by Rakesh Mohan
Interestingly, despite undergoing the recent aggressive growth trend, Indian MSPs are much lower than the support prices given by some of its global competitors. Even in 2014–15, Indian MSPs of rice and wheat were below most of the comparable countries in the region of south and south-east Asia, especially China, that India aspires to compete with. For example, India’s rice MSP (converted from paddy MSP) was $330/MT, while in China it was $440/MT for Indica rice and $505/MT for Japonica rice (see Graph 2).
Graph 2: MSP of Rice and Wheat in Selected Countries in 2014–15 ($/MT)
Source: Compiled by authors from country-specific reports.
With MSP levels below international levels, the country displayed its inherent consumer bias. The recent upward correction was a necessity for the country to support a farmer who was suffering because of relatively lower MSPs and limited global market access. Exclusively blaming the hike in MSPs for raising food prices is not just naïve but is also indicative of the anti-farmer mindset that the country has conveniently nurtured over the years. Upon undertaking a quantitative exercise (for the period 1995–95 to 2012–13) to determine the factors that drove up the sticky food prices, we found high food inflation explained by three factors: exuberantly high fiscal deficits (Centre and states), high and growing agri-labor wage rates, and rising global prices.
The orchestrated fiscal stimulus given by all countries, including India, in response to the global crisis of 2007–08, catapulted the country’s fiscal deficit from 4 per cent of GDP in 2007–08 to 8 per cent in the two years of 2008 and 2009. The average M3 growth rate in the years between 2008–09 and 2012–13 was about 17 per cent. Even nominal wages in the farm sector were rising by around 18 per cent, and real wages at around 7 per cent per annum during the last years of UPA-I (and much of the UPA-II period), which added to the costs of production, thus pushing up food prices.
Private Investments in Agriculture
Capital formation in agriculture by the private sector (primarily farmers) responds, inter alia, to two things: relative incentive structure between agriculture and industry as captured by their relative prices and to public-sector investments in agriculture (under the complementarity hypothesis).
Graph 3 shows the evolving trends in the country’s gross capital formation in agriculture. Two structural changes emerge in this graph. One, the share of private investments in overall investments in agriculture, which was almost half in early 1980s, had grown to almost 85 per cent by 2013–14, making the public investments’ share very marginal (only 15 per cent). Second, driven by this trend of growing private investments, overall investments in agriculture as a share of AGDP, which hovered around 10–12 per cent in the early 1990s, rose to almost 20 per cent by 2013–14.
Graph 3: Public and Private Capital Formation in Agriculture, at 2004–05 Prices
Source: Compiled by authors, based on data from National Accounts Statistics, MOSPI, GoI.
Performance of AGDP
The impact of all these factors on AGDP growth has been mixed. India’s agriculture GDP grew by 4.1 per cent per annum during the Eleventh Five-Year Plan (2007–11), up from about 2.5 per cent per annum during the ten years preceding this plan (1998–2007). This period of growth in agriculture maps with the period that witnessed the fastest rate of poverty reduction in the country. During the period 2004–05 to 2011–12, poverty in India reduced at a rate three times faster than during 1993–94 to 2004–05. Not coincidently, this growth period was also precisely the time when relative prices moved in favor of agriculture.
However, it is interesting to note that this growth took place despite the fact that about 53 per cent of India’s gross cropped area is still rainfed, which often causes higher uncertainty depending upon monsoon rains. A quantitative analysis of the factors that explain the historical variations in the country’s AGDP reveals interesting results. For the period between 1996–97 and 2014–15, more than 91 per cent variations in AGDP (dependent variable) were explained by three factors: relative prices (RP) with one-year lag, monsoon rainfall index (RNI), and a trend variable capturing the long-term improvements in technology. The impact of relative prices was the largest and statistically quite significant.4
Direct Reforms in Agriculture and Their Impact
We discuss in this section the major agriculture-sector reforms and the impact they have had on the sector in the twenty-five years that followed. The studied reforms will include the ones undertaken directly in agriculture, or in input prices (subsidies), or in the trade policies. Special crop-specific production programmes will also be discussed in this section.
Fertilizer Subsidy Reforms
In the July 1991 Budget, urea prices were at the first instance raised by 40 per cent but, later, on account of an uproar within the then ruling Congress party, they were rolled back to 30 per cent. The effort was to phase out large subsidies on agri inputs and get the fiscal deficit under control. In 1992, the government appointed a Joint Parliamentary Committee to look into this issue, which recommended further lowering of urea price by 10 per cent but freeing up phosphorous (P) and potash (K) fertilizers. Obviously, that did not solve the problem of fertilizer subsidy, nor did it help to correct the use of N, P and K fertilizers. Graph 4 presents the movement of maximum retail prices of various types of fertilizers from 1980–81 to 2013–14. It is clear from the graph that urea prices have been constant over a long period, while P and K prices erupted after 2010–11, when a nutrient-based subsidy scheme was accepted for P and K, but not for nitrogenous fertilizers. This has made the N, P and K balance even worse in certain regions such as Punjab and Haryana, indicating large inefficiency in the use of chemical fertilizers.
This issue of fertilizer subsidy is still unresolved. The quantum of fertilizer subsidy ballooned suddenly in 2008–09, as global prices of chemical fertilizers increased substantially while domestic prices, especially of urea, remained frozen. As a result, the fertilizer subsidy crossed Rs 1,00,000 crore. As a percentage of AGDP, it was 10 per cent, and as a percentage of the Union government’s tax revenue, it crossed 20 per cent. It came down as the global prices receded. However, in the Union Budget of FY 2017, fertilizer subsidy expenditure is budgeted at Rs 70,000 crore, and in addition, there are pending bills of the fertilizer industry that amount to more than Rs 45,000 crore. Together, it is one of the top three subsidies that the GoI gives on food, fertilizer and fuels.Because of the extremely low prices of urea, Indian urea often finds its way to Nepal as well as to Bangladesh through informal channels and into several non-agricultural uses. This is where a lot of scope exists for future reforms—we elaborate on this in the last section. Suffice to say here that despite initial moves to streamline this issue in 1991, the problem persists, and no government has had the boldness to address this head-on.
Graph 4: Maximum Retail Prices of Urea, DAP and MOP (Rs/MT)
Source: Compiled by the authors, based on data from Fertilizer Statistics (various issues), Fertilizer Association of India.
Graph 5: Fertilizer Subsidies in India
Source: Compiled by authors, based on data from Union Budgets.
Trade Policies on Agri Products
In 1990–91, much of Indian agriculture global trade (about 94 per cent of AGDP) was subject to many types of non-tariff barriers. These trade-restricting barriers included compulsory export and import licensing, canalization (restriction of trade through generally one parastatal body), and the use of MEPs.
India’s agri-trade policies have been ad hoc and unpredictable. These policies have been observed to be subservient to the overall objective of food security and price stabilization for the consumer, much to the detriment of the farmers who have borne the brunt of such ad hocism due to export restrictions. A case in point is the 2007–08 global food crisis, which triggered a ban on wheat and rice exports. To illustrate the evolution in India’s agri-trade policies and their impact, we present case studies on cereals, mainly rice and wheat and on edible oils.
1. Edible Oils
The story of edible oils has to start from 1986, when India was importing about 30 per cent of its consumption requirement. It was almost the second-biggest import item after crude oil. Scarcity of foreign exchange in 1986 compelled India to set out a goal of self-sufficiency in oilseeds by 1990–91. This was a very ambitious target and to achieve this goal, the government created a Technology Mission on Oilseeds (TMO). The TMO tried its best to raise productivity and improve the marketing and processing of oilseeds, etc., but it was nowhere near its goal by the end of 1988. In January 1989, the TMO, headed by P.V. Shenoy, sought help from Dr Verghese Kurien, the famous ‘milk man of India’, who was responsible for ushering in the White Revolution in the 1970s. Dr Kurien’s first move was to stop all imports of edible oils. This led to the flaring up of domestic prices of edible oils, and about 7 million hectares of area shifted from cereals to oilseeds. India achieved almost complete self-sufficiency by 1992–93, when imports fell to less than 5 per cent of its requirements. This success was the ‘Yellow Revolution’. However, India fell short of cereals in that year and almost 3 MMT wheat had to be imported to fill the gap between domestic production and consumption requirements. There was nothing wrong in these imports except two things: the import parity price of wheat was almost double the price paid to Indian farmers as the MSP for their domestic produce and domestic prices of edible oils were at least 60–70 per cent higher than their import-parity prices. Large inefficiency in India’s allocation of resources within agriculture was loud and clear. This was communicated to the policymakers through a comprehensive paper, which set the stage for trade-policy reforms in edible oils and in the cereal sector in the subsequent years.
In April 1994, the quantitative restrictions (QRs) on edible-oil imports were abolished and replaced by 65 per cent tariffs on palm oil, which were brought down to 30 per cent in the following year, and then to 20 per cent and then further to 15 per cent in each successive year. Initially, this did not have much impact on imports as global prices were rising, but with the onset of the East Asian crisis in 1997, several commodity prices—especially of edible oils—collapsed, and this led to rising imports of edible oils. The fear of the erasure of the ‘Yellow Revolution’ triggered demands to raise import duties. The new government succumbed to this pressure and raised import duties on palm oil from 15 per cent in 1998 to almost 75 per cent in 2001 for crude palm oil and to more than 90 per cent for refined palm oil (see Graphs 6a, 6b, 6c).
In 2004, a new government came with Dr Manmohan Singh as the prime minister. The import duties started easing as global prices of edible oils started rising. By 2008, these duties came down to zero! Even in FY 2016, with a moderate duty, India was importing more than 50 per cent of its consumption requirement, and self-sufficiency in edible oils now seems a distant dream.
Graph 6a: Import Duties on Crude and Refined Palm Oils
Graph 6b: Import Duty and Global Prices of Palm Oil
Graph 6c: Domestic Production and Import of Edible Oils
2. Cereals
Cereal exports and imports were highly restricted, primarily through the ‘canalization’ route. Exports were further restricted through high MEPs or outright QRs. The only exception was basmati rice, exports of which normally hovered below 0.5 MMT. The year 1994, which saw the change in import policy for edible oils, also saw the change in common rice exports, which were opened to the private sector without much restrictions. As a result, India emerged as the second-largest exporter of rice in 1995–96 with an export of rice close to 5 MMT (see Graph 7).
The journey of rice exports, however, has not been very smooth. It has suffered several times—sometimes due to falling global prices but more often due to restrictive government export policy through either high MEPs or outright bans on common rice exports (as during 2007–11). Nevertheless, rice exports moved up from one peak to another and during FY 2013–2015, on an average, India exported more than 10 MMT rice and became one of the largest exporters of rice in the world (see Graph 7).
Wheat experienced an even more restrictive export-policy regime. It faced bans during 1996–2000 and again during 2007–11. Nevertheless, like rice, wheat exports too were substantial during FY 2013 to FY 2015. In fact, during the three years from FY 2013 to FY 2015, India exported 62 MMT cereals, an annual average of more than 20 MMT. This has been the largest cereal export, a sort of ‘cereal wonder’, in India’s long history (see Graph 7).
Gradually, over time, India opened up exports of several other agri commodities. In commodities such as cotton and beef (buffalo meat), India became the largest or second-largest exporter in FY 2014.
Graph 7: Cereal Exports from India
Source: Compiled by authors, based on data from DGCIS, GoI (various years).
Despite the reforms and the impressive performance on the trade front, the policy governing some of the agri exports is still highly restrictive, especially in the case of pulses, sugar, oilseeds and edible oils. Not-so-essential commodities such as onions and potatoes are subject to sporadic bans or high MEPs; even the trade in basic cereals oscillates inter- and intra-year between trade regimes. These are elements of anti-agriculture bias that still exist, though not to the degree as it did before the 1991 reforms of exchange-rate correction and slashing of industrial tariffs.
Domestic Agri Marketing and Production–policy Reforms
Although agri commodities have national markets, the laws and practices under the Essential Commodities Act (ECA, 1955) and the Agriculture Produce Market Committee (APMC) Act make marketing of agri commodities less efficient and riskier. Under ECA, for example, movement of commodities can be restricted between states, or even between districts within a state; limits on private sector stocks of ‘essential commodities’ can be imposed, strangulating the role of the private players. Similarly, limited licensing of commission agents under APMC creates a ‘rent-seeking’ class of commission agents, who have oligopolistic powers and take away undue share in the value chains of most agri commodities. Future and forward markets in most agri commodities (except turmeric, pepper, potato, gur and castor seed) were banned in the pre-reforms era. Existence of a dualistic marketing system, particularly for rice and wheat, under which part of the marketed surplus of certain commodities is procured by the government (or its nodal agency called the Food Corporation of India—FCI) to be distributed to an identified vulnerable section of the society at highly subsidized prices, complicates the already strangulated agri markets. Combining this with the government’s levy system for rice and sugar, wherein the rice millers had to deposit a certain percentage of milled rice to FCI at fixed prices, further limits the efficiency of market systems. In some states, this levy ratio was as high as 70 per cent. After moderation in this ratio over the years, the government finally abolished it. In the case of sugar, the levy rate after peaking at 65 per cent in the pre-reforms era underwent moderation and was later abolished. Cotton too had a monopoly procurement scheme in Maharashtra but that too was eventually dismantled.
All such restrictive policies increased the gap between the farm-gate prices and the retail prices, thus accentuating the anti-agriculture bias in the system and in policymaking. Most of them have been relaxed and some (like the levy system) have been phased out during the twenty-five years of the piecemeal reforms. However, the draconian ECA and APMC policies are still in place, inducing the markets with uncertainty and high risk. Quantifying the impact of all these on farmers’ incentives is a challenging task, but Gulati and Sharma (1991) calculated this for the pre-1991 reform period, and the results reinforced the presence of an anti-agriculture bias in Indian agri policies.
On the agri-production front, two promising missions were launched during the UPA-I period, which are noteworthy. One was the National Horticulture Mission (NHM) launched in 2005–06, and the other, as already mentioned, was NFSM, launched in 2007 in response to the 6 MMT wheat imports by India in FY 2007.
In 2007–08, NFSM had set a target to
increase the country’s foodgrain production by 20 MMT in the subsequent five years, i.e., by 2011–12. In terms of the three commodities, a 20-MMT increase referred to 10 MMT rice, 8 MMT wheat and 2 MMT pulses. Supported by large increases in MSPs of wheat and rice (by almost 40 per cent within two years) and reasonably good rainfall, foodgrain production increase was more than double the target, i.e., the 2011–12 foodgrain figure was higher by 42 MMT compared to that of 2006–07. Incidentally, the global food crisis of 2007–08 saw India ban its common rice and wheat exports. High MSPs, strangulated private trade and banned international markets forced the government to procure most of the produced grains. The result was FCI’s wheat and rice stocks touching unprecedented level of 82 MMT (against the buffer-stocking norm of 31.9 MMT) on 1 June 2012. Removal of the export ban in September 2011 led to a surge in cereal exports during 2012–13 to 2014–15.
NHM had an interesting take-off. Starting from a level that was way below the level of foodgrain production in the country, by FY 2016, production of horticulture products at 280 MMT surpassed the grain production at 252 MMT (see Graph 8).
Graph 8: Production Trends in Indian Foodgrains and Horticulture
Source: Horticulture Statistics at a Glance 2015; Agricultural Statistics at a Glance 2014; Directorate of Economics and Statistics (DES).