given the ratio of institutional and non-institutional financing availed by rural households in 2013 as 56:44. It would not be wrong to say that about half the financing of the Indian farm economy is from informal sources. Following demonetisation, cash crunch faced by trade has been transferred to the farmers. This is the perhaps the single-most important cause of the farm unrest being seen at the moment. As and when that cash comes back in circulation, through trade, normalcy will be restored. All other actions of this government have been consistent with past practices.