With global farm prices collapsing in every crop from wheat to sugar, about a fifth in just the last six months—India is on the cusp of a new farm deal, should Prime Minister Narendra Modi wish to make that happen. Apart from it being just a matter of time before Indian food inflation falls further, there are other implications. With global prices collapsing, India’s potential to export wheat, for instance, has been badly hit; the flip-side is that import costs of edible oils will also fall significantly—on balance, India’s farm trade surplus will probably fall by $4-5 billion. Since global prices are near MSP levels in various crops like wheat, this means the government will have to keep MSP hikes to the minimum—in any case, hikes in the last two seasons have been around 4% versus a 97% hike in wheat MSP in FY06-12 and around 90% for rice. What this also means is that government policies have to be really quick to take advantage of the global conditions—India missed the opportunity to sell 10-15 million tonnes of wheat from FCI’s overflowing stocks till even a few months ago when prices were ruling at $320-330 per tonne as compared to $245 today; apart from the loss, this wheat will have to be carried by FCI for another year or two.
In the case of sugar, as today’s front page story suggests, the government needs to completely re-engineer the policy—move to Rangarajan’s formula—and also perhaps face farmer unrest as prices are way below what farmers have got used to. Indeed, given how prices are projected to remain low for most crops for the next year or so, this is the best time to scale up an income transfer policy. That is, give farmers cash support and encourage them to move to crops that are more appropriate—fruits and vegetables in some cases; it could also mean moving rice and wheat away from Punjab and Haryana to eastern states which have more water available. Indeed, this is also the best time to increase the use of cash transfers in place of physical supplies of PDS wheat and rice—with market prices softening, customers will feel the pain less. The government took the opportunity in diesel, the question is whether it will do the same in agriculture.