Why the government should release India's agriculture from its choking controls
The government recently announced at a press conference hefty increase in procurement prices of paddy, cotton and several other kharif crops. Home minister Rajnath Singh, who was present at the press conference, was in a self-congratulatory mood and declared that the government had fulfilled its promises to the farmers of ensuring prices 50 per cent above the cost of production.
Whether these prices are really 50 per cent above the total cost of production as outlined in the working done by the renowned agricultural scientist Dr MS Swaminathan is a matter of debate. But let us leave that for the time being. Let us first look at whether procurement even at these prices is an illusion or reality.
Dr Ashok Gulati in an interview given to Rediff on July 5, 2018, calls the entire announcement of enhanced procurement prices "big foolishness". He further declared that the government has no idea of economics. It is a basic of economics that prices are fixed in the market by forces of demand and supply. The prices cannot be fixed on the basis of production cost. Gulati gives several examples. Let us take groundnut for instance. The MSP for groundnut has been fixed at Rs 4,500 per quintal but is selling at Rs 3,500 per quintal in the market. The reason is simple. The market fixes the price.
The government has announced a hike of 26 per cent for cotton crop. Now, if this is the prevailing price, cotton exports will come to zero because the present difference between export price and domestic price is just 10 per cent. With a price hike of 26 per cent, we will price ourselves out of the international market. The Cotton Corporation of India will have to procure seven million tonnes of cotton else the domestic market will collapse. What this 26 per cent hike will do to the domestic textile industry is another matter. There are reports of an imminent 10 per cent hike in garment prices.
The basic truth is that the government will procure a minimum amount maybe 10 per cent to 15 per cent of the crop. At these enhanced prices they will sit on an increased pile of unsold stocks. The government is already sitting on an unsold stock of four million tonnes of pulses and millions of tonnes of rice and wheat. This stock is then sold through public distribution system at subsidised prices or is exported at a loss or it just left to rot. In 2017, the food subsidy bill was Rs 1,69,000 crore. There will be a hefty increase this year.
Ajay Jakhar, who is chairman of Punjab State Farmers and Farm Workers Commission, warns against making promises to farmers that cannot be fulfilled. According to Jakhar, it is not possible to give the prices as recommended by Swaminathan because it will result in huge losses for the government. The prices so fixed will have no relation to the market price.
The same is true for sugar cane and milk where the sugar cane mills and dairies are sitting on huge unsold stocks and prices are fixed arbitrarily by the government so that there are enhanced prices for the cane growers and the milk supplying farmers.
Unsold stocks of skimmed milk powder have gone up sharply even as export prices of the powder have dropped sharply. The crises in both the commodities are likely to escalate from October onwards.
The real problem is that we have reached a stage with regards to most agricultural crops where we are producing more than we can consume. If markets are allowed to determine the prices of these commodities, the prices would decline sharply. This will hurt the farmer who is already impoverished. The cost of not letting him see the reality is that the Indian state is saddled with huge stocks of agricultural produce which rots or is disposed of at lower market prices. This cycle continues and the poor farmer continues to produce the same crop with rising expectations, which would not be fulfilled.
The solutions are painful and can be implemented only over a long period of time. The most obvious one is that the farmer is able to reduce his costs so that the market prices are remunerative for him. This can be done by increasing his productivity through better technology and better knowledge and information. The other is by letting him freer access to the market. The government must loosen the controls over agriculture. The time has come to free agriculture produce from the Essential Commodities Act. The Indian farmer is more than capable of feeding the nation. He must be allowed to tap foreign markets and gradually become more efficient and dynamic. There is no reason why he will not rise to the challenge. The Indian industry has done so after the 1991 reforms and so will the Indian farmer.
There will be transient challenges in the short-term. There may be sharp agricultural distress or sudden hike in food prices. These are pains of reform and change. We in the urban areas should be ready for these changes before the system settles down. If we do not change, we will continue to do tremendous injustice to our brothers. We will in the meantime continue to pay for huge agricultural subsidies and wastage of food grains.
There is no alternative to change.