State intervention in grain markets: whither the policy direction?

POLICIES SUCH as importing onions when prices skyrocket and curbing exports of cotton when prices firm up have become regular in recent years. These are intended mainly to protect the interests of consumers (mostly urban) and industry. Little concern is shown for the interests of the farming community. The first agricultural policy announced recently after 50 years of independence is a disappointment in terms of providing any direction to the future. Indian agriculture continues to reel under the ad hoc and knee jerk State interventions. The recent glut in the foodgrain markets and the proverbial State intervention in the form of Food Corporation of India (FCI) is a case in point.

The intervention measures of the State in the purchase of foodgrains are rather ill advised. These market interventions send wrong signals to the farm sector and delay its integration with the market system. More importantly, it benefits the trading community and the large farmers rather than protect the small and marginal farmers. Because of their low marketable surpluses, lack of infrastructure and other handicaps, small and marginal farmers sell their produce to traders at prices much lower than what the latter receive from the FCI.

The poor quality of rice this year further had depressed the price farmers receive from the traders. On the contrary, the FCI has been forced to buy the grain at a higher price (Rs. 540 a quintal irrespective of the quality), which is the maximum price in terms of cost of cultivation. This higher price helps traders to make a quick buck.

In situations like this the support price should be at the minimum level, that is, cost C1 (all paid up costs plus imputed value of family labour) or C2 (C1 plus rental value of land), rather than at the maximum level, that is, cost C3 (C2 plus additional value of human labour based on statutory wages plus 10 per cent of the first two components to account for managerial input of the farmer).

For instance, C1 and C2 costs for paddy in Andhra Pradesh were Rs. 277 and Rs. 405 for 1996-97 (the latest estimates available). Even after adding the expected increase in costs (based on the previous years) the minimum support price will be in the range of Rs. 325 (C1) and Rs. 450 (C2) a quintal for the current year. In addition to this, the FCI's procurement, transport and storage costs (including losses), which are double that of private traders, will further push the FCI in to red. At the going rate of Rs. 540 a quintal, the FCI is losing a minimum of Rs. 150 a quintal and a maximum of Rs. 600. For, the acquired stocks would ultimately go waste, as there is no storage capacity with the FCI. In fact, the committee on FCI had suggested that 5 million tonnes of grain should be dumped into the sea, as it is not suitable for consumption.

The expected benefits from this intervention seem to be more political than economic. The main objective of the intervention which is to protect the farmers from losses is thwarted by the trading community. Traders gain the most from FCI interventions, as they dump the poor quality rice (purchased from farmers at much lower price) on the FCI. As a result, small and marginal farmers are not receiving the statutory price.

Another perceived benefit is self-sufficiency and food security. It is apprehended that the glut in the grain market may lead to a shift of the cropping pattern away from foodgrains resulting in food shortages. This appears to be rather imaginary. For, farmers do not change their cropping pattern due to price fall in one year. This is more so in the case of foodgrains like paddy due to socio-cultural and physiological constraints. Farmers are attached to foodgrain crops (especially paddy) as they are concerned with food security at the household level. In Andhra Pradesh, a shift away from paddy would be a long run prospect, as it is physiologically difficult to convert paddy fields to other crops in the short run. Moreover, paddy is known as the lazy man's crop and hence farmers prefer it to other though remunerative crops in the short run. Hence, unless the glut continues in the coming years it is unlikely that farmers will shift away from paddy.

Of late, the State policies seem to be driving the farm sector to a brink, instead of making it vibrant. Farmers are not allowed to adjust to the integration of local markets with global ones. On one hand they are deprived of higher prices for crops like cotton and on the other, they are not allowed to adjust the cropping pattern in accordance with the market. As a result, the potential for private initiative is depressed.

Ironically, while public investment in agriculture is declining, especially in irrigation development, substantial public funds are being wasted in the name of market interventions with no positive, if not negative, impact. Instead, liberalising the grain trade (lifting the restrictions on grain movement between States and regions within the country) will be far more effective.

The most contested option is the opening up of the Indian grain markets to global competition. Total integration will be advantageous to Indian farmers in some products and disadvantageous in others. Rice is one commodity where India is not price competitive and global integration will push local prices down further. However, in the long run, left to the market forces, prices will stabilise and area adjustments will take place in accordance with the price responsiveness of the farmers. The buffer stocks (45.5 million tonnes) with FCI will suffice to see the country through the period of adjustment process. And farmers will benefit from the shift in cropping pattern towards more remunerative crops as well as higher prices for their produce (like cotton). Further, there is a possibility that some precious water will be saved if the cropping pattern shifts in favour of less water intensive (as compared to paddy) crops like floriculture and cotton.

However, there is one hitch in this process. While FCI stocks can guarantee food security at the national level, how to ensure viability of agriculture in poorer regions and of the poorer (small and marginal) sections of the farming community? Neglect of the interests of these sections will jeopardise the policy objectives of poverty alleviation and reducing inequalities.

For instance, in the fragile resource regions groundwater tables are shrinking faster, in the absence of public investment to replenish it, resulting in the drying up of wells. More importantly, the intra-regional disparities are on the rise, as most of the small and marginal farmers in these regions are not able to invest in groundwater exploitation and hence remain outside the purview of the liberalised markets.

These farmers cannot afford to grow commercial crops due to their limited access to water. For instance, in most of the arid tracts few marginal farmers grow rabi crops, as they do not have water. One of the reasons for the suicides by cotton farmers in Andhra Pradesh was the indebtedness consequent to well failure. Though public investment towards watershed development programmes in these regions will reduce their fragility by increasing in situ soil moisture and groundwater tables, it is unlikely to address the equity issue. For watershed development per se will not guarantee access to water to all sections of farmers because of the capital intensive and lumpy nature of groundwater exploitation.

As a result, public investment in watershed development will improve the groundwater (common resource) for the purpose of private exploitation. In the process of liberalisation (declining input incentives and increasing output prices) it will be beneficial to large, medium and corporate farmers to acquire land. At the same time it is rational on the part of small and marginal farmers to sell their lands, as they cannot grow commercial crops for the market.

In the absence of alternative employment avenues these farmers will add to the unemployed labour force. In the light of shifting cropping patterns and corporatisation of agriculture, the agricultural sector may not be able to support an increased labour force. The only way to help small and marginal farmers is by strengthening their resource base. Access to groundwater to all sections of the rural population is a necessary condition. At the policy level, water rights need to be de-linked from land rights through appropriate legislation and institutional arrangements. South Africa has done this within two years of getting independence. This will bring equity in the distribution of the most important common pool resource. The State policies should focus on achieving this objective, at least in the long run, rather than relying on ad hoc policies.

V. Ratna Reddy

Centre for Economic and Social Studies,

Hyderabad

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