Minimum Support Price

Pulse of the matter

Toor_Dal_Tur_dal

 

The Economic Survey of 2015-2016 is a lovely document which goes into great detail on what is wrong with India on the economic front and offers good workable solutions to solve these problems.

One of the points that the Survey makes is regarding the Indian agriculture becoming cereal centric. The reason for this lies in the fact that the government procures rice and wheat from the farmers at the minimum support price(MSP). While the government announces an MSP for 23 crops, it largely buys only rice, wheat and some cotton. For sugarcane there is an MSP like engagement where the government fixes prices and the sugar mills are legally obligated to buy sugarcane from the farmers at that price.

As the Survey points out: “In principle MSP exists for most farmers for most crops, it’s realistic impact is quite limited for most farmers in the country. Public procurement at MSP has disproportionately focused on wheat, rice and sugarcane and perhaps even at the expense of other crops such as pulses and oilseeds.”

This has effectively led to a situation where the government has large stocks of rice and wheat much above the buffer stock norms. But it also leads to a situation where there are frequent spikes in the price of pulses. In the recent past the price of tur dal (or pigeon pea) had touched Rs 200 per kg. Elections have been lost in the past on onion prices going up and given this, elections can easily be lost in the future with price of pulses going up.

Importing pulses is really not a solution because India is the number one producer as well a consumer of pulses in the world. As the Survey puts it: “Given that India is the major producer and consumer of pulses, imports cannot be the main source for meeting domestic demand.”

This means that the farmers need to be incentivised to produce pulses and at the same the yields on pulses also need to go up. The question is how can the government incentivise farmers to produce pulses and wean them away from producing rice and wheat.

As the report titled Price Policy for Kharif Crops—The Marketing Season of 2015-2016 points out: “A pertinent question arises as to why farmers are not wholeheartedly diversifying towards oilseeds and pulses. Based on Commission for Agricultural Costs and Prices’s interaction with a wide spectrum of farmers and also based on field visits, it emerged that farmers need a backup plan in the form of reasonably strong procurement machinery to be put in place to fall back upon when the prices fall below minimum support price.”

Along these lines, the Economic Survey recommends a “strengthened procurement system” for pulses. And the good part is that the finance minister Arun Jaitley has gone ahead with this suggestion in the budget.

As Jaitley said in his budget speech: “Effective arrangements have been made for pulses procurement… Incentives are being given for enhancement of pulses production. Rs 500 crores under National Food Security Mission has been assigned to pulses.”

Also, the government has plans of creating a buffer stock for pulses like it has for rice and wheat. As Jaitley said during his speech: “A number of measures have been taken to deal with the problem of abrupt increase in prices of pulses. Government has approved creation of buffer stock of pulses through procurement at Minimum Support Price and at market price through Price Stabilisation Fund. This Fund has been provided with a corpus of  Rs 900 crore to support market interventions.”

Given the current structure of the agricultural economy these are steps in the right direction. With the government buying more pulses at the minimum support price, it will incentivise more farmers to grow them, improving the total production of pulses. This is very important given that pulses are a huge source of protein for vegetarians.

The other big problem with pulses is that most of it is grown on unirrigated land. As the Economic Survey points out: “In contrast, a large share of output in wheat, rice and sugarcane – in Punjab, Haryana and UP – is from irrigated land. In water scarce Maharashtra, all sugarcane is grown on irrigated land.

Meeting the high and growing demand for pulses in the country will require large increases in pulses production on irrigated land, but this will not occur if agriculture policies continue to focus largely on cereals and sugarcane.” A better procurement policy for pulses will help in increasing production.

Further, pulses have a low yield. In fact, the yield in India is lower than other key pulse producing countries like Brazil, Myanmar and Nigeria, which have better yields than that in India. Madhya Pradesh which is the main state producing pulses, has a yield of 938 kg per hectare. In comparison, China has yield of 1550 kg per hectare.

What has not helped is the fact that the yield has more or less remained flat. In 2007-2008, 826 kg of tur dal was produced per hectare. By 2013-2014, this number had risen to only 859 kg per hectare, at a rate of less than 1% per year (around 0.7% to be precise).

As Dharmakirti Joshi and Dipti Deshpande economists at Crisil Research point out in a research note titled Every third year, pulses catch price-fire: “Pulses account for about 20% of area under foodgrain production, but less than 10% of foodgrain output. Also, over time, production of pulses has failed to catch up with demand. Output has grown less than 2% average in the last 20 years, while acreage has grown even lesser at 0.8%. Not surprisingly, yield rose only 0.9%.”

In order to improve yields, either more pulses need to be grown under irrigated areas, or the unirrigated areas need access to irrigation. The second option will take a lot of time to achieve. Given this, it is important that farming of pulses is encouraged in areas which have access to irrigation. And that is precisely what Jaitley has tried to do with this budget.

There may be lot that is wrong with Jaitley’s budget, but he has got it right when it comes to pulses.
(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared in The Asian Age and Deccan Chronicle on March 2, 2016

Mr Modi where has minimum government gone?

narendra_modiPromises are meant to be broken, especially in politics.

Narendra Modi, the prime minister of India, in the run-up to the 2014 Lok Sabha (the lower house of Indian Parliament) had promised “minimum government and maximum governance” to the citizens of India.

He has clearly forgotten the minimum government bit of that promise. At least that is the way it seems from the third annual budget, for 2016-2017, presented by Arun Jaitley, the finance minister in the Modi government.

The allocation to the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS), a scheme of which Modi has been severely critical of in the past, has been set at Rs 38,500 crore ($5.62 billion) for 2016-2017.

This is the highest allocation ever to the scheme. The scheme guarantees work for 100 days in a financial year to every household whose adults are willing to do unskilled manual work. The trouble is it doesn’t lead to the creation of any useful assets and hence, more or less works as a dole.

Also, the scheme doesn’t benefit many of those it is intended for. The economist Surjit Bhalla has called MGNREGS as the fourth most corrupt institution in the world after FIFA, the BCCI (the institution that governs cricket in India) and the public distribution system used by the Indian government to distribute food grains as well as kerosene to the poor.

The allocation to food subsidy stood at Rs 1.35 lakh crore($19.7 billion) down a little from Rs 1.39 lakh crore($20.3 billion) last year. The government sells rice, wheat and sugar at subsidised rate through 5.5 lakh( 0.55 million) fair priced shops, which form the public distribution system, throughout the country. The trouble is the system is extremely leaky and a huge proportion of the food grains are siphoned off and get diverted into the open market.

A committee to fix up this system was set up very soon after the Modi government came to power. It submitted its report in January 2015. The recommendations of the committee haven’t been taken on.

The government also sells fertilizers to farmers at a subsidised price. The subsidy towards this has marginally fallen to Rs 70,000 crore ($10.2 billion) from Rs 72,438 crore ($10.6 billion) during the last financial year. This small fall is because of a fall in fertilizer prices. This system is also extremely leaky and only around 35% of urea (a kind of fertilizer) actually reaches the small and marginal farmer it is meant for.

The same is true about kerosene as well, which the government distributes through the fair prices shops. Nearly, 46% of the kerosene is siphoned off. The allocation towards petroleum subsidies this year is at Rs 26,947 crore ($3.9 billion) against Rs 30,000 crore ($4.4 billion) during the last financial year. But what needs to be kept in mind is that oil prices have fallen during the last one year.

What this tells us very clearly is that as far as subsidies are concerned Narendra Modi has been no different from his predecessor Manmohan Singh and continues to run full throttle, what is a very leaky system.

Further, the government continues to own 27 banks. Since 2009, the government has invested around Rs 1.02 lakh crore in these banks to recapitalise them. The banks have given loans to crony capitalists close to the previous government, which they are now unable to recover.

For the next financial year, the government has allocated a further Rs 25,000 crore ($3.65 billion) to be invested in these banks. Jaitley also said that “if additional capital is required by these Banks, we will find the resources for doing so.”

What Jaitley meant here was that the government would do “whatever it takes” to keep these banks going.

The question that Jaitley did not answer is—why does the government need to own 27 banks? Over and above this, the government continues to own and run loss making companies. Until March 2014, the accumulated loss on these companies was Rs 1.04 lakh crore.

The government continues to own, a loss making airline, a loss making telecom company, a loss making scooter company, loss making hotels and so on. In his speech Jaitley did talk about strategic sale of government owned companies. But the past record of the Modi government (or the other governments before it) has been quite shaky on this front.

The government has also talked about selling some assets of these firms. As Jaitley said, we will encourage these companies to “divest individual assets like land, manufacturing units, etc. to release their asset value for making investment in new projects.”

The government also decided to set up a Higher Education Financing Agency (HEFA) with an initial capital base of  Rs 1,000 crores. As Jaitley said in his speech: “The HEFA will be a not-for-profit organisation that will leverage funds from the market and supplement them with donations and CSR funds.”

The question here is why not just allow education to be run as a for-profit business, legally. Currently, most private education institutes in India are owned by politicians, and are conduits as well as generators of black money. Black money is essentially money which has been earned but on which taxes have not been paid.

What this means is that at least the “minimum government” part of Narendra Modi’s “minimum government maximum governance” has gone for a toss. Like most electoral rhetoric it has been abandoned—lock, stock and barrel.

Now this doesn’t mean that there was nothing good in the budget. Here are some of the good points. The government buys rice and wheat from the farmers directly at a price referred to as the minimum support price. The benefits of this direct buying are concerned by farmers in a few states like Punjab, Haryana, Andhra Pradesh etc.

The government has plans to extend procurement of food grains to other parts of the country. It has plans of setting up an online procurement system through the Food Corporation of India.  Given that, a government benefit is available, it should be available throughout the country and not only in certain states.

A major problem that the Indian farmer faces is getting his produce to the market before it goes bad. As the finance minister Jaitley said in his speech: “A lot of fruits and vegetables grown by our farmers either do not fetch the right prices or fail to reach the markets.”

In order to tackle this the government plans to implement the “Unified Agriculture Marketing Scheme which envisages a common e-market platform that will be deployed in selected 585 regulated wholesale markets.”

Another interesting move in order to tackle produce going bad is allowing “100% FDI…through FIPB route in marketing of food products produced and manufactured in India.”

One of the major successes of the Modi government since coming to power has been electrification of villages.  As of April 1, 2015, 18,542 villages were not electrified. Between April 1, 2015 and February 23, 2016, 5542 villages were electrified. This was more than the total combined achievement of the last three years. Also, the government has promised 100% electrification by May 1, 2018.

The government is also trying to create jobs and plans to invest Rs 2,18,000 crore in roads and railways during the course of the year.

To conclude, while the government is trying to do the right things on many fronts, but by trying to run every business possible, it is just overextending itself.

And that is something that could have been easily corrected in this budget. Sadly, an opportunity has been lost.

(Vivek Kaul is the author of the Easy Money trilogy. He can be reached at [email protected])

The column originally appeared in the Khaleej Times on March 1, 2016, with a different headline.

Why India should be growing dal and not sugarcane

Toor_Dal_Tur_dal

Dal prices, in particular tur dal (also known as arhar dal or pigeon pea) prices, have been on fire. The price of tur dal even crossed Rs 200 per kg sometime back. As I write this, the price of tur dal is still hovering around Rs 200 per kg.

This trend has prevailed over the last few years where dal prices have reached astonishingly high levels at various points of time. Why is that the case? The reasons are both from the demand as well as supply side.

As rural incomes have gone up over the last few years, the demand for dal as a source of protein has gone up. The supply hasn’t been able to keep pace. Over and above this, short term weather trends have led to massive spikes in dal prices.

In 2007-2008, India produced 3.08 million tonnes of tur dal. In 2014-2015, the total production was down to around 2.78 million tonnes, which was lower than the production in 2007-2008. The total production in 2013-2014 had stood at 3.34 million tonnes.

Hence, between 2013-2014 and 2014-2015, there was a significant fall in production of tur dal. Economists Ashok Gulati and Shweta Saini in a column in The Indian Express estimate that the “the consumption of tur hovers between 3.3 to four million tonnes.” Hence, there is a clear gap between the demand for and the supply of tur dal.

What has not helped is the fact that the yield has more or less remained flat. In 2007-2008, 826 kg of tur dal was produced per hectare. By 2013-2014, this number had risen to only 859 kg per hectare, at a rate of less than 1% per year (around 0.7% to be precise).

As Dharmakirti Joshi and Dipti Deshpande economists at Crisil Research point out in a recent research note titled Every third year, pulses catch price-fire: “Pulses account for about 20% of area under foodgrain production, but less than 10% of foodgrain output. Also, over time, production of pulses has failed to catch up with demand. Output has grown less than 2% average in the last 20 years, while acreage has grown even lesser at 0.8%. Not surprisingly, yield rose only 0.9%.”

There are fundamental reasons behind why tur dal prices in particular and dal prices in general have been on fire. Over and above this there is a more recent reason as well. The monsoon this year was at 86% of its long period average. And this did not help either. As Joshi and Deshpande point out: “Pulses are highly risk-prone crops because most of the production is rain-dependent. Barely 16% of total pulses area is covered by irrigation and hence the crop is highly vulnerable to monsoon shocks.”

Also, the current incentive structure of the government is in favour of growing rice, wheat and sugarcane. As Gulati and Saini point out: “The government needs to create a crop-neutral incentive structure for farmers, which is at present skewed in favour of rice, wheat and sugarcane. Much of the subsidies on fertilisers, power, and irrigation go to these crops. These subsidies amount to more than Rs 10,000/ hectare. If the same amount were given to pulse growers, they would be incentivised to produce more.”

The government declares a minimum support price for rice and wheat and actively procures grains through the Food Corporation of India and other agencies.

It declares a minimum support prices for dal as well, but doesn’t actively procure it. Given this, while the farmer is sure of the government buying the rice and wheat that he produces at a certain time, the same certainty doesn’t exist in case of dal. As Joshi and Deshpande point out: “Production is also risky because of inadequate post-harvest storage facilities, absence of assured marketing outlets (unlike wheat and rice) and lack of government assurance for purchase under public distribution.”

The irony is that with economic incentives like assured procurement by the government lead to the farmers producing water intensive crops in water-scarce areas. As TN Ninan writes in The Turn of the Tortoise—The Challenge and Promise of India’s Future: “Punjab and Haryana need to change their choice of crops and reduce growing water-hungry rice…Growing sugar cane, even more water hungry than paddy, in water-scarce Maharashtra is equally contraindicated—especially since the country happens to be surplus in sugar most of the time, and exporting sugar amounts to exporting water.”

As Ninan further points out: “The high cane prices make the crop attractive to farmers who otherwise might have grown less water-intensive crops, especially in stretches where water is not abundant. But one price distortion leads to another, and then another.”

With this entire structure in place enough dal doesn’t get grown. As Gulati and Saini point out in another column in The Financial Express: “Pulses need much less water, are nitrogen-fixing, and therefore do not need much chemical fertilisers either. They can thus save on large input subsidies (power, irrigation and fertilisers), much of which are normally cornered by rice, wheat and sugarcane as these crops have high irrigation cover and higher fertiliser consumption.”

So even though growing dal needs lesser water not enough dal is grown because the prevailing economic incentives go against it. And this anomaly is not going to go away anytime soon.

The column originally appeared on The Daily Reckoning on Nov 30, 2015

Less than 5.8% of farmers benefit from the minimum support price system

agriculture

Towards the end of April, the Parliament’s Committee on agriculture made a rather bizarre commendation to the government. “The committee urged that steps should be taken to fix remunerative pricing with 50% profit margin over cost of production for all the 24 crops without any further delay as recommended by this committee,” the committee said.
What does mean? The committee has basically recommended that the government should ensure that the minimum support prices that it declares for various agricultural crops should give the farmers a profit of 50% over their cost of production. The government declares minimum support prices for 24 agriculture crops which include rice paddy, wheat, jawar, bajra, maize, ragi, pulses, oilseeds, copra, cotton, jute, sugarcane, and tobacco.
Even though it declares the minimum support price for 24 crops it primarily buys only rice and wheat from farmers through the Food Corporation of India(FCI) and other state procurement agencies.
Why do I say that the suggestion of the Parliament’s Committee on agriculture is bizarre? The answer to this question lies in the Report of the High Level Committee on Reorienting the Role and Restructuring of Food Corporation of India (better known as the Shanta Kumar Committee Report). The report makes some interesting points using data from the 70th Round of NSSO (National Sample Survey Organisation) on The Key Indicators of Situation of Agricultural Households.
As per this survey there are 90.2 million agricultural households in India. From this, during the period July to December 2012, only 18.67 million households reported selling paddy. Of this number only 13.5% sold to a procurement agency (i.e. either FCI or other state procurement agencies). This essentially means that only 2.52 million households sold paddy to the procurement agency. Of this who sold to a procurement agency only 27% of their sales were at the minimum support price.
Between January and June 2013, 5.46 million households reported selling paddy. Of this only 10% or 0.55 million households sold to a procurement agency. And of those who sold to a procurement agency only 14% of their sales were at the minimum support price.
The situation is similar when it comes to wheat. As per the survey, between January and June 2013, 13 million households reported the sale of wheat, but only 16.2% reported to have sold wheat to a procurement agency. Of those who sold to a procurement agency, only 35% of their sales happened at the minimum support price.
So what does this mean? The total number of agricultural households who were able to sell rice paddy and wheat to the procurement agencies works out to 5.21 million. As the Shanta Kumar Committee Report points out: “The number of households comes to just 5.21 million (2.55 million paddy households during July-Dec 2012; 0.55 million paddy households during Jan-June, 2013; and 2.11 million wheat households during Jan-June 2013).”
The figure of 5.21 million forms 5.8% of the total number of agricultural households of 90.2 million. In fact, this number is also on the higher side once one takes into account the fact that there are households that sell both paddy and wheat to the procurement agencies. Further, as mentioned earlier not all wheat and paddy is being sold to procurement agencies at the minimum support price.
After taking these factors into account, the number of direct beneficiaries from the minimum support price announced by the government and the procurement system set up to buy paddy and wheat, comes out to be even lower than 5.8% of the agricultural households.
As the Shanta Kumar Committee Report puts it: “The direct benefits of procurement operations in wheat and rice, with which FCI is primarily entrusted, goes to a miniscule of agricultural households in the country.”
Further, the procurement benefits large farmers in a few selected states like Punjab, Haryana, Andhra Pradesh and lately from Madhya Pradesh and Chhattisgarh. Large farmers are the luckiest of the lot—they have a ready made customer in the form of the government for what they produce and they don’t need to pay any income tax either. What muddles the situation further is that in some states, the procurement agencies buy nearly 70-90% of the wheat and rice and literally crowd out the private sector.
This crowding out leads to food prices going up. Food inflation hurts the poor the most. Half of the expenditure of an average Indian family is on food. In case of the poor it is 60% (NSSO 2011). What Rahul and the Congress party need to understand is that everyone associated with agriculture does not own land. As per the draft national land reforms policy which was released in July 2013, nearly 31% of all households in India were supposed to be landless. The NSSO defines landlessness as a situation where the area of the land owned is less than 0.002 hectares.
Any price rise, particularly a rise in food prices which is what an increase in MSP leads to, hurts this section of the population the most. Didn’t the Parliament committee on agriculture consider this, before making the recommendation that it did? If yes, why do they want to make things difficult for a major section of the population, by recommending what they have? Or are MPs too close to large farmers that benefit the most from rising minimum support prices?
The grain bought by the government is sold through the public distribution system (PDS). This grain is sold at extremely subsidized prices. Rice is sold at Rs 3 per kg and wheat is sold at Rs 2 per kg. The trouble is that the PDS is terribly leaky. As per NSSO 2011 the PDS leakage is 46.7%. This means that of every 100 kgs of grain distributed through the PDS, 46.7 kgs hits the open market. This is not surprising given the huge gap in prices between grain sold through the PDS and that sold in the open market. In fact, in some states the leakage is as high as 70-90%.
And this led the Shanta Kumar Committee to ask: “Given such large leakages, one must question the reasons behind this, and whether it is worth keeping FCI pouring grains into a system that fails to deliver.”
To conclude, the question to ask is—what is the point in keeping such a wasteful system going? The trouble is that its become too much of a holy cow for the government to do anything about.

The column originally appeared on The Daily Reckoning on May 12, 2015

Modi govt is wrong, the hike in MSP of rice will lead to inflation

Paddy_Fields_The Cabinet Committee on Economic Affairs (CCEA) has decided to increase the minimum support price (MSP) of rice by Rs 50 per quintal or 3.8% to Rs 1360, for this year. The MSP is the price at which the government buys rice from the farmers, through the Food Corporation of India(FCI) and other state government agencies.
The law minister Ravi Shankar Prasad was confident that this decision will not fuel inflation. As he told the media “I do not think rise in MSP is directly linked to inflation. We are taking several measures to control inflation”.
While the increase in MSP of 3.8% is lower than the average increase of 9% per year in the MSP of rice since 2007-2008, Prasad’s statement is wrong on several counts. As economist Surjit Bhalla put it in a November 2013 column in The Indian Express “For each 10 per cent rise in previous years’ procurement prices, there is a predicted 3.3 per cent increase in the current year CPI…When the government raises the MSP, the prices of factors of production involved in the production of MSP products — land and labour — also go up.”
Given this, even a 3.8% increase in the MSP of rice will translate into some inflation. Further, several states like Punjab, Haryana, Uttar Pradesh, Andhra Pradesh and Odisha, levy procurement taxes on the rice and wheat procured by the central government through FCI.
A recent article in The Financial Express estimates that these “purchase levies account for 10-14.5% of the minimum support price (MSP) announced by the Centre on rice and wheat procurement.” Hence, when the MSP of rice goes up, these levies which are a certain percentage of the MSP, also go up. This in turn pushes up the price of rice.
Also, it is worth remembering here that the FCI, directly and through state government affiliates, procures rice and wheat from farmers at the MSP set by the government. It buys all the rice and wheat that farmers bring to it, as long as it meets a certain quality. Farmers have a ready buyer, and one who keeps increasing the price.
This has led to a situation where the government of India has become the biggest hoarder of rice and wheat. A recent report in The Financial Express points out that “the Food Corporation of India (FCI) had rice stock of more than 28.2 million tonnes at the start of the month, which is more than the double the requirement under the strategic reserve norm.” Hence, it is not surprising that the price of rice in May 2014 rose by 12.75% in comparison to May 2013.
Earlier this month the government decided to sell around 5 million tonnes of rice in the open market. As and when this happens this will have some impact on the price of rice. But that effect will be negated with the government buying all the rice that lands up at its door and starts hoarding again in the months to come.
Take the case of last year when the MSP for rice was increased by 4.8% to Rs 1310 per kg. In October-November 2013, the inflation in the price of rice was at around 15%. The only possible explanation for this is the fact that the government bought much more rice than it needed to run its various programmes. Hence, a lesser amount of rice landed up in the open market and thus fuelled inflation.
Given these reasons, Ravi Shankar Prasad is wrong when he says that the decision to increase the MSP of rice will not fuel inflation. Having said that some amount of increase in the MSP of rice is necessary. The farmers also need to be paid more every year, given the high inflationary times that we live in. The only way for the government to ensure that it does not cause inflation is to buy the right amount of rice and wheat that it actually needs to run its various programmes and not more.
The article originally appeared on www.firstbiz.com on June 27, 2014

(Vivek Kaul is a writer. He tweets @kaul_vivek)