It's time to mend our farm-related polices: Business Standard: 18th July 2010

There is need for a fresh look at agricultural pricing and procurement policies, to ensure that there are fewer distortions

The standard response to low agricultural production is to increase the support price offered to farmers. Against the background of a low kharif harvest last year, the government has recently increased the MSP (Minimum Support Price) once again for the kharif crops. The question here is a broader one regarding our approach to agriculture in terms of pricing, procurement and stocking, which has created distortions in other areas.
The MSP is the rate at which the government procures produce from farmers. It is an open-ended scheme and any farmer can sell any amount to the Food Corporation of India (FCI) at the MSP. While the government announces these prices at the beginning of the season, the idea is to assure the farmers a minimum income. While the MSP is effective for rice and wheat, it does not really work for the other crops, where the market prices are higher. Therefore, the MSP is all about rice and wheat. More importantly, while the MSP was intended to be the last resort for farmers, it has become the convenient first option for them.



The practice of increasing the MSPs has been more pronounced in the last four years. For example, between 2005-06 and 2009-10, the MSP was increased by over 80 per cent for moong, 65-70 per cent for wheat and rice, 60-65 per cent for tur, sugarcane, and coarse cereals, 50 per cent for soybean and 35-40 per cent for groundnut. Has this really helped?
The answer is, yes and no. The MSPs for crops other than rice and wheat are not really used by farmers to sell to the government. But, they do lend an upward bias to the prices in the market, and hence indirectly provide farmers with better prices. However, they also tend to distort cropping patterns, as farmers have tended to move to rice and wheat where relative returns are better and assured.
The result has been a gradual migration to cereals from oilseeds and pulses, which has made India more dependent on the outside world for supplies through imports. But, farmers have received better prices and to this extent have benefitted significantly in the last few years.
The accompanying graph shows how the terms of trade have moved in favour of the farmers when the price indices for primary products and manufactured products are juxtaposed, with 1999-2000 being the base year. The WPI indices for both these groups have been normalised with the base year for comparing the ratios. The pattern fluctuated until 2005-06, after which there has been a distinct increase in favour of the farm sector.
There have been three fallouts from this policy. First, there has been pressure on food prices, as the MSPs have provided an inherent inflationary thrust to market prices as they set new benchmarks for the market. Second, attention has got diverted from the basic malaise of agriculture, i.e., low productivity. Higher prices can provide better incomes to farmers, but the critical part is to improve productivity, which can only be done by ushering in a new Green Revolution with provision of better seeds, irrigation facilities and fertilisers.
Higher prices are only a partial solution and cannot sustain the farmers’ income on their own in the long run. Productivity and output has to increase to provide self-sustaining incomes for them.
The other major fallout of this policy relates to the procurement and stocking objectives of FCI, which has tended to create shortages despite abundant production. This is where related policies need to be revisited. Let us look at rice and wheat, the two main crops that are featured high in terms of government support. The marketable surplus of rice and wheat are 80 per cent and 66 per cent respectively (based on 2006-07 data). This means that out of a total output of say 90 mn and 80 mn tonnes respectively, actually 72 mn tonnes of rice and 54 mn tonnes of wheat are available for the market.
The government comes in now and through its open-ended scheme starts procuring 30 mn tonnes of rice and 22 mn tonnes of wheat, which has been the case in the 2009 (rice) and 2010 (wheat) seasons until April. We have only 42 mn and 32 mn tonnes respectively left in the market, which in turn creates a shortage.
The government has been stocking large quantities of wheat and rice in the name of food security, well beyond the buffer stock norms, which peak at a combined quantity of 27 mn tonnes for July. As against this amount, FCI has stocks of 60 mn tonnes of wheat and rice as on April-end 2010. Quite clearly, such surpluses, while doubling the sense of food security, do accentuate the shortages in the immediate time frame. This combined with the higher MSPs has put pressure on the prices of these products.
There is hence need for a fresh look at the entire policy towards agricultural pricing and procurement, to ensure that there are fewer distortions. By merely increasing prices, we are deferring the problem for a later date.