A 1960s-style policy response to control the price of pulses will not work, and instead, be anti-farmer
This year, with each passing day, the outlook for Indian agriculture seems less brighter and the spirit of the farmer is sagging. The monsoon-rains deficit appears to be the trigger. Although rains in the last few days offered some respite to Maharashtra’s Marathwada region, the situation in India’s largest agri-state, Uttar Pradesh, has gone from bad to worse with rain-deficit there having shot up to more than 40%. Back-to-back drought, after last year’s, seems very likely.
Last year’s drought, with monsoon rains falling short of the long-period average (LPA) by 12%, saw foodgrain production fall by close to 5%; and this year, with an almost similar deficit of rain, the likely damage is anybody’s guess. Clearly, the overall average agri-GDP growth in the first four years of the 12th five-year Plan (2012/13–2016/17) is going to be below 2%, way below the targeted 4%. Lower growth is causing increased farm distress and a spurt in farmer-suicides. With almost half of India’s labour force still engaged in agriculture, any political party that brushes this distress aside will be doing so it at its own peril—in fact, digging its own grave. The Narendra Modi-led NDA government seems to be losing the pulse of the Indian farmer.
In this column, we want to focus on pulses, a key source of protein for Indians. This year, pulses’ prices are going through the roof. Though the government appears optimistic about handling the situation, the traders, with their ears to the ground, are not. As per data collected by the ministry of consumer affairs, retail prices of tur/arhar (pigeon pea), on September 18, 2015, hovered between R132/kg in Delhi to R142/kg in Raipur, with Mumbai, Kolkata and Chennai falling within this range. Compared to the same date last year, this amounts to an increase of 69% in Delhi, 114% in Raipur, 73% in Mumbai, 74% in Chennai and 78% in Kolkata—the average price-increase, in the five centres, is a whopping 82% this year! But tur is not the only one on fire. The five centres saw the retail prices of gram (chick pea), urad (black gram), and masoor rise 51%, 40% and 28%, respectively. Thankfully, pulses did not follow suit with onions, whose retail prices have gone up by 84% in Delhi and 206% in Chennai!
The government has tried various policy instruments to tame the prices of onions and pulses, but there is no relief yet nor is it being foreseen. There are three standard policy instruments in the government’s tool-box: (1) restrict/ban exports of these commodities and open up imports at zero duty; (2) invoke Essential Commodities Act (ECA) to impose stocking limits, forcing private trade to liquidate stocks immediately; (3) suspend/ban forward and futures trading of those commodities. This is what the government has been doing since 1955. Nothing has changed.
The Cabinet cleared invoking of ECA last week; the minister of agriculture went on record about importing 5,000 tonnes of tur to tame prices; there is news of an impending suspension of trading in futures. Pulses are sensitive commodities and employing these archaic tools simply reveals the government’s ignorance on running a market-economy for agriculture.
We are not the socialist state we were in the 1960s. The policy tool-box needs innovation and a greater alignment with market forces. Let us take each of these policies and identify how to refine the tools.
Take the trade policy, first. Allowing import of pulses at zero duty and imposing export controls, reflect an inherent consumer bias, much to the detriment of farmers. With an open export-import policy, the price of a commodity will settle between their export and import parity prices and if our domestic prices are higher, nothing will go out. But if our farmers/traders can get a better price outside, it will only incentivise the peasantry to produce more pulses.
Consumers, in that case, can be protected through an income policy instrument. So, abolish all export controls on pulses. Importing pulses and selling it in domestic markets at prices below the import parity price is anti-farmer.
What one fails to understand is that despite knowing in advance about a 2-million metric tonnes (mmt) fall in pulses’ production in FY15 (over FY14) and the foreseeable pressure on prices, the government failed to import enough to bridge the supply gap. To manage price volatility, the government needed at least 1 mmt of pulses import under its control. Private trade imports, in any case, amount to nearly 4-5 mmt of pulses, the largest import being yellow pea (about 2 mmt), primarily from Canada. About 0.6 mmt of tur is imported, mainly from Myanmar and Tanzania.
Now, consider stocking limits under ECA. To support consumption spread through a year, of a commodity that is harvested within a short span of 1-2 months, someone has to stock. By putting stocking limits, you convert all large stockists into “hoarders” overnight and compel them to offload within 15 days or so. This offloading may give temporary relief, but the resulting zero/low private stocks will haunt future markets. In the long-run, this tool will discourage creation of storage capacities and thus harm farmers. Farmers sell immediately after harvest and in the absence of storage incentives, there would be a glut and prices will plummet, even way below minimum support prices (MSP), as what happened in FY14. Putting stocking limits under ECA is a rusty policy tool from 1955, one that is anti-farmer, and its usage should be discouraged. If some traders still collude to rig the market, the subject should be referred to the Competition Commission of India.
The role of commodity exchanges is very poorly understood by our bureaucracy and policy makers. A robust commodity exchange should facilitate price discovery and spot prices/premiums should be reflective of likely future volatilities. With regulations through FMC/SEBI, the exchange can act as a messenger of short- to medium-run future prices. But shooting the messenger by suspending/banning futures, is like shooting your own foot. After that, you are in a blind alley.
So, here is our submission: abolish export controls on pulses, abolish stock limits, and let forwards and futures flourish. Keep imports open, as they are today, and let the government hire some stocking facilities (about 1 mmt) from the private sector and stock some pulses, and let the government also play in forwards and futures to ensure some price stability in domestic markets. In order to do this, first the skills of our bureaucracy will have to be upgraded so that they understand how to manage commodity prices in a market economy. Is there someone who can bell this cat?
Gulati is Infosys Chair professor for agriculture and Saini is consultant, ICRIER