Editorial: Crossing the Rubicon

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November 01, 2014 1:46 PM

Finmin report talks of a farm incomes policy

If a recent working paper on the finance ministry website is anything to go by, there seems to be some radical rethinking in government on the suitability of the current agriculture policy. If the paper is representative of finance minister Arun Jaitley’s thinking, it could also offer a way out of the current WTO impasse and the high rates of food inflation. As opposed to the current, and wasteful, system of FCI procuring rice and wheat primarily which is way in excess of what is needed, and then not having the storage space to keep it, and more than half of this not reaching the target audience, the paper proposes a combination of a leaner FCI with a much smaller ration shop system along with a farms income policy and cash coupons for citizens. While the paper doesn’t come to a firm conclusion on the MSP-causes-inflation debate, it does says ‘hikes in MSP pump additional funds into the countryside, which, with no proportionate increases in productivity, adds to inflation’. The paper takes two periods, 2000-01 to 2006-07 and 2007-08 to 2013-14 and looks at the relationship between inflation and MSP in these two periods. Food inflation, it finds, was more than 5% in 20 of the 84 months in Period 1 and more than 5% in 76 of the 84 months in Period 2. While MSPs rose 12 to 56% in Period 1, they rose 59 to 175% in Period 2.

After discussing the usual problems associated with FCI procuring too much foodgrain, and of the states levying exceptionally high taxes as well as the excessive nature of commissions in cartelised mandis, the paper talks of the larger impact of a MSP-based policy that remains focused on a few crops. Even if prices of fruits and vegetables are rising faster, it points out, farmers feel safer growing wheat and rice since there is a guarantee that FCI will pick up the produce. Which is why, if farmers are given a guaranteed income—using Aadhaar-based bank accounts perhaps—farmers will then look at growing more fruits and vegetables in response to higher market prices; this will also lower inflation levels.

Most important, in the context of the current impasse at the WTO, as this newspaper has been arguing, if farmers are given income support, the government’s need to give MSP-based support disappears. Once this goes away, India cannot be accused of subsidising its farmers since, under WTO rules, income support for farmers is categorised as non-trade-distorting. Move to income-support to farmers and cash-transfers to citizens, which is what the finance ministry working paper is talking about, is actually a single-shot solution to several problems ailing the sector today—moving away from the over-dependence on wheat and rice, for instance, will reduce the problem of the falling water table; and once income support is introduced then, even for wheat and rice, the crop can be grown in more suitable areas like Bihar and West Bengal instead of the current Punjab and Haryana.

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