India needs agricultural reforms, not frequent market interventions harming farmer interests

The webs we weave in agricultural policy have entangled us from which unshackling has become very difficult. India needs massive reforms to make markets function better, much less intrusion of the State and more freedom for the farmer to participate in the market process and profit from it.

Ajit Ranade Aug 23, 2023
Onion damping in Maharashtra (Photo: Youtube)

The Indian government announced that it will procure an additional two lakh (20,000)  tonnes of onions this year. This will take the buffer stock target this year, to five lakh (500,000) tonnes, from the earlier target of three lakh (300,000) tonnes.  Most significantly this announcement came one day after the imposition of 40 per cent export duty. So, in plain words, the government increased local supply by effectively curtailing exports, which caused prices to crash, and then mopped up cheaper onions to increase its buffer stock. 

Does this smack of interfering with the market mechanism? Does this not appear to be arm-twisting onion farmers to sell onions at a lower price to the government? Even a former agriculture minister criticised the export tax since it will harm farmers. That minister hails from a state which supplies one-third of the country’s onions. Farmers are already agitating against the export tax. 

But farmers have been used to such arbitrary interventions in the market mechanism for agricultural products. This week’s onion inflation rate is 19 percent and that is worrisome for the government. Never mind that onions consume only a fraction of the household budget.  But onion prices can bring politicians to tears, and governments have fallen on this bulb’s erratic price rise.  

Mixed signals to farmers

Remember the farm laws that were proposed in Parliament in September 2020?  One of the three laws proposed complete decontrol of prices, and removal of stocking limits. Also, the deregulation of arbitrary bans on exports or imports. That very week, when farm laws were tabled, several trucks heading to Bangladesh were stopped at the border because they were carrying export cargoes of onions. These actions like stopping exports on the one hand, and on the other hand seeking to deregulate agricultural markets give mixed and dishonest signals. 

Perhaps the present export tax on onions is a preventive measure, especially since we have been singed badly by highly inflated tomato prices. The National Cooperatives Consumer Federation of India (NCCF) and the National Cooperative Marketing Federation of India (NAFED) have already procured more than 1.5 million tonnes of tomatoes in their buffer stock. They are selling them at subsidised rates, since prices have soared to 200 rupees a kilo. Where are these subsidies paid from? 

India has also imported unspecified amounts of tomatoes from Nepal, and maybe other countries too, in order to douse the fire of inflation. Retail inflation is running at 7.5 percent, far above the 6 percent tolerance limit of the Reserve Bank of India. So, tomatoes are among the chief villains causing inflation. Vegetable price inflation is however seasonal and notoriously fickle.  But it hogs disproportionate media attention. 

In July India banned the export of non-basmati white rice and also broken rice.  Together these account for 45 percent of all rice exports. This upset many of our trading partners and made India look like an unreliable supplier.  There are some countries in Africa and Asia whose import dependence for rice from India can jeopardize their food security.  Was the government concerned about food security? Apparently not. What then could be the reason for banning exports? Prima facie it seems to be about serving the interest of ethanol makers.  An estimated 3 million out of 5 to 6 million tonnes of broken rice go to make ethanol. So, the export ban increases the availability of ethanol for car engines, but this is at the cost of the rice farmer’s profits.  Rice prices internationally are at a decadal high and it was a good opportunity to make a handsome profit. But the farmer has always been at the receiving end when it comes to anti-profit measures like export bans on agricultural products.

Urban bias in agriculture 

These recent stories of policy action on tomatoes, onions, or rice illustrate why reforms in agriculture are very hard and remain unfinished. Firstly, there is an inherent urban bias, which means that policies give higher priority to the welfare of urban consumers (low food inflation) rather than the farmers’ interest. So, farm policies that reform markets and deregulate in favor of the farmer, can always arbitrarily be reversed or curtailed. Secondly in order to compensate the farmers’ loss caused by price controls, input subsidies continue, such as free water and electricity, cheap fertiliser, or no income tax on agricultural income. This causes enormous and avoidable fiscal stress. Thirdly, there is no exploration of market mechanisms such as forward markets, to substitute the heavy hand of the State. Forward markets are seen as speculation and are alleged to cause volatility of prices. This is an unproven hypothesis.  Hence the government continues to depend on heavy interference in the market via procurement, storage and trade of agricultural commodities.  In doing so it does not hesitate to use anti-competitive monopoly behavior. Who will take the government to court for anti-competitive, abuse of dominance?  

Agriculture thus remains shackled by price control, stocking limits, arbitrary import and export bans, and frequently changing policies. Even though technically it is a state subject there is plenty of interference from the central government, besides the state governments.  The farmer then is coddled with heavy and distorting subsidies. The subsidies not only cause fiscal problems via loan waivers, non-performing assets, or fiscal deficits, but also environmental crises. Witness the soil degradation and salinity in Punjab due to excessive use of chemical fertilisers which are heavily subsidised.  To top it all, half the farmers do not get the subsidies, since either they are landless or tenants, and thus not tied to the land they till. The webs we weave in agricultural policy have entangled us from which unshackling has become very difficult. India needs massive reforms to make markets function better, much less intrusion of the State and more freedom for the farmer to participate in the market process and profit from it. 

(The writer is a noted economist and commentator. Views are personal. By special arrangement with The Billion Press)

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