Opinion Green shoots of change

While this may send the farmers back to their villages,it will not solve the other half of the government’s problem. If mills have to pay higher rates to farmers,they will surely pass the burden to wholesalers who will,in turn,pass it to retailers and by extension to the aam aadmi. If not the farmers,the consumers will rise in protest.

There is a similar problem in wheat and rice where the government has hiked minimum support prices (MSP) by unprecedented amounts in recent times —wheat and rice MSPs were hiked by around 20 per cent each in both 2007-8 and in 2008-09. Someone will have to bear the final cost — either the government (which is already reeling under huge deficits) or the consumers,not all of whom are prosperous farmers and are usually net buyers of food.

Also,the fact that there is an MSP for some crops and not for others potentially leads to another major distortion. Farmers will,following the assured price signal,move away from producing agricultural goods not covered by MSP to those covered by MSP.

Aware of the link between consistently rising MSPs and food

inflation for the consumer,the prime minister expressed concern about this trade-off in reply to a question asked by a young child on why food prices are so high,on a recent Children’s Day interaction. But he did not offer a solution. That’s not because he doesn’t know of one. His reformist economist instincts would indicate that he does. But he perhaps worries about how the political process will react to ideas of agricultural reform. Good economics has,so far,not made for good politics with the Indian farmer.

But we may have finally reached a point of inflexion in the interaction between agricultural output and food inflation,which may present the government a unique opportunity to reform the orthodox political economy of Indian agriculture. For the longest time now there seems to be a consensus on at least two key policy positions in Indian agriculture. First,the overarching need to be self-sufficient in food. Second,that the government,not the market,must set prices for key agricultural goods. Both positions are guided by a general suspicion of the capacity of the market mechanism to deliver fair prices and quantities to both farmers and consumers. Now,in the face of dissatisfied farmers and dissatisfied consumers,that consensus may have reached its breaking point. And about time too.

Even politics may be more amenable to change as there are few things politicians fear more than sustained food inflation. The rate of food inflation,in a most recent estimate is nearly 15 per cent,much higher than the overall wholesale price inflation rate of just over 1 per cent. Those with a long memory will remember how the BJP was first routed in its stronghold of Delhi on the single issue of high onion prices.

The solution to all this is to decontrol pricing in agriculture and to encourage trade,both exports and imports. Consider how this would work in sugar since it’s the most in the news. At the moment,there is no way to determine what the fair price of sugarcane is since the government does not allow a free market. Once pricing is decontrolled farmers may indeed get a higher price than what the government is giving them. But to keep local prices in check,so that they do not

become absurdly high,the government must be liberal with imports. In the years of shortage,like in the current year,local farmers will command a higher price but consumers can be protected by aggressively allowing cheaper imports from elsewhere — Pakistan which has surplus sugar would have been a good bet this year.

All this sounds okay,but what about a situation in which farmers,for some reason,are unable to get a reasonable price locally at all? For one,the government should facilitate exports but,given the supply chain bottlenecks,this will need time. In the meanwhile,given that farmers have the ability to organise themselves effectively,a government cannot afford to not have a back-up plan. Here,the government would be well advised to consider a direct cash transfer programme to farmers who need a supplementary income in times of distress. That would not distort the market for consumers and would provide the necessary income support for farmers.

A similar direct cash transfer policy should be considered for the poorest consumers too. Instead of the government procuring vast amounts of foodgrain (and distorting the market) and then distributing it inefficiently through a moribund public distribution system (count in the vast amount which just rots in warehouses),it should just transfer the same amount of money to the poor to buy the foodgrain at market prices.

Of course,you can argue that there are multiple reasons for the spike in food prices beyond just government interference in the market,not least a bad monsoon,international shortages (in pulses in particular),and high commodity prices in the global market which is flush with liquidity in the aftermath of worldwide stimulus. But the fact is that these are beyond the direct control of the government. The best way to counter external shocks is to have our own farm house in order.

dhiraj.nayyar@expressindia.com