A panic response to drought

This is plain economic sense. The question is whether we are tackling drought relief the right way. Relief can be given in several ways and the government has chosen a combination of approaches to make its strategy all encompassing. Loan waivers are one part of the deal and we can already see banks squirming over this. Fertiliser prices are to be tinkered with which means that the farmer gets them cheaper — but how will this help a crop that is already ruined? The more recent announcement is a rise in the procurement prices of foodgrains and this leads to the debate on the choice between direct action and measures that interfere with market forces.

Increasing procurement prices is perceived as a measure to increase the income of farmers who are compensated for their lower output. This means that only those who produce a positive output will be rewarded and those who perhaps lost their entire paddy are excluded from the relief chain. Further, the small farmer seldom sells directly to the government and the final intermediary would be the beneficiary of higher procurement prices.

Therefore, what is suggested in such a case is direct action through cash payments, assuming of course that the money doled out reaches the farmer. At a more ideological level, higher procurement prices raises some nasty economic issues. By increasing the price today, the market mechanism is tampered with, which means that the true cost is not reflected — an issue that assumes importance given the large buffer stocks we have.

The related issue is that these higher prices will have to be carried forward the next year too, which means two things. The first is that more grain will be produced provided the monsoon is good enough, as there is incentive to ‘grow more to earn more’. The second is that the government is only fueling inflation because by increasing the price of foodgrains, an irreversible decision has been taken. Given that inflation is already an issue on the supply side with the global economic scenario indicating an upward movement in oil prices, the increase in procurement prices would mean the self-infliction of inflation.

We need to have in place a comprehensive drought relief programme which can be implemented whenever a crisis occurs instead of such piecemeal measures. Direct intervention of the government through cash transfers is preferable to loan waivers and artificial price changes. That is the point.