The agriculture saga in
India gets repeated almost every year. The two triggers are a delayed or deficient monsoon and higher food prices. This year, there is a combination of the two, which has made the issue even more acute. The official view was that there was no need to panic as the granaries were full, even though the stocks were of only wheat and rice. Imports of foodgrains were banned and we were assured that the monsoon would catch up, which it has somewhat done in July. We probably will end up with a satisfactory aggregate harvest and will soon forget about the problem until next year. And the same saga will start all over again.
There are two sides to this problem. The first is on the supply side. While foodgrain production has increased continuously in the last three years, the performance has been skewed by rice and wheat, while pulses remain neglected. We remain net importers of pulses and higher production in any year merely means that we import less.
The policy thrust has been on rice and wheat; production has been propelled by providing incentives to farmers. The minimum support price (MSP)—the price floor at which the government buys food—of wheat has been increased from Rs630 per quintal in 2003-04 to Rs1,080 in 2008-09, while that of paddy has been increased by Rs300 per quintal during the same period. Production is further bolstered by the presence of the open-ended procurement programme of the Food Corporation of India (FCI).
There have been two consequences. First, farmers prefer to produce these two crops, which in turn reduces the water table level—these crops need relatively more water. Second, the open-ended procurement scheme squeezes private traders. The marketable surplus of rice is around 70%, while that of wheat is 55%. Therefore, when we talk of production of around 80 million tonnes (mt) of wheat this year, only 44 mt enters the market, of which FCI has claimed around 24 mt. This leads to an anomaly where there is surplus production and prices still increase on account of the shortage being inadvertently created. The solution would be to release this stock, which is not being done—ostensibly to retain public confidence!
The second side of the problem is demand: Here, one must realize that with our population growing by 1.4% per annum, individual products need to grow by this level. This has not been so in the case of pulses and oilseeds; this has exacerbated the problem. Shortfall in oilseeds production can be substituted with imports of edible oils; this, however, comes at a price, as international prices respond to
The other important factor working towards increasing the demand for food in general is the declining poverty ratio. The Economic Survey 2008-09 has reported that the poverty ratio has come down by almost 9 percentage points between 2000 and 2005. This actually means that around 100 million people have moved out from utter “wretchedness” to a better standard of living, which translates immediately into higher demand for food items beyond the staples of rice and wheat. Therefore, thanks to such economic mobility, demand would be increasing at a faster rate than the population growth and will, hence, have to be matched through higher production or imports.
However, the bigger problem is the cyclical nature of production, which has been alternating between highs and lows. This is because, first, the area under cultivation is not keeping pace with increasing demand. This can partly be explained by the gradual shift of agricultural labour to urban areas, due to the uncertainty in farming. Second, the dependence on the monsoon is still very high. Less than half of cereals production is supported by irrigation, while 85% of pulses are still dependent on the monsoon. Also, just around 30% of oilseeds come under the irrigation belt. The absence of irrigation facilities has contributed further to alienating farmers from their land. Alternatively, they keep changing their cropping pattern, which, in turn, affects the crop output.
What are the solutions? Quite clearly we need to have in place a comprehensive agricultural policy which starts from landholding, inputs, credit, marketing, subsidies and distribution—all of which should be internally consistent. The roles of the state and the private sector should be clearly delineated and adhered to without ad hoc intervention.
We need to improve acreage and yields so that there is a self-sustaining production stream in place—the second Green Revolution. Further, we should seriously consider our pricing policies. MSPs and procurement have caused certain distortions which can be corrected by letting the market forces play a role through futures trading. This way, the procurement process could be capped and targeted primarily at the buffer stock and MSP would be the last resort rather than the first choice for the farmer. Given the shortages that occur in pulses and oilseeds, we could consider buffer-stocking these until we have attained stable production levels. Moreover, we can also conceive of having a system of providing tax incentives to companies, so as to make farming in non-MSP crops more attractive.
Pursuing such a policy will do away with the approach we are taking today, one that myopically looks only at the very short term.
Madan Sabnavis, Chief Economist, NCDEX Ltd.