Why Farmers Still Don’t Trust the Government

Chintan Patel and Vivek Kaul

In a recent column, the veteran editor Shekhar Gupta wrote that Indian politics is now clearly divided along economic lines, with the BJP + being ‘unabashed backers of private sector’ and others in the opposition being ‘freshly dyed-in-red socialists’.

While definitive statements on politics of the day are rarely totally correct, they can always be placed in a certain context. Let’s take the case of farm laws pushed very hard by the current union government and passed by the Parliament.

While there is no denying that economic reforms in agriculture are the order of the day, there is also no denying that the way these laws have been drafted and pushed through the Parliament, it makes the union government look like unabashed backers of the private sector, which in a democracy isn’t possibly a good thing.

In the same column, Gupta quoted the former finance and home minister, P Chidambaram’s view on the union budget, presented at the beginning of this month. Chidambaram, as Gupta quoted him, said: “It was a Budget… addressed to the one per cent of Indians who owned 73 per cent of national wealth.”

Of course, Chidambaram’s party, the Congress, which largely governed India up to 1996, with a few brief interludes in between, and then again from 2004 to 2014, has been responsible for a lot of this inequality.

If we were to take a leaf out of Gupta’s book and make a definitive statement, what the Congress practiced for many years was bad socialism and what the BJP is currently practicing in case of the new farm laws, and as we shall see in this piece, is bad capitalism.

But before we get around to doing that we need to go back in history a little.

The State of the Indian Farmer

Up until the mid 1960s, India was dependent on wheat imports, primarily from the United States. In order to set this right, the union government of the day promoted the green revolution. To encourage the farmers to grow a certain kind of wheat, the government provided price support, in the wheat-growing areas of Punjab and Haryana by buying wheat through the Food Corporation of India (FCI).

This essentially convinced the farmers to grow the specific kind of wheat that the government wanted it to, given that there was a ready buyer for it. This procurement of foodgrains initially started with the noble motive of helping the farmers who were taking part in the initial phase of the Green Revolution

Gradually, the FCI started procuring rice as well and thereby encouraged farmers to grow rice in the semi-arid region of Punjab as well as Haryana. In that sense, policies formulated to usher in the green revolution in the 1960s have long become outdated. They promote wrong cropping patterns that are neither environmentally optimal nor responsive to demands of the population. This has also led to depletion of ground water in large parts of Punjab and Haryana.

Thanks to the green revolution and the procurement infrastructure that developed because of it, India now overproduces foodgrains and does not produce enough of other food items, for which there is demand.

As of February 2021, the FCI had a total stock of rice and wheat amounting to 561.93 lakh tonnes. While the total stock that needs to be maintained as of January 1 every year, including the operational stock and the strategic reserve, amounts to 214.1 lakh tonnes.

Clearly, there is a problem of over production and over storage here. It also means that the government ends up over buying rice and wheat, which it doesn’t really need and which then sits in the godowns of FCI and rots.

On the other hand, India isn’t growing enough of something like pulses. While the per capita production has improved in the recent years, it is still not anywhere near where it used to be in the mid 1960s. In 2019-20, the per capita production of pulses stood at 16.9 kg, up from 13.6 kg in 2014-15, but still nowhere near a production of 25 kg per capita in 1964-65.[i]

The over production of rice and wheat doesn’t just lead to underproduction of other agricultural crops, it creates other problems as well. (In order to get a good overview of the other problems, please click here to read a piece one of us wrote in September 2020, when the farmer protests were just about starting).

We wouldn’t be over-stretching if we say that there is a huge problem in the way agriculture is currently practiced in this country. And if Indians, and not just India, has to progress, the Indian agriculture system needs to be set right. The farming laws in their current state are not going to achieve that.

In 2020, farmers formed around 41.5% of India’s workforce but contributed only  around 15-16% of India’s economic output. This basically means that farmer incomes are abysmal. The average household income of farmers was Rs 6,427 a month as per the Situation Assessment Survey of Agricultural Household 2013 – with farmers in some states making much lesser than the average. To give a sense of the state-wise skew on this figure, the income for Punjab was Rs 18,509, for Haryana it was Rs 14,434 (the top two) and that for Bihar it was just Rs 3,557. An average household in India has five members.

This data is on the slightly older side. One thing we can do is to adjust it for inflation between December 2013 and December 2020. The rural inflation as measured by the consumer price index between these two time periods stood at 4.4% per year. Assuming that the farmer incomes have grown at this rate per year, then the average household income of farmers stands at Rs 8,688 per month.

Of course, and as we have seen above, there are variations around the average income across the states, but even with that, the farming income is low. In this backdrop, it is clear that the status quo in Indian agriculture is untenable. Policy-makers face a stiff task of inducing changes in cropping decisions whilst improving farmer incomes.

There is also the promise of doubling farmer incomes by 2022, which was first made Prime Minister  Narendra Modi at a rally in Bareilly on February 28, 2016 and reiterated by Arun Jaitley in the budget speech next day.

The New Farm Laws

On September 27, 2020, President Ram Nath Kovind approved three Farm Bills (which were passed in the Lok Sabha on September 17 and in the Rajya Sabha on September 20). These laws are seemingly an attempt to achieve the twin objectives of raising farmer incomes and modifying cropping pattern. These laws are as follows:

1) The Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Act 2020 (which the farmers refer to as the APMC Bypass Act ) creates a mechanism allowing the farmers to sell their farm produces outside the Agriculture Produce Market Committees (APMCs). Any license-holder trader can buy the produce from the farmers at mutually agreed prices.

2) The Farmers (Empowerment and Protection) Agreement of Price Assurance and Farm Services Act 2020 (referred to as Farmers Contract Act hereafter) seeks to create a legal framework for contract farming in India, wherein farmers can enter into a direct agreement with a buyer to sell the produce at predetermined prices through verbal or written contracts.

3) The Essential Commodities (Amendment) Act 2020 is an amendment to the existing Essential Commodities Act, deregulating storage limits on items such as cereals, pulses, oilseeds, edible oils, onions and potatoes, except in extraordinary situations.

Farmer groups across the nation have opposed the new laws and brought their protest to the streets, and the ensuing stand-off with the union government has gone on for several months now. While protests against the farm laws have happened all across the country, the main sustained protest has happened on the borders of Delhi, leading many commentators to say that this is primarily a protest of large farmers of North India.

There is no denying that large farmers have the most to lose and are maybe driving this movement, nevertheless, at the same time it needs to be said that large protests typically tend to happen around the seat of power.

As veteran editor and economy watcher TN Ninan wrote in a recent column: “ Much of the action in the French Revolution was centred on Paris.” The same thing happened when the Bolsheviks led by Vladmir Lenin took over the strategic locations in the Russian capital of Petrograd (now known as Saint Petersburg). Hence, Delhi will remain symbolic in the same sense.

In this piece, we look at the different arguments put forth by those who are opposing these laws and try to figure out how much sense they make. We also look at the overall issue of agricultural reforms. Let’s take a look at these pointwise.

1) A chief concern of farmer groups opposing these laws is that the new laws herald a change in policy which will lead to a roll-back on government procurement of foodgrains and minimum support prices (MSPs). The government declares MSPs for 23 crops every year, but it primarily buys rice and wheat directly from farmers at the MSP. In the recent past, it has also bought pulses and oilseeds to promote their production.

Apprehensions regarding the dismantling of the MSP regime explain the mass mobilization of farmers in Punjab, Haryana and western UP – areas with high government procurement of grains, due to historical reasons of the union government wanting to promote the green revolution in the country.

While the new legislation itself is silent on the MSP, the government has repeatedly given assurances that procurement and MSPs will continue. But these assurances in isolation haven’t been enough to placate farmer fears. There are multiple reasons for the same.

As NITI Aayog’s occasional paper titled Raising Agricultural Productivity and Making Farming Remunerative for Farmers published in December 2015, points out: “There is a need for reorientation of price policy if it is to serve the basic goal of remunerative prices for farmers. This goal cannot be achieved through procurement backed MSP since it is neither feasible nor desirable for the government to buy each commodity in each market in all region.”

This paper essentially had the philosophical underpinnings on which the new farm laws are based.

Also, if the government purchases and the MSP are done away with, there will be further danger of free power, fertiliser subsidy etc., being done away with as well. This is something that farmers who benefit from these things, wouldn’t want.

Secondly, if the idea is to promote private corporate trade in agriculture over a a period of time, then it is but natural for the government to gradually get out of the sector. That is how liberalisation of any sector has worked over the years. Hence, the government’s assurance on MSP and procurement haven’t carried much weight with the farmers.

On the flip side, the rice and wheat which the FCI buys directly from the farmers, it distributes through the public distribution system or ration shops as they are more popularly known, at a very low price to meet the needs of food security.

Given that the public distribution system is in place, it will be very difficult for the government to totally get out of the system of declaring MSPs and procuring rice and wheat. Also, the importance of this system has come into focus in the past one year, as the government distributed free rice and wheat through these shops across the country, to negate the negative economic impact of the spread of the covid-pandemic.

Hence, it is highly unlikely that the government will do away with MSPs and procurement, though the level of procurement might come down over the years, with the government only buying as much as it needs to fulfil the needs of food security and not more.

Net net, the system as it exists is likely to change in the years to come. Further, given the way the government pushed the farm laws through the Parliament, it has become difficult for the farmers to trust the government.

2) Other than the MSP issue, there are several other reasons which have farmer groups alarmed.

Central to a bulk of these concerns is the role of the Agricultural Produce Market Committees or APMCs. The new APMC-bypass law does not explicitly call for the closure of existing APMCs (or mandis as they are more popularly known as).  However, it allows private-party transactions between buyers and sellers outside the mandis. Transactions that take place outside the APMCs are not subject to either state cess or state APMC laws.

This effectively creates two parallel marketplaces – one that is highly regulated, and one that is very lightly regulated, if at all. One that is controlled by the state governments and another that is controlled by the union government.

Farmers contend that such an arrangement is effectively a death-knell for the mandis, as non-mandi transactions have been heavily incentivized. They argue that a regulated marketplace within the mandi will be replaced by an unregulated marketplace outside the APMC framework. Transactions conducted outside the APMCs would be no longer regulated in the same way, implying that government officials cannot step in to address irregularities around weighing and measurement of produce and payment disputes.

Now, sarkari interference in a commercial transaction or setting, is mostly viewed as a bureaucratic hurdle by all parties involved. Yet interestingly the prospect of getting rid of this oversight has the farmers concerned implying that their fear of being exploited by buyers and traders in an unregulated setting, outweighs whatever shortcomings there might be in the existing system.

On the flip side, the outside competition should help in driving down the high mandi fees, which exist currently.

Experts who have come out in support of these laws have pointed out that the removal of the APMC cess, removal of barriers of entry for new purchasers and increased competition for crop procurement, which these new laws are likely to bring in, will help drive crop prices higher. So, why then are farmers so resistant to the new unregulated marketplace?

One patronizing line of reasoning, as has been the case whenever reforms are pushed through stealth, is that the farmers are too naive to understand what is really in their best interests, presumably due their ignorance of economics and benefits of free-markets.

The link between reduced regulations and increased prosperity is well established in other sectors in post-liberalized India. That said, discounting the lived experience and opinion of the stakeholders and purported beneficiaries of a given law is unwise.

It is important to note that a large portion of farm trade already occurs outside of APMCs. The chart below shows the proportion of sales across various channels for a list of agricultural commodities. It can be seen that non-APMC transactions feature prominently for most agricultural items.

Source: NSS Report 70th round.
Chart: https://www.theindiaforum.in/article/three-farm-bills.

Let’s take the case of rice and wheat, the two foodgrains primarily bought by the government directly from the farmer. In case of rice (paddy) 63% of the total quantity was sold in local private markets. In case of wheat it was at 25%.

This happens for a host of reasons such as distance constraints, door-step sales to offset past debt, the difference in government procurement infrastructure across different parts of the country, etc.

The best metric of efficacy of any new policy will be its effect on farmer incomes, which are ultimately determined by prices farmers get for their produce. And this is where APMCs play an important role in the price discovery process. Prices for agricultural produce are decided in APMCs by open- auctions or closed-bid tenders.

Thus the APMCs serve as transmitters of pricing information across the market, as sales occurring outside the mandis are influenced by APMC prices as well. Once APMCs become obsolete, as is the fear, how will price discovery happen?  That is one concern raised by farm groups resisting the APMC-Bypass law.

In this sense, there needs to be some level playing field between APMCs and the new markets that are expected to spring up thanks to the new laws.

3) Another concern raised by critics is that the decline of APMCs will lead to fragmented markets and render farmers more vulnerable to exploitation by traders. The APMCs provide a platform for collective bargaining which is only possible with aggregated and coordinated sales. Once sales migrate to private, uncoordinated transactions there is a possibility of monopsonies emerging for each distributed geography pushing sale prices downward.

A monopsony is a market which has a single buyer, giving that sole player an undue advantage on dictating prices. As an example, if Maruti was the only car manufacturer in the country, it would enjoy a near monopsony over the automobile spare parts market. In such thin and fragmented markets, the balance of information and bargaining power will be heavily tilted against farmers, especially ones with small holdings.

While these fears are not unfounded, it should be pointed out that the existing system of price discovery and middlemen has been prone to manipulation by traders and commission agents, much to the detriment of farmers. As Sudha Narayan, a noted agricultural economist points out, even with open auctions, middlemen and traders often collude against farmers to depress sale prices.

Also, it needs to be said here that most of India’s farmers are too small to be dealing with any marketing system on their own. The point being that even in the new markets that are likely to emerge middlemen might continue to be the order of the day.

It is being assumed that buyers who currently buy from big commission agents, will start buying directly from farmers and let go of the middleman. There is a reason why these buyers buy from agents. It is convenient for them to do so. Do they want to take on the headache of building a new system right from scratch? Is it worth their time and money?

These are questions for which answers will become clearer in the days to come. But prima facie given the abysmal ease of doing business in most states, we see no reason why the buyers won’t continue buying from the agents, instead of having to deal with many farmers. This is a point that needs to be kept in mind as well.

For such small farmers to be able to benefit and get a better price for their produce without selling to a middleman, all kinds of other infrastructure is needed. These include everything from more cold storages to improved roads connecting villages to the newer markets that come up, power supply which can be relied upon (so that a cold storage can function like one) and traders who compete to get their produce.

It is worth remembering that arthiyas (commission agents) who buy produce from farmers at APMCs, are locally influential people. Hence, assuming that parallel systems of buying and selling in the form of new trade markets, will come up automatically, is rather lame.

It is worth remembering that many arthiyas are themselves big farmers and can ensure that the system continues to work as it is. They might just move out of APMCs to avoid paying levies (which are very high especially in states of Punjab and Haryana at 8.5% and 6.5%, respectively). Everything else might continue to be the same. This depends on whether creation of new infrastructure is worth not paying the levy.

4) The displacement of trade into the unregulated sphere has another downside. It invisiblizes data. When agriculture sales and storage are not recorded centrally, key data points get lost. Evidence-based policy making requires robust data. Without the availability of data on sale prices, volumes and storage, policy makers could be rendered “blind”, adversely affecting decisions regarding agriculture, food security, and food distribution.

One solution to this problem would be to mandate the recording of all trade outside APMCs be recorded in a central/state registry, especially if the new regulations lead to the creation of new markets with decent infrastructure (as opposed to fragmented, distributed transactions).

5)  Other than profitability, these laws have also been opposed on the grounds of being unduly favourable to corporates. This, as we said at the very beginning, makes the government, look like an unabashed backer of the corporate system.

Section 15 of the Farmers’ Produce Act says “no civil court shall have jurisdiction to entertain any suit or proceedings in respect of any matter, the cognisance of which can be taken and disposed of by any authority empowered by or under this Act or the rules made thereunder.”

Instead, the adjudicating powers are given to Sub-Divisional Magistrates (SDMs) and Additional District Magistrates (ADMs) – both being bureaucrats. This has stoked fears of subversion of justice against the farmer. If there is a small farmer on one side of the dispute and a large or even a medium sized corporate on the other side, whose side is the bureaucrat likely to take? One doesn’t need a degree in rocket science or an advance qualification in computer chip design, to answer this question.

This provision in the new farm laws, which doesn’t allow farmers to take a dispute to a Civil Court, also seems to be in line with the narrative of too much democracy inhibiting economic reforms, that has been promoted in the recent past.

So what is the net learning from all this?

The attitude towards corporates highlights the us-vs-them mentality of farmer leaders and activists. If something is good for big business, it must be bad for them. Their argument is that the “freedoms” offered by the new laws vis-a-vis crop sales or storage already existed for the farmers. The changes introduced by the new farm laws are to essentially unshackle the corporates.

This extreme suspicion of corporates and their profit-making motives is unfortunate and can be attributed to both the legacy of socialist thought in India, the politicians often bad-mouthing businessmen, the less than exemplary behaviour of corporates themselves and instances of exploitative practices by corporates in the past.

A blanket fear of corporate involvement is arguably short-sighted, even if understandable due to past practices. Having a robust supply chain of climate-controlled warehouses and transportation is critical to allowing farmers to tap into larger national and international markets.

One practical way to do this at a substantial scale is to attract investment by large corporates. Corporatization en-masse doesn’t have to mean exploitation of farmers. On the contrary, it can help realize higher incomes, given the correct safeguards and regulatory oversight, which has gone missing in the new laws.

This needs to be communicated as well as demonstrated with a few success stories if such materialize, where deregulation and entry of corporates leads to increased farmer incomes. Once farmers have seen concrete benefits maybe the psychology of distrust against corporate players can be reversed.

As Vijay Kelkar and Ajay Shah write in,  In Service of the Republic: “ The safe strategy in public policy is to incrementally evolve—making small moves, obtaining feedback from the empirical evidence, and refining policy work in response to evidence.” Of course, moving incrementally goes against the very idea of a government which believes in making big moves and building a huge narrative around it.

Trust is perhaps the core issue that fuels farmer opposition. There seems to be a complete breakdown of trust in the current government from the farmers’ end. The seeds of discontent were first sown by repeated inconsistencies between election manifestos and implemented policies.

Such tendencies are not unique to the current ruling party, but that hardly absolves them of some significant reversals on election promises. Issues that farmers find particularly grating are the inconsistencies in the Modi government’s stance towards implementing the Swaminathan commission recommendations and their reversal on the promise to open 22,000 agriculture mandis for improved market access.

Also, what does not help is the way these laws were pushed through the Parliament, without any discussion being initiated with the farmers. The government got talking with them only after the protests erupted. In this environment, it is hardly surprising that there is low trust.

The government did itself no favours by the manner in which it introduced the new laws. Even if the intent is to benefit farmers by bringing in the new laws, the means employed by the government do not inspire confidence. Constitutional norms of deliberation and debate in the Parliament were circumvented to make sudden, sweeping changes on a state subject, reneging on our federal ethos.

Moreover, the laws were drafted unilaterally, without seeking inputs from farmers – the purported beneficiaries. Circumventing these good-faith practices has furthered suspicions held by detractors that the laws are indeed meant to further corporate interests only. What hasn’t helped is the fact that farmers cannot challenge disputes arising under these news laws, in Civil Courts.

As the American experience of the late 19th century and early 20th century shows, unregulated capitalism only leads to robber barons and huge inequality in the society, which India has enough of already. Hence, bad socialism has now been replaced by bad capitalism.

Farmer protests continue to expose the deep fault lines in our agrarian economy. The response to these laws offer some valuable lessons to politicians and policymakers. For one, it is impossible to predict with certainty the effect of these laws on agriculture prices. The arguments put forth by farmers merit meaningful engagement.

Dismissing their concerns as misguided or malicious smacks of hubris. In a democracy, good leadership and policymaking is as much about means as ends. Transparency, debate and discussions are essential before draft bills become laws. It is essential to engage key stakeholders and socialize any big-bang changes to avoid surprises and minimize disruptions. One can only hope that the political class has the wisdom and grace to recognize their mistakes and learn from them.

But all this involves hard work, which is a tad too much for a government primarily engaged in building narratives and following them up purposefully. Also, by trying to push agricultural reforms through the stealth route and not engaging with the status quo, the government has done the cause of economic reforms a great harm. In the time to come, it will become even more difficult for it to push through any new economic reform, unless it sits and talks this one out with the farmers.

For starters it should offer to do away with some of the most controversial clauses in the new laws which favour the corporates at the cost of the farmers. That can at least be a small start.

[i] https://niti.gov.in/sites/default/files/2019-07/RAP3.pdf and author calculations on data from http://agricoop.nic.in/sites/default/files/FirstEstimate2020-21.pdf. Population of India in 2019 assumed to be 137 crore, using World Bank data.

The ‘convoluted’ economics of pulses in India.

Toor_Dal_Tur_dal

The kharif crop sowing season is on. The ministry of agriculture declares regular data on this front every week. The latest data suggests that as on June 23rd 2017, the area sown under pulses stood at 5.97 lakh hectares. By the same time last year, the area sown under pulses had stood 9.01 lakh hectares. Hence, this year has seen a drop of close to 34 per cent, as far as area sown under pulses is concerned. The question is why? While deciding on how much area to allocate to a particular crop, farmers basically look at the price they received for it, the last time they produced and sold it. On that front, the record of pulses hasn’t looked good in the recent past. Look at Figure 1.

Figure 1: 

lefttop00Figure 1 plots out the inflation and recent deflation (a fall in prices) of pulses over the last few years. In December 2015, the price of pulses had gone up by 49 per cent in comparison to December 2014. This rate of price rise fell in the months to come, but remained in and around 30 per cent. While this made pulses unaffordable for the common man, the indication it sent out to farmers was to plant more pulses because that is where money was to be made. Take a look at Figure 2. It plots the total production of pulses over the years.

Figure 2: 

In 2016-2017, the production of pulses went up by 37 per cent to 22.4 million tonnes. This was the highest production of pulses in India ever. The farmers were expecting a good price for it, but what they got was exactly the opposite. The price of pulses crashed. Take a look at Table 1. It has the details of the prices received for different kind of pulses across different mandis in India.

Table 1: Price Movement for major pulses in Major Domestic Markets (in Rs/gtl) 

As is clear from Table 1, the price of different kinds of pulses except for chickpeas, has fallen in comparison to the last year. Tur dal or pigeon pea has been hit in particular, with prices in March 2017, falling by close to 45 per cent across different mandis.

This is not surprising given that Tur dal production went through the roof this year. Take a look at Figure 3, which plots the production of Tur dal over the years.

Figure 3: 

As can be seen from Figure 4, the production of tur dal in 2016-2017 jumped by close to 80 per cent to 4.6 million tonnes. This massive increase in production was primarily in response to a massive jump in price in 2015-2016. With the massive increase in supply in 2016-2017, the prices of tur in particular, and pulses in general, have crashed.

The central government declares the Minimum Support Price (MSP) for 23 crops, including rice and wheat. While the government declares the MSP for 23 crops, it procures only rice and wheat directly from the farmers, using the Food Corporation of India as well as state procurement agencies. Recently, the government has started to procure pulses as well, in the hopes of being able to offer a reasonable price to farmers.

But given the poor procurement mechanism in place, the price of pulses in many places, fell below its MSP. As a February 2017 report in The Times of India points out in the context of the state: “The MSP for tur dal is Rs 5,050 per quintal, but farmers are getting only Rs 4,200-4,300 per quintal.”

Some sort of stability could have been provided to these falling prices, if the government through its various agencies would have bought pulses at the MSPs it had announced. But given the recent start in procurement of pulses, the government agencies are not in a position to procure much. In 2016-2017, the total procurement of pulses by various government agencies stood at 1.1 million tonnes. This amounted to around 4.9 per cent of the total production of pulses. As the Price Policy for Kharif Crops-The Marketing Season 2017-18 points out: “Procurement of pulses is about 1.1 million tonnes as on 21.03.2017, much higher than earlier years but market prices are still ruling below MSP in some states. Therefore, there is a need for effective involvement of states in procurement of pulses. However, infrastructure of NAFED and SFAC [two of the agencies that procure pulses] needs to be strengthened with administrative and financial support to take up procurement of pulses on a substantial scale throughout the country.”

NAFED has had multiple problems regarding procurement of pulses, from a shortage of gunny bags, to running out of space due to a bumper crop. Having said this, procurement by the government isn’t really a long-term solution. What is needed is the development of a proper market system, where farmers can get the best prices for their crops. This of course, is easier said than done. While, Indian politicians like to flirt with market economics in many areas, the moment it comes to agriculture, they tend to clamp up.

Also, what has not helped is the fact that imports of pulses have continued unabated. Between April 2016 and January 2017, a total of 6.1 million tonnes of pulses had been imported. In 2015-2016, a total of 5.8 million tonnes of pulses had been imported. Hence, more pulses were imported in the first nine months of 2016-2017 than the year before that. The trouble was that in 2016-2017 along with a jump in imports, the production of pulses also went up by 37 per cent. If the import of a commodity is allowed, it’s export should be allowed as well.

While this brought down the price of pulses in the short-term, it sent out the wrong economic signals to farmers who had planted pulses in 2016-2017. And given this, the current financial year has seen the area sown for pulses fall dramatically by more than a one-third, in response to the recent crash in the price of pulses. As far as the plantation of pulses in kharif season goes, there is still some time to go and these numbers can change.

But if they don’t, then the total production of pulses through 2017-2018, will be lower than the bumper crop in 2016-2017. This, of course, will send the prices of pulses up all over again. Indeed, this is worrying for a nation where the consumption of protein is going up. Pulses remain the best source of protein for the vegetarian part of the population.

This pretty much summarises the way the ‘convoluted’ economics of pulses works in India.

The column originally appeared on Equitymaster on June 27, 2017

The ‘convoluted’ economics of pulses in India.

Toor_Dal_Tur_dal

The kharif crop sowing season is on. The ministry of agriculture declares regular data on this front every week. The latest data suggests that as on June 23rd 2017, the area sown under pulses stood at 5.97 lakh hectares. By the same time last year, the area sown under pulses had stood 9.01 lakh hectares. Hence, this year has seen a drop of close to 34 per cent, as far as area sown under pulses is concerned. The question is why? While deciding on how much area to allocate to a particular crop, farmers basically look at the price they received for it, the last time they produced and sold it. On that front, the record of pulses hasn’t looked good in the recent past. Look at Figure 1.

Figure 1: 

lefttop00Figure 1 plots out the inflation and recent deflation (a fall in prices) of pulses over the last few years. In December 2015, the price of pulses had gone up by 49 per cent in comparison to December 2014. This rate of price rise fell in the months to come, but remained in and around 30 per cent. While this made pulses unaffordable for the common man, the indication it sent out to farmers was to plant more pulses because that is where money was to be made. Take a look at Figure 2. It plots the total production of pulses over the years.

Figure 2: 

In 2016-2017, the production of pulses went up by 37 per cent to 22.4 million tonnes. This was the highest production of pulses in India ever. The farmers were expecting a good price for it, but what they got was exactly the opposite. The price of pulses crashed. Take a look at Table 1. It has the details of the prices received for different kind of pulses across different mandis in India.

Table 1: Price Movement for major pulses in Major Domestic Markets (in Rs/gtl) 

As is clear from Table 1, the price of different kinds of pulses except for chickpeas, has fallen in comparison to the last year. Tur dal or pigeon pea has been hit in particular, with prices in March 2017, falling by close to 45 per cent across different mandis.

This is not surprising given that Tur dal production went through the roof this year. Take a look at Figure 3, which plots the production of Tur dal over the years.

Figure 3: 

As can be seen from Figure 4, the production of tur dal in 2016-2017 jumped by close to 80 per cent to 4.6 million tonnes. This massive increase in production was primarily in response to a massive jump in price in 2015-2016. With the massive increase in supply in 2016-2017, the prices of tur in particular, and pulses in general, have crashed.

The central government declares the Minimum Support Price (MSP) for 23 crops, including rice and wheat. While the government declares the MSP for 23 crops, it procures only rice and wheat directly from the farmers, using the Food Corporation of India as well as state procurement agencies. Recently, the government has started to procure pulses as well, in the hopes of being able to offer a reasonable price to farmers.

But given the poor procurement mechanism in place, the price of pulses in many places, fell below its MSP. As a February 2017 report in The Times of India points out in the context of the state: “The MSP for tur dal is Rs 5,050 per quintal, but farmers are getting only Rs 4,200-4,300 per quintal.”

Some sort of stability could have been provided to these falling prices, if the government through its various agencies would have bought pulses at the MSPs it had announced. But given the recent start in procurement of pulses, the government agencies are not in a position to procure much. In 2016-2017, the total procurement of pulses by various government agencies stood at 1.1 million tonnes. This amounted to around 4.9 per cent of the total production of pulses. As the Price Policy for Kharif Crops-The Marketing Season 2017-18 points out: “Procurement of pulses is about 1.1 million tonnes as on 21.03.2017, much higher than earlier years but market prices are still ruling below MSP in some states. Therefore, there is a need for effective involvement of states in procurement of pulses. However, infrastructure of NAFED and SFAC [two of the agencies that procure pulses] needs to be strengthened with administrative and financial support to take up procurement of pulses on a substantial scale throughout the country.”

NAFED has had multiple problems regarding procurement of pulses, from a shortage of gunny bags, to running out of space due to a bumper crop. Having said this, procurement by the government isn’t really a long-term solution. What is needed is the development of a proper market system, where farmers can get the best prices for their crops. This of course, is easier said than done. While, Indian politicians like to flirt with market economics in many areas, the moment it comes to agriculture, they tend to clamp up.

Also, what has not helped is the fact that imports of pulses have continued unabated. Between April 2016 and January 2017, a total of 6.1 million tonnes of pulses had been imported. In 2015-2016, a total of 5.8 million tonnes of pulses had been imported. Hence, more pulses were imported in the first nine months of 2016-2017 than the year before that. The trouble was that in 2016-2017 along with a jump in imports, the production of pulses also went up by 37 per cent. If the import of a commodity is allowed, it’s export should be allowed as well.

While this brought down the price of pulses in the short-term, it sent out the wrong economic signals to farmers who had planted pulses in 2016-2017. And given this, the current financial year has seen the area sown for pulses fall dramatically by more than a one-third, in response to the recent crash in the price of pulses. As far as the plantation of pulses in kharif season goes, there is still some time to go and these numbers can change.

But if they don’t, then the total production of pulses through 2017-2018, will be lower than the bumper crop in 2016-2017. This, of course, will send the prices of pulses up all over again. Indeed, this is worrying for a nation where the consumption of protein is going up. Pulses remain the best source of protein for the vegetarian part of the population.

This pretty much summarises the way the ‘convoluted’ economics of pulses works in India.

The column originally appeared on Equitymaster on June 27, 2017

‘Dal’onomics 101: All you Wanted to Know but were Afraid to Ask

Toor_Dal_Tur_dal

The consumer price inflation number is released every month by the ministry of statistics and programme implementation. For the month of May 2016, among all items that constitute the index, the price of pulses rose the fastest. The price of pulses(dal) rose by 31.6% between May 2015 and May 2016. This after rising by 16.6% between May 2014 and May 2015.

Hence, over a two-year period the price of pulses has risen by around 53.4%. This is as per the consumer price index, the rise in price at the actual retail level might be more. The only other items that saw double digit inflation, over the last one year, were vegetables and sugar.

Of course, this rise in price must have upset the monthly budget of many homemakers. Nevertheless, the rise in price of pulses is not something new. It is now a part of our lives. The question is why is this happening?

In the budget speech made in February, earlier this year, the finance minister Arun Jaitley had said that: “Monitoring of prices of essential commodities is a key element of good governance. A number of measures have been taken to deal with the problem of abrupt increase in prices of pulses.
has approved creation of buffer stock of pulses through procurement at Minimum Support Price and at market price through Price Stabilisation Fund
.”

On the face of it, this sounds a sensible thing to do. Up until February, the government maintained buffer stocks for rice and wheat. The idea was that it could do the same for pulses as well. If prices went up, some of the buffer stock could be released in the market and prices be stabilised.

The trouble is what works with rice and wheat doesn’t necessarily work with pulses. With an assured procurement of rice and wheat by the government, India produces much more rice and wheat than it needs. As the Economic Survey of 2015-2016 points out: “It is increasingly clear that there is over-production of cereals, especially in some states. Reducing this over-production—a manifestation of this exit problem—is difficult.”

What is the trouble with the government procuring pulses as well? The dietary patterns as they evolve seem to favour increased protein and pulses are a major source of protein, in a country, where a significant portion of the population is vegetarian.

The trouble is that the production of pulses hasn’t been going up. In 2013-2014, the total production of pulses stood at 19.25 million tonnes. In 2014-2015, this fell to 17.15 million tonnes. The target though was at 20.05 million tonnes. The expected production in 2015-2016(as per the third advanced estimate) has fallen even further at 17.05 million tonnes.

The failed monsoon over the last two years is the obvious explanation for this. Also, what does not help is that a major portion of pulses are produced in unirrigated areas unlike rice and wheat. As the Economic Survey points out: “The production pattern for pulses is very different from other crops. Not only is most of the land dedicated to growing pulses in each state unirrigated, but the national output of pulses comes predominantly from un-irrigated land. In contrast, a large share of output in wheat, rice and sugarcane – in Punjab, Haryana and UP – is from irrigated land.”

Hence, for a pulses production to increase a good monsoon is necessary. In this scenario of falling production of pulses, the government decision to build a buffer stock hasn’t really helped. In early March 2016, the ministry of agriculture told the Rajya Sabha that the government has decided to build a buffer stock of pulses amounting to 0.15 million tonnes. One third of the amount had already been procured.

This meant that the overall supply of pulses to the open market fell further, driving up prices. Given the huge gap between demand and supply, even a small fall in supply, can drive up prices.

The following table shows the total amount of pulses that have been imported over the years.

Chart 4.6: India’s Imports of Pulses, 2004-05 to 2014-15India's Imports of Pulses, 2004-05 to 2014-15In 2014-2015, the total amount of pulses imported stood at 4.57 million tonnes. As can be seen from the table, the total amount pulses imported has gone up dramatically over the years. Between April 2015 and February 2016, the country imported 5.56 million tonnes of pulses. (Source: Commodity Profile of Pulses, May 2016).

Myanmar remains a major source for import of pulses. But despite the imports, the prices of pulses continued to rise. As the report titled Price Policy for Kharif Crops—The Marketing Season of 2016-2017 points out: “India being the largest producer, consumer and importer of pulses in the world, its domestic demand-supply volatility has high impact on international trade.

This means that Indian demand drives up prices in international markets. So, even if we are able to import pulses to meet demand, the prices continue to remain high. As the Economic Survey points out: “Given that India is the major producer and consumer of pulses, imports cannot be the main source for meeting domestic demand. Therefore, policy must incentivise movement of resources towards production of pulses.”

One reason why farmers do not like to grow pulses despite such high prices is that unlike rice, wheat and sugarcane, there are no steady buyers. This means that farmers have to sell their produce in private markets where they can get a price even lower than the MSP. And given this, lack of predictability about a price, farmers prefer to grow rice and wheat.

In an ideal world, the way out of this would be develop a proper agricultural market where market forces would do their work. But in India, what is likely to happen is that the government will procure more and more pulses, like rice and wheat, in the years to come.

As the report titled Price Policy for Kharif Crops—The Marketing Season of 2016-2017 points out: “The long-term measures include increasing productivity, bringing more area under pulses cultivation by diversifying from paddy and wheat alongside providing adequate facilities for assured procurement, creating buffer stock of pulses and their distribution through Public Distribution System (PDS).”

This is a bit of a chicken and egg story. As the government procures more pulses, the supply in the open market will fall, pushing up prices, until the government releases pulses into the open market. This is how things will operate, with spurts in prices of pulses, until enough farmers know about the fact that the government is procuring pulses as well, along with rice and wheat. This knowledge will then lead to more farmers cropping pulses and a gradual increase in production, in the years to come.

Also, the yields of pulses in India is very low in comparison to other countries. As the Economic Survey points out: “India has low yields comparable to most countries. On an average, countries like Brazil, Nigeria, and Myanmar have higher yields. Some states do much better than the all-India average, but even the key pulse producing state of Madhya Pradesh has yields (938 kg/ha) barely three-fifths that of China’s (1550 kg/ha).”

Price stabilisation of pulses also requires an improvement in the yields.

The column originally appeared in Vivek Kaul’s Diary on June 24, 2016

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