A policy failure in pulses

By: | Published: August 7, 2015 12:25 AM

The criteria for fixing MSP of pulses should be sensitive to prevailing market prices

The agricultural price policy, which aimed at providing a remunerative and stable price environment to farmers through MSPs and obligatory procurement by government agencies, has helped India overcome massive food shortages to emerge as a net exporter of food. Though the Terms of Reference (ToR) of the Agricultural Prices Commission requires that policy-induced incentive should move in favour of crops where domestic supply is less than demand, relative to crops where it is more and rising, the implementation experience of price policy suggests it has ignored the ToR and mainly benefited crops such as wheat and rice among foodgrains and sugarcane and cotton among other crops. This has resulted in a shift of land and other resources away from pulses, oilseeds and coarse grains to wheat and paddy, which has created serious imbalances in demand and supply of various agricultural commodities. The production of pulses has been growing at a lower rate than demand, whereas the demand for cereals has been growing at a lower rate than growth in production.

As a result, the country’s imports of pulses have been rising while exports of rice and wheat have increased. India is meeting about 15% of its demand for pulses through imports. In this context, one would expect the price policy to influence a price parity in favour of pulses vis-a-vis rice and wheat (see graph).

It shows the ratio of MSP of wheat relative to gram declined for almost a decade beginning 1996-97, and increased sharply after that. Between 2007-08 and 2009-10, the price of wheat relative to gram remained at almost the same level as it was during mid-1990s. The price of paddy relative to arhar followed a similar pattern, i.e. declined for seven years beginning 1998-99 and increased slightly after that, before it started declining again since 2008-09.

Gr8

However, the fall in ratio turned out to be statistically non-significant. Thus, at a time when the country moved towards surplus rice and wheat and inadequate pulses, no serious policy efforts were made to change the price parity in accordance with the requirement. The requirement of pulses has been bypassed by the price policy.

The price policy has been irrelevant in case of pulses. Unlike wheat and paddy where prices received by farmers have been lower than the support price announced by the government—thus demand side not supporting MSP—in pulses, the farm gate prices have always been higher than the support price, as it is fixed on supply-side factors. An invariably higher price realised by farmers than MSP indicates that increase in MSP could not keep pace with the increase in wholesale market price. An analysis of change in MSP of arhar announced by the government relative to change in the wholesale price in UP during 2001-02 and 2009-10 shows that MSP for arhar was 93% of the wholesale price in the Kanpur market at the beginning of the last decade, which declined to 56% by 2009-10. The story of gram at Morena market in MP is similar—on an average, MSP for gram was 30-35% below the wholesale price between 2004-05 and 2008-09. However, in sharp contrast, in case of rice during 2002-03 to 2006-07, MSP remained higher than the wholesale price and was almost similar to the wholesale price without any margin in case of wheat, as shown in a study on price policy and farm profitability published in EPW. These examples illustrate that pulses suffer from policy (price) failure. Our support price policy has violated the fundamental principles of economics, i.e. “only that production is rational which is backed by demand.” This makes a strong case for fixing MSP for pulses based on demand-side factors.

Not only this, in comparison to rice and wheat, where MSP has provided a reasonable level of margins of around 20% over total costs to the farmers, in case of pulses it has either remained very close to the cost of production (CoP) without leaving any margins or below CoP. For instance, in case of arhar, during 2003-04 to 2011-12, MSP remained below CoP in the range of 5-20% except in 2004-05 and 2011-12. In case of urad and moong, CoP has always been higher than MSP. Particularly, margins have been higher since mid-1990s and more so in the years 2004-05 to 2006-07, when MSP was able to cover only 50-60% of CoP in case of moong. Whereas in urad, margins remained in the range of 15-25% throughout the last decade. This partly explains farmers’ preference to adhere to paddy-wheat cropping pattern vis-a-vis pulses. The connotation to this is there is a need for greater transparency in the method of arriving at MSP.

With low productivity level of pulses and the reluctance of farmers to invest adequate resources to modernise farming of pulses, it is strongly recommended that the criteria for fixing MSP of pulses should be sensitive to prevailing market prices along with greater transparency in maintaining parity in prices.

The author is faculty, National Institute of Bank Management, Pune. Views are personal

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