Email this to someoneShare on LinkedInShare on FacebookTweet about this on TwitterShare on Google+Share on StumbleUponShare on Tumblr

Our previous post discussed the need to exercise restraint when applying pricing policies in agricultural markets. India’s current pricing policies have encouraged monocropping, dramatically increased food wastage, and indirectly damaged the environment. This post explores the unintended consequences of India’s pricing polices and offers potential solutions for an optimal mix of free markets and government intervention.

Consequences of an Unsound Policy

Monocropping

Although Minimum Support Price (MSP) is available for 25 crops, the Food Corporation of India (FCI) procures only rice and wheat. MSP for these two products has been rising each year, but market rates are lower and traders are unwilling to match MSP.

Monocropping is a direct consequence of this intervention. Farmers continue to plant the same crop year after year because they have a guaranteed purchaser. The graph below shows the gradual rise, over the last 50 years, of planting area dedicated to only rice and wheat.

graph01-june-2017
FCI’s Food Wastage

The FCI procures rice and wheat with the intention of distributing them to states based on the allocation set by the Public Distribution System (PDS). These crops are acquired at prices higher than MSP and this has directly encouraged excess production. The market is unwilling to pay such high prices and so the FCI is forced to purchase excess stock. Thus, the total amount procured is significantly higher than the amount allocated by PDS.

graph02-june-2017

There is no option left for the government but to store these crops for future use in godowns across the country. The problem is further compounded by a severe shortage of proper storage facilities leading to substantial rotting and loss of grains. 1.94 Lakh MT of food was wasted between 2005-2013. The offtake (the amount of grains actually distributed) is, in effect, much lower than the amount allocated.

Environmental Damage Linked to Input Subsidies

A related policy that impacts the sector’s efficiency is the government’s policy on input subsidies. India subsidises agricultural inputs to keep farm costs low and production high. But the cost of subsidies to the government is rising each year. The fertiliser subsidy grew at a CAGR of 18% in the last decade. The intended benefit of low consumer prices is challenged by the cost of subsidies being passed on to consumers in the form of higher inflation and taxes.

graph03-june-2017

Urea accounts for half of the government subsidy set aside for fertilisers. This has led to excess urea consumption and an imbalance in soil nutrition. The ideal N-P-K ratio for soil is 4:2:1. The current soil makeup is 8.3:2.7:1.
25% of India’s total land is undergoing desertification. 32% of total land is facing degradation. This is affecting productivity and will have a long-term impact on the livelihood of and food security for millions across the country.

The Problems are Solvable

Pulses – one solution for two problems

The government must procure pulses through FCI. MSP for pulses has been rising each year, as have annual imports of the product. Also, nearly 40% of agricultural land in India is nitrogen deficient. Pulses and legumes are known for improving the nitrogen content of soil. If FCI procures pulses, we can solve two problems at one time – improve soil fertility and keep a check on the demand-supply equation for pulses.

Declaring / hiking MSP only when necessary

MSPs began as a distress measure, but they are being used each year irrespective of the trend in the agriculture economy. Years with good rainfall and abundant output are times when MSP should be used to insulate farmers from low market prices.

MSPs began as a distress measure, but they are being used each year irrespective of the trend in the agriculture economy. Years with good rainfall and abundant output are times when MSP should be used to insulate farmers from low market prices.

Agricultural investment is key

The current policy is one-sided – we need more asset creation. The government should invest more in the procurement, storage, and marketing of agricultural produce and subsidise less. If an established agriculture supply chain is in place, intervention will only be needed in times of distress.

Parting Thoughts

This year a record production of oilseeds and pulses led to a surplus in the market and prices plunged for these products. The government does not procure these products as efficiently as it does rice and wheat. Thus, farmers have suffered despite a good monsoon year. Many pulses & oilseeds farmers will now likely go back to sowing rice & wheat this Kharif season and we will be back to monocropping.

The FCI can discourage monocropping by expanding procurement to a larger variety of crops. The government should use price policies only when there is a need to maintain balance between consumer demand and producer’s output. The key to solving these problems is a mix of free markets and targeted intervention.

Email this to someoneShare on LinkedInShare on FacebookTweet about this on TwitterShare on Google+Share on StumbleUponShare on Tumblr