Why high dal prices are not enough to increase production


In response to yesterday’s column a reader on the social media concluded that it is obvious that farmers should grow tur dal which is priced at Rs 200 per kg, in comparison to sugar which is selling at a much lower price. He further said that businesses which tend to enjoy pricing power tend to do well.

Only if it were as simple as that. This is the classic, interest rate cut will lead to increased consumption, kind of economic theory—it doesn’t always work. In fact, in order to encourage farmers to plant more dal (pulses) the government in early November announced a significant increase in the minimum support price of gram and masur dal.

The minimum support price of gram was increased by Rs 250 to Rs 3425 per quintal (i.e. 100 kgs). The minimum support price of masur was increased by Rs 250 to Rs 3325 per quintal. Over and above this, a bonus of Rs 75 per quintal has also been announced.

Does this increase in minimum support price and a bonus to top it, mean that farmers will now automatically plant more dal in the rabi season, which is currently on. The government clearly thinks so. As the press release announcing the increase in minimum support prices (MSPs) pointed out: “The higher MSPs would increase investment and production through assured remunerative prices to farmers.”

In a world of lower interest rates leading to increased consumption kind of economics, this would have made perfect sense. The trouble is do farmers know about the government offering a minimum support price on dal? The Commission for Agricultural Costs and Prices (CACP), a part of the ministry of agriculture, suggests otherwise.

As the report titled Price Policy for Kharif Crops—The Marketing Season of 2015-2016 points out: “Two most important procurement agencies of the Government of India namely Food Corporation of India (FCI) and National Agricultural Cooperative Marketing Federation of India Limited (Nafed) were set up with the main objectives of procuring notified commodities at MSP, if and when the market prices go below MSP. These agencies have been in the existence for over 50 years and 30 years respectively. Yet, the benefits of MSP bypass a large section of farmers, rendering the pricing policy and procurement operations ineffective. As per Situation Assessment Survey (NSS 70th Round), only 2.57 million households were benefitted directly from procurement of paddy during 2012. The procurement of oilseeds and pulses is far worse.”

So the question is do the farmers know about these price signals being sent out by the government? And the answer is no. In fact, as can be seen from the accompanying table in 2014-2015, the Nafed barely picked up any tur, moong or urad dal.

Table: Procurement of Pulses by Nafed.

Nafed picked up 1543 tonnes of tur dal in 2014-2015. The total production of tur dal in 2014-2015 was around 2.78 million tonnes. The total production in 2013-2014 had stood at 3.34 million tonnes. What this tells us is that unlike rice and wheat, the government agencies are picking up very little of dal directly from the farmers at the minimum support price.

The fact that the government picks up rice and wheat and does not pick up dal has distorted the entire production process of dal. What does not help is that the average farmer has faced losses.

As a recent news-report in The Economic Times points out: “According to an analysis done by the scientists of the Mahatma Phule Krishi Vidyapeeth (Agricultural University), Rahuri, farmers who grew tur in 2014, suffered losses of 12.7 per cent.”

The news-report then goes on to suggest that most farmers had to sell the tur dal they had produced at below MSP in 2013 and 2012. And this explains why the production of tur dal fell from 3.34 million tonnes in 2013-2014 to 2.78 million tonnes in 2014-2015. What this also tells us is that high prices are not leading to increased gains for farmers, and it is the middle men who are gaining the most.


Imports are not a solution because the global market for dal is very thin. As the report titled Price Policy for Rabi Crops—The Marketing Season of 2016-2017 points out: “As per Food and Agricultural Organization (FAO), the total global production of pulses was 72.3 million tonnes in 2013, out of which about 19% is traded. India is the largest producer of pulses in the world with a share of 24.3 percent…India is the largest importer with a share of 27.3%.”

In fact, India’s import of pulses has gone up dramatically from 13.4 lakh tonnes in 2004-2005 to around 45.7 lakh tonnes in 2014-2015. Further any more jumps in imports will only lead to an increase in prices of dal. So what is the way out?

The farmers first and foremost need to be aware that there is something known as a minimum support price. As the report titled Price Policy for Kharif Crops—The Marketing Season of 2015-2016 points out: “This calls for giving wide publicity about MSP and procurement agencies on radios, television and vernacular languages in popular local dailies, at least 15 days before the start of procurement operations so as to reach farmers far and wide.”

Second, given that state agencies are procuring rice and wheat, they need to procure dal as well, in order to balance things out.  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 CACP’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.”

As the press release announcing an increase in the minimum support price of Rabi crops pointed out: “The Cabinet also directed that in order to strengthen the procurement mechanism for pulses and oilseeds, Food Corporation of India (FCI) will be the Central Nodal Agency for procurement of pulses and oilseeds.”

Let’s see how much impact this move has. In an ideal world, the market should do its own thing, but in this case government intervention seems to be the best way out, at least in the short-term.

(The column originally appeared on The Daily Reckoning on Dec 1, 2015)

A 200 year old economic theory tells us what is wrong with the developed world today

Jean-baptiste_SayVivek Kaul

I like to quote a lot of John Maynard Keynes in what I write. The reason for that is fairly simple—Keynes is the Mirza Ghalib of economics. He has written something appropriate for almost every occasion.
Nevertheless, I’d like to admit that even though I have tried to read his magnum opus
The General Theory of Employment, Interest and Money a few times, over the years, I have never been able to go beyond the first few chapters.
The economist whose books I find very lucid is the Canadian-American economist John Kenneth Galbraith. Galbraith unlike other economists of his era was a prolific writer and was one of the most widely read economists in the United States and other parts of the world between the 1950s and 1970s. He was even the US Ambassador to India in the early 1960s.
His most popular book perhaps was
The Great Crash 1929, a fantastic book on the Great Depression, which he wrote in the mid 1950s. His other famous work was The Affluent Society published in 1958.
But the book I am going to talk about today is
A History of Economics—the past as the present. In this book Galbraith looks at the history of economics and writes it in a way that even non-economists like me can understand it.
One of the laws that Galbraith talks about is the Say’s Law. This law was put forward by Jean-Baptise Say, a French businessman, who lived between 1767 and 1832. “Say’s law held that out of the production of goods came an effective aggregate of demand sufficient to purchase the total supply of goods. Put in somewhat more modern terms, from the price of every product sold comes a return in wages, interest, profit or rent sufficient to buy that product. Somebody, somewhere, gets it all. And once it is gotten, there is spending up to the value of what is produced,” wrote Galbraith explaining Say’s Law.
The Say’s Law essentially states that the production of goods ensures that the workers and suppliers of these goods are paid enough for them to be able to buy all the other goods that are being produced. A pithier version of this law is, “Supply creates its own demand.”
And this law explains to us all that is wrong with the developed world today. As Bill Bonner writes in his latest book
Hormegeddon—How Too Much of a Good Thing Leads to Disaster “French businessman and economist, Jean-Baptiste Say, discovered that “products are paid for with products,” not merely with money. He meant that you needed to produce things to buy things; you could not just produce money…has anyone ever mentioned this to the Federal Reserve?”
The central banks in the developed world have printed
close to $7-8 trillion in the aftermath of the financial crisis which broke out in mid September 2008, with the investment bank Lehman Brothers going bust. The Federal Reserve of the United States has printed around $3.6 trillion dollars in the aftermath of the crisis to get the American economy up and running again.
The standard theory that has emerged in the aftermath of the financial crisis is that consumer demand has collapsed in the Western world and this has led to a slowdown in economic growth. In order to set this right, people need to be encouraged to borrow and spend. As John Maynard Keynes put it: “Consumption—to repeat the obvious—is the sole end and object of economic activity.” (There I have quoted him again!)
To get borrowing and consumption going again central banks have printed a lot of money to ensure that the financial system remains flush with money and interest rates continue to remain low. At low interest rates the chances of people borrowing and spending would be more. And this would lead to economic growth was the belief.
Now only if economic theory worked so well in practice. Also, it was “excessive” borrowing and spending that led to the crisis in the first place.
Raghuram Rajan and Luigi Zingales explain this very well in a new afterword to
Saving Capitalism from the Capitalists, “For decades before the financial crisis in 2008, advanced economies were losing their ability to grow by making useful things. But they needed to somehow replace the jobs that had been lost to technology and foreign competition… So in an effort to pump up growth, governments spent more than they could afford and promoted easy credit to get households to do the same. The growth that these countries engineered, with its dependence on borrowing, proved unsustainable.”
It is worth pointing out here that the share of United States in the global production of goods has fallen over the last few decades. Thomas Piketty makes this point in his magnum opus
Capital in the Twenty First Century. Between 1900 and 1980, 70–80 percent of the global production of goods happened in the United States and Europe. By 2010, this share had declined to around 50 percent, around the same level it was at in 1860. Also, faced with increased global competition, Western workers were unable to demand the pay increases they used to in the past.
Piketty further points out that the minimum wage in the United States, when measured in terms of purchasing power, reached its maximum level in 1969 and has been falling since then. At that point of time, the wage stood at $1.60 an hour or $10.10 an hour in 2013 dollars, taking into account the inflation between 1968 and 2013. At the beginning of 2013, the minimum wage was at $7.25 an hour, more than 28 percent lower than that in 1969.
This slow wage growth has led to Western governments following an easy money policy by making it easy for people to borrow. As Michael Lewis writes in
The Big Short—A True Story: “How do you make poor people feel wealthy when wages are stagnant? You give them cheap loans.”
In case of the United States, trade with China had an impact as well. As the historian Niall Ferguson writes in
The Ascent of Money: A Financial History of the World: “Chinese imports kept down US inflation. Chinese savings kept down US interest rates. Chinese labor costs kept down US wage costs. As a result, it was remarkably cheap to borrow money.”
Ironically, what worked earlier is not working now. What has happened instead is that financial institutions have borrowed money at low interest rates and invested it in financial markets all over the world, in search of a higher return. Despite the central banks printing a lot of money, Japan recently entered a recession, with two successive quarters of economic contraction.
Europe is staring at a deflationary scenario. And the economic recovery in the United States continues to remain fragile.
Further, over the coming decades, a billion more people are expected to join the work force in Asia, Africa and Latin America. This will apply a downward pressure on costs and prices in the years to come and hence, wages in developed countries aren’t going to go up in a hurry.
Moral of the story: Western nations need to go back to making things, if they want a sustainable economic recovery. But as the American baseball coach Yogi Berra once famously said “In theory there is no difference between theory and practice. In practice there is.”

The article originally appeared on equitymaster.com as a part of The Daily Reckoning, on Nov 28, 2014