A Growing Problem

"All the urban people are riding on the broken back of the peasantry." —Manmohan Singh, at an Indian Society of Agricultural Economics conference in 1994.

"It is not just a myth but a malicious propaganda that farmers are heavily subsidised."—Sharad Joshi, peasant leader

THERE has to be some sense in all this. When the urban consumer pays Rs 60 a kg for onions, the average farmer would have rarely got more than Rs 10 for his produce. Even as arhar dal (yellow lentil) sells for Rs 40-45 in the cities, the producer might have received a harvest price of Rs 14-18. For quite some time, the consumer has been paying Rs 15 and above for a kg of common rice, Rs 10 for atta, Rs 30-40 for pulses and Rs 10-40 for vegetables. For quite some time, farmers have been complaining about little support to agriculture, high input costs, and low harvest prices. For quite some time, traders have been complaining of business risks and poor market infrastructure. (Not this year, when bad weather and a stupid administration helped them recoup their losses.) So who's benefiting when agricultural prices are rising on all fronts?

None. In the long run, not even the trader. Last week, the government announced another big hike in the minimum support price (MSP) of wheat for 1999-2000, to Rs 550 a quintal from Rs 445 (Rs 510 including bonus of Rs 55) last year, a 21 per cent rise (8 per cent including bonus). With this, the wheat MSP has exactly doubled in nine years. Yet, higher prices haven't helped farmers grow more wheat or rice—output has increased by just 15-20 per cent in these nine years! In the meantime, higher MSPs have blown the food subsidy to unmanageable proportions (around Rs 10,000 crore expected this year, plus a probable fertiliser subsidy of Rs 12,000 crore).

Fumes Ashok Gulati, professor at the Institute of Economic Growth: "The agriculture sector is in a complete mess. We're screwing up on almost every front." Agrees Y.K. Alagh, former Union minister and agriculture expert: "The world over, agricultural prices are going down and India is seeing an opposite trend. Our policies are still stuck in the '70s mindset."

What is that? Try to hike agricultural incomes—and improve the terms of trade with industry—only through subsidising farm inputs and raising MSPs. Be paranoid about food security and not allow free trade in agricultural commodities. Instead, keep a huge stockpile of food, which, if the farmer sold in the open market or exported, may have earned him a better income.

Those strange terms: Since the '80s, the phrase "improving the terms of trade" has been high on every government's to-do list. Argues Bhupat M. Desai, professor at the Indian Institute of Management, Ahme-dabad: "The '90s have seen a very high increase in nominal prices. One key reason for this is the deliberate policy to heftily raise procurement prices to correct the anomaly with international prices and change the terms of trade in favour of agriculture."

What happens when the terms of trade go against agriculture? It means that the prices of agricultural goods are rising slower than those of manufactured goods, thereby transferring real resources from agriculture to industry and impoverishing the farm (and rural) economy. With Indian industry also protected through an overvalued exchange rate and high import duties, agriculture was neglected at a great cost. Many economists, notably Manmohan Singh, Montek Singh Ahluwalia and Ashok Gulati have called this an implicit taxation of agriculture and sought to reverse this by reducing import tariffs for industry and encouraging farm exports.In fact, Gulati and others have calculated the aggregate measure of support (AMS) for Indian agriculture at minus 22 per cent in the late '80s. In Punjab, where power and water are in fact virtually free, it was a high minus 30 per cent. Thanks to reforms, the AMS has reduced to minus 17 per cent over 1992-95. Over this period, says Gulati, every percentage point shift in the terms of trade has meant Rs 7,000 crore of resources being shifted to agriculture.

In reality, the terms of trade have moved towards agriculture thanks also to the post-1991 policy of improving the incentive regime for producers through higher MSPs and wide political support for keeping the farmers happy. Says Alagh: "The MSPs announced in the '90s have been much higher than the Commission of Agricultural Costs and Prices (CACP) recommendations to the Cabinet Committee. But if you consider the wide fluctuations in agricultural prices throughout India, the terms of trade haven't really moved up much. We've just managed to correct the earlier imbalance." Argues Gulati: "What has been the rate of inflation? Around 8-9 per cent a year. Is the rise in procurement prices more than that?"

 On an average, yes. But not everyone subscribes to Gulati's AMS calculations, even their very basis.

Does agriculture really need support? Even as the government has gone ahead with the Gulati-Pursell argument, on the basis of CACP estimates, the AMS works out to as high as plus 7. But many argue that the CACP calculation models are ancient. In fact, Joshi feels even Gulati's estimates are ridiculously low. Taking into account the cost of unsupplied power, costlier fertiliser, shoddier farm implements and other inputs, he calculates the AMS to be as much as minus 72 per cent. On the other hand, leftist economists like Prabhat Patnaik dispute the very basis of calculating AMS by comparing Indian prices with global prices.

Says Desai: "India's lower domestic prices are largely an indication of its lower unit costs due to its different resource endowments and less capital-intensive technology." Adds Ramesh Chand, principal scientist, ICAR: "India has to be compared with other developing countries in terms of prices. In developed countries, the AMS may be very high, but 95 per cent of the country may be paying the tax to the 5 per cent dependent on agriculture. This is not so in India." Income too is important. As Gulati says, the price of US wheat would be $140-180 per quintal. "By that standard—that is, if you compare this price to the average American's income—you have to sell grain at 50 paise per kg in India. That's obviously not possible."

MSPs are announced for 23 commodities but are effective only for rice and wheat. That's because market prices for all others are far higher than the MSPs. Even otherwise, price as an instrument to improve terms of trade could prove double-edged. As Desai says, high MSPs can also raise consumption and/or encourage diversification into non-agricultural activities. Prices can also be an ineffective tool to protect anybody—the rich farmer or the poor. Says Gulati: "When you subsidise inputs, you mess up. When you subsidise output, you mess up again. Tax the rich farmer but don't try to protect the poor through the price policy, do it through income policy." By creating conditions for him to raise his income in ways other than wait for the government to announce a new subsidy or a higher procurement price.

Booming consumption, shackled routes: A more serious accusation is that agricultural policies have failed to adapt to the rising and diversified demand for food products. According to Alagh, India entered a period of medium high growth in the mid-'70s, when per capita income grew 3 to 4 per cent against one per cent in the '50s. "Per capita grain consumption has gone up from 160 kg a year to 180, sugar from 6 kg to 14, edible oil from 2.5 to 6 kg. Fruit and vegetable demand is growing at 5 per cent. Once this happens, it's a very different ballgame. In the '60s, Nitin Desai, Vijay Kelkar and I were working out the buffer stock policies for grain. We're still in a similar frame of mind—food security is our only concern."

And the only way governments have sought to ensure that is through a plethora of controls, which has stunted agricultural growth and trade. In 1995, Bimal Jalan, now RBI governor, wrote: "There are licensing requirements for wholesale trade, storage and processing of virtually all agricultural commodities in all states. Official permits are required for out-of-state sales of some commodities (paddy in Tamil Nadu and Andhra Pradesh, oil in Gujarat, cotton and alcohol in Maharashtra). There are limits on storage of agricultural products like rice (Maharashtra, Punjab and Andhra Pradesh), wheat (Bengal and Madhya Pradesh), sugar (in Kerala) and virtually all food in Uttar Pradesh and Tamil Nadu."

CUT to the present. Gulati, end-1998: "We still have a monopoly procurement scheme for cotton in Maharashtra, 75 per cent levy on rice in Punjab and Haryana, 40 per cent on sugar. We have to have free movement of agricultural goods, free stocking. We have to abolish all physical controls. In sugar, we delicense but don't decontrol and then decide to import. We don't even know what that means." So the farmer can grow more, but still can sell only in ways that the government decides from time to time. Forget export, he is often not even permitted free movement of his produce across state boundaries. And this is seven years after reforms began!

The shortest way to straighten out supply bottlenecks could be free trade in agriproducts. And not the stop-and-go in trade as we have now. Today we export sugar, tomorrow we don't. Even now the Food Corporation of India (FCI) is exporting rice, but the ministry could issue a directive any day stopping that. Says Alagh: "Start with the neighbours. There wouldn't have been an onion crisis had imports been allowed from Pakistan. Opening up trade with Bangladesh will immediately regulate fish prices."

Sell and buy, but where? But free trade of agricultural produce will have to be balanced with regulated domestic markets and proper marketing strategies, unlike the onion variety. "Throughout India," laments Gulati, "there's not one national market for agricultural produce." Forget national markets, in several parts of India, agricultural markets just don't exist. In large tracts of Bihar or Orissa, there's no FCI procurement centre and foodgrains are bought below the MSP, says Chand. Adds Alagh, "More than 70 per cent of groundnut is sold outside regulated markets, allowing traders to raise their margins. Traders minting money is not a market failure, it's a policy failure."

There's a vast rural infrastructure waiting to be tapped but the government is strapped for cash, thanks to inefficiently subsidised inputs where the recovery rate is between zero and 20 per cent of costs. Asset creation in agriculture has halved from 18 per cent of GDP in 1981 to 9 per cent in 1992. Some 62 per cent of Indian agriculture remains totally rainfed. In Guj-arat, for instance, agriculture commands less than 40 per cent area, less than 20 per cent of which is irrigated. But yield per person employed is third after Punjab and Haryana. The story is the same in the eastern parts of the country where agricultural prosperity has made a difference despite little subsidies. These areas could be poised for another green revolution if the infrastructure can be provided.

Sums up Alagh: "With our policies, you never know which commodity will explode and when. Today it's onions, tomorrow it could be tomatoes or even eggs." And both consumers and producers may have to go on burning a hole in their pockets while a dithering government watches.