Not DeMo, just the old Demons PDF Print E-mail
Saturday, 17 June 2017 00:00
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Lack of agricultural reform caused the crisis in Maharashtra and Madhya Pradesh, not demonetization


Ever since the onion price crash led to the bloody agitation in Madhya Pradesh, many have argued this was the result of demonetisation. Harish Damodaran talked of, in The Indian Express (goo.gl/Uw7Nem), potatoes in Farrukhabad, Uttar Pradesh, fetching below  Rs350 per quintal in February compared to Rs 600 or more last year; in the case of onions in Lasalgaon, Maharashtra, they traded at Rs 450 per quintal in May as compared to Rs 750-800 and Rs1,200 in the same month of the preceding two years … several such examples are given, from garlic to grapes. Since demonetisation, he and others argue, caused a haemorrhaging of liquidity in the markets, there were few buyers. According to this logic, though the central bank has pumped cash back into the economy, the black economy is still starved for cash and so trades like those in commodities are suffering.

The argument seems rational and can, in fact, also be used to explain the crash in prices in, say, the housing market where a lot of the transactions are in cash. The problem, however, is that, in the case of real estate, prices were falling even before demonetisation. And in the case of onions in Lasalgaon, if the fall from Rs 750-800 to Rs 450 this year is meaningful, so is the fall last year, from Rs 1,200 to rs 750-800.

Talk to anyone in the agriculture/commodities sector, and they will tell you about the typical agriculture price-output cycle. A huge price spike will cause a surge in production which, in the absence of adequate storage or bulk buyers, leads to a sudden collapse in prices; this leads to a fall in sowing the next year and a spike in prices. To be certain, there are exceptions, but the cycle is quite strong. So, as Banikinkar Pattanayak reported in this newspaper (goo.gl/I2mUys), a bumper potato crop in 2014-15 resulted in wholesale prices crashing to `1,198 per quintal during harvest season (Feb-Apr) as compared to `1,938 in the previous quarter; in the case of onions, production touching 21 million tonnes in 2015-16 saw prices falling to Rs 1,201 during harvest (Apr-June) as compared to Rs 1,563 the previous quarter. The graphic, where prices have been plotted with production of the previous years, shows this relationship quite clearly.

That prices should collapse is, of course, no surprise since in the absence of a big buyer, this is a simple matter of supply exceeding demand. Had FDI in retail been allowed and big retail chains entered the market, things could have been different. Or, if food processing had grown large enough, the large production would simply have been processed. With neither large retailers nor large processors, there is not enough cold storage either—according to food processing minister Harsimrat Kaur Badal, the storage capacity for horticulture is just around 6% of the country’s total need.

Given the BJP’s 2014 promise of raising farmer profit margins to 50%—this later morphed into doubling incomes by 2022— it is amazing that the government never woke up to this reality sooner. With even retail food inflation falling from 6.3% in April 2016 to just 1.2% in April 2017, it is obvious farmer margins have been even further squeezed.

Apart from the government dilly dallying on FDI in retail, reforms like futures and creating a pan-Indian agriculture market which will take time, it continues to impose stocking limits and bans exports the moment farm prices start to rise. Its latest response, earlier this week, was to increase interest subvention on farm loans by another Rs 5,339 crore, taking the total to `20,339 crore this year. What it doesn’t take into account is that, while 45% of all farm credit is still from the informal sector, the bulk of loans are in any case taken by better-off farmers. And, as a study by ICRIER points out, there are large leakages in such loans.

Also, as Credit Suisse points out—see page 1graphic—farm loans are slowing in states like Telangana which had loan waivers some years ago. Given the `170,000-180,000 crore spent on farm subsidies—`70,000 on fertilisers and `100,000 on water and electricity—and the fact that little goes to the small farmer versus the `60,000 crore or so of public investment,surely the government could have made a move towards converting this to per acre cash payments? No amount of farm loan waivers will help till these distortions are fixed.


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