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Monday, 19 September 2016 07:54
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Procurement critical, but freeing markets more vital


Though many will consider chief economic advisor Arvind Subramanian’s report on incentivising pulses production as reiterating a decision already made by the government—of hiking minimum support prices (MSP) for procurement and keeping a 2 million tonne buffer—the report is a lot more than that, and not just because it comes up with new ideas on calculating MSPs or how it shows small/marginal farmers sell below the MSP all the time. So, it points to the much higher risk that farmers face growing pulses and also the positive externalities such as lower water/fertiliser usage and less greenhouse gas emissions while also fixing nitrogen levels in the soil. While asking the CACP to build this into its model, it shows how taking into account higher risk increases the recommended MSP to R52 per kg—from R46 in a normal situation—and to R63 once positive externalities are taken into account; the same exercise gets it to conclude MSPs for paddy need to be cut by R20 per kg due to negative externalities.

More important, it explains why, in anything more than the immediate season, the needs of the farmers and consumers are perfectly aligned—so anything that ‘apparently benefit(s) consumers end(s) up hurting them because production and availability of pulse decline over time’. Such actions, favoured by the current government as much as by earlier ones such as the UPA, include export bans and low stocking limits for wholesalers/retailers. An appendix on the Essential Commodities Act (ECA) argues this has discouraged private investment in large-scale marketing infrastructure like cold storages—with private players prevented from becoming truly large, they cannot buy enough during the harvest as a result of which prices crash and farmers suffer; even a 2 million tonne buffer, after all, is limited compared to the total production of more than 10 times that. Much of this argument, in terms of the impact of bans/stock-limits and the alignment of interests of farmers and consumers, needless to say, apply to all crops. Every other year, we see low onion supplies leading to sharp inflation that brings tears to consumers’ eyes; while the natural result is higher production the next year, the bans/limits and absence of large buyers ensures prices crash at the next harvest, resulting in another supply shortage the year after that…

The report, sadly, leaves open-ended the timeframe for reviewing ECA and introduction of futures which is the only credible—and far more effective—alternative to government procurement, as also on introducing GM crops to increase India’s low yields. But its recommendations on removing export bans and relaxing/removing stocking limits may have a better chance despite the government being in favour of them—because, faced with a serious pulses situation, it is likely to be more amenable to sensible market-based solutions. Keep in mind, when the government’s anti-market policy on natural gas pricing—for close to two years—drove all fresh exploration to a halt, it lost no time in reversing this and, quickly enough, this resulted in exploration firms starting to revisit their original investment plans.



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