India’s Big Government

by Vivek Kaul

What this clearly tells us here is that Big Government fiddling with the sugar prices turns out to be a loss-incurring proposition for farmers. In an ideal world, when a mill does not pay a farmer on time, one would expect the farmer to offer the sugarcane that he produces to another mill the next year. But in the world of Big Government, things don’t work that way.

  ****

  In August 2012, the Lok Sabha MP Prataprao Ganpatrao Jadhav received an answer to a question he had put to the government. He had asked “whether the Government has imposed a ban on [the] issuance of new licences for [the] setting up of sugar mills in Maharashtra”.

  To this, the government answered: “[The] Sugar Industry has been de-licensed vide press note dated 31.08.1998, with which the requirement of a licence for setting up new sugar mills was dispensed with. The entrepreneurs are now free to set up new sugar mills at their preferred locations subject to compliance of rules & regulations of the Central/State Governments [emphasis added].”

  The real answer to the question Jadhav was asking lies in the italicised part in the last paragraph. While the licensing regime for the setting up of a sugar mill may have been done away with, the rules, as they stand, make it almost impossible for an entrepreneur to set up a sugar mill at a location of his choice.

  In July 1980, the central government fixed the minimum radial distance between two sugar mills at 30 kilometres. This was done in order to ensure that each mill had an adequate availability of sugarcane. In January 1997, this was increased to 40 kilometres. In January 2006, Clause 6A of the Sugarcane (Control) Order of 1966 was amended, and the minimum radial distance was reduced to 15 kilometres. Hence, as things stand as of now, no sugar factory can be set up within a 15 kilometre radius of an existing sugar factory.

  Furthermore, the state governments, with the prior approval of the central government, can set a higher minimum radial distance between two sugar mills. The states of Punjab, Haryana and Maharashtra have made use of this provision and increased the minimum radial distance to 25 kilometres. The reasons offered for this vary, from decrease in the area under sugarcane production to the increase in crushing capacity of the existing sugar mills.692

  This minimum distance criterion of 15-25 kilometres essentially ensures that an entrepreneur is really not free to start a sugar mill at a location of his choice. Other than this, the sugarcane farmers have to supply their produce to a specific sugar mill. The funny thing is that the farmers are supposed to sell their produce to that specific sugar mill, even if they haven’t been paid their past dues. What does not help is that farmers are made to wait at the mill gates, sometimes for more than a few days. Farmers have also complained that the mills do not correctly weigh the sugarcane that they supply and that it is under-weighed by 10 to 20 per cent.693

  The idea behind linking sugarcane farmers to specific sugar mills was that this would encourage the mills to carry out development work, leading to an increase in the sugarcane productivity. But that doesn’t seem to have happened, with sugarcane productivity barely moving from 68 tonnes per hectare to 72 tonnes per hectare between 2009-2010 and 2014-2015.694

  The people who came up with such rules essentially forgot what the lack of any competition can do to businesses. The way the system is currently structured, it gives sugar mills no incentive to work efficiently. Come what may, the sugarcane farmer has to come back to them with his produce. Hence, the supply of raw material to manufacture sugar is guaranteed. If there had been some competition, then, if one mill did not pay up on time, the farmer would have had the option of going to another mill with his produce. But that cannot happen in this case. Also, if the farmer-mill matching system hadn’t been there, it would have ensured greater flexibility to mills, depending on their crushing capacity, to enter into contracts with the farmers.695

  This meddling by Big Government in the sugarcane and sugar market needs to end. There are multiple things that need to be done. The states need to end the SAP system that they have come up with. The central government needs to make it clear to the states that it won’t keep rescuing them in order to be able to pay the accumulated arrears. In fact, the central government had to intervene in the sugar sector in both 2013-14 and 2014-15.696

  As the document titled The Price Policy for Sugarcane: The 2013-14 Sugar Season points out: “If any state wants to give some extra support to its cane farmers, an investment subsidy or income support policy would be better, and not the price policy, which distorts the markets.”

  Furthermore, the radial distance stipulation for the setting up of a sugar mill and the matching of sugarcane farmers to mills both need to go. Only then will some semblance of competition be introduced into the system. Or, as The Price Policy for Sugarcane: The 2016-17 Sugar Season document points out: “To create healthy competition, both among farmers and millers, the Commission [for Agricultural Costs and Prices] recommends to dispense with cane area reservation to enable farmers to supply their cane to any mill. This will allow [the] Schumpeterian ‘process of creative destruction’ to work and [the] untenable situation of cane arrears to farmers will not arise.”

  When was the last time that you saw a reference to the economist Joseph Schumpeter and the ‘process of creative destruction’ in an Indian government document? But that is precisely what the sugar sector in India needs. The question is: Will something like this happen in the years to come?

  Many sugar mills in India are controlled by politicians. The politicians use these mills as a source of electoral funding as well. This is clearly brought out by the economist Sandip Sukhtankar in a research paper titled ‘Sweetening the Deal? Political Connections and Sugar Mills in India’. As he writes:697

  The cane price falls by approximately Rs. 20 in politically controlled mills during election years. These drops translate to an economically significant drop in revenues of Rs. 60 lakh (US$ 135,000) per election year per mill. Evidence suggests that the profit decline is not due to effects on mill operations, but rather due to [the] appropriation of funds for electoral purposes…. From the perspective of farmers, this fall in prices could represent either pure theft by mill chairmen or indirect campaign contributions.

  Hence, sugar mill owners pay low prices to sugarcane farmers during an election year so as to be able to funnel more money into the electoral campaigns of politicians. If creative destruction in the form of competition is unleashed in the sugar sector, politicians won’t be able to use sugar mills as their cash cows to fight elections. This makes it very difficult to believe that any competition will be introduced into the sector in the time to come. Big Government will continue to rule.

  ****

  In the case of sugarcane, the central government sets the FRP every year. This is the minimum price at which sugar mills have to buy sugarcane from farmers. Of course, as we have seen in the earlier sections, the system has been messed around with, with state governments offering their own SAP, which tends to be higher than the FRP.

  Other than declaring the FRP for sugarcane ever year, the central government also declares the Minimum Support Price (MSP) for 23 other crops, including rice and wheat. While the government declares the MSP for 23 crops, it procures only rice, wheat and cotton directly from the farmers, using the FCI as well as state procurement agencies. In fact, 90 per cent of the procurement of rice and wheat is now carried out by the state procurement agencies.698 Recently, the government has started to procure pulses as well, in the hopes of being able to control the rise in their prices.

  It is interesting to see how the procurement of food (primarily rice and wheat) evolved in India. The British created the first granaries (called golas) in 1783-84. This was in response to a very long drought in North India at that point of time.699

  In 1878, Lord Robert Lytton, the then Viceroy of India, established the policy on famine relief for the first time. Around that time, India also got its first Famine Insurance Fund. This basically involved setting aside money (and not foodgrains) to carry out famine relief measures. The
hoarding of foodgrains was deemed as unadvisable by the Food Commission of 1880.700

  In fact, the storage of foodgrains didn’t happen until much later. In 1939, the British government ruling India introduced rationing in order to ensure an equitable distribution of foodgrains among urban consumers, so as to protect them from high inflation. In 1943, this led to the Foodgrains Policy Committee being appointed by the British government, formalising the first scheme towards the centralised purchase of foodgrains.701

  At the same time, the Bengal Famine of 1942-1943, in which millions died, led to the establishment of the Food Department in December 1942. As the World Bank report titled India Foodgrain Marketing Policies: Reforming to Meet Food Security Needs, published in 1999, points out:702

  The Bengal Famine of 1943 was a major impetus for the formulation of a comprehensive food policy in India. Policy intervention in the foodgrain market was virtually absent till 1943. Free market forces were allowed to determine the prices of foodgrains. However, both internal and external forces often placed the economy in crisis. The consequences of the crises were severe since the nutrition intake levels of the poor were low even in normal periods. Weak integration of submarkets stifled market adjustments, causing local foodgrain shortages even though there was no shortage at the global level. Disruption of imports and the internal transport system during W.W. II [i.e., the Second World War] resulted in a near collapse of the free market system and led to the Bengal famine in 1943, in which more than a million people died of starvation. The situation was further worsened by the restrictions imposed by the surplus provincial governments on the movements of foodgrains outside their [respective] jurisdictions.

  Government intervention in the food market thus started only after the Bengal famine of 1942-1943. As the World Bank report points out: “The Food Policy Committee set up after the famine emphasised the need for the active involvement of the Central Government in the management of the food economy in the country. The Foodgrains Policy Committee favoured government intervention in the foodgrain market and suggested a system in which a central agency would participate in the procurement and distribution of foodgrains parallel to the private trade.”

  In fact, between 1943 and 1947, administrative control, monopoly procurement and public distribution became the order of the day. Around this time, the government started to import foodgrains and distribute them through ration shops. Foodgrain imports of two million tonnes per year helped meet a major part of the rationing requirements.703 Interestingly, it is these ration shops which, over a period of time, would become what we now call the PDS (Public Distribution System) of more than five lakh fair price shops operating throughout the length and breadth of the country.

  India’s policy towards foodgrains after Independence was influenced by the way the British government handled things during the last few years before Independence. What did not help was the fact that, after the partition of the country into India and Pakistan, India inherited 82 per cent of the population but only three-fourths of the area under cereal production. Furthermore, India inherited only 69 per cent of the pre-Partition irrigated area. Also, before Partition, 24 per cent of the cropped area was irrigated. This dropped to 19 per cent after Partition.704

  This basically led to a situation wherein government intervention in the food markets continued. After Independence, the foodgrain trade went through a cycle of control and decontrol, with the government issuing licences to curb private trade. In fact, the 1950s saw the government assume monopoly control over foodgrain movement between states. Nevertheless, in December 1953, Rafi Ahmed Kidwai, who became the Food Minister in 1952, introduced decontrol for both rice and wheat.705

  But this situation did not remain for long, as supply bottlenecks started to show up from 1955 onwards. In 1954, the foodgrain production had stood at 72 million tonnes. This declined to 69 million tonnes by 1956 and 67 million tonnes by 1958. The fall in the production of food-grains led to a price rise of 11 per cent between 1956 and 1958.706

  There were multiple repercussions of this. The buffer stock of foodgrains (or the stock of rice and wheat maintained by the government) in 1955 was reduced to 0.9 million tonnes. This led to the return of licensing of the foodgrain business. It also led to the enactment of the Essential Commodities Act of 1955.707

  The shortage of foodgrains meant that the government went about importing them and distributed them through the ration shops, or the PDS, as they had evolved into. The 1950s saw the extension of these shops even into the rural areas.708 Until the mid-1960s, the government kept intervening in the foodgrain market, without really going about procuring foodgrains to build a buffer stock on a large scale. As the World Bank report points out: “Similarly, policy efforts on procurement were also minimal: foodgrain procurement per annum averaged 2.2 million tonnes in 1951-1955, 0.8 million tonnes in 1956-1960, and 14 million tonnes in 1961-1965.”

  This was understandable, given that the country wasn’t producing enough foodgrains, and if the government had gone about procuring foodgrains as it does these days, it would have led to a further shortage and price rise. It was only in the sixties that government procurement started to go up.

  What the government did instead was to import foodgrains and distribute it through the PDS. In fact, by the 1970s, the PDS had become the universal mechanism used by the government for the distribution of subsidised food.709

  But getting into the 1970s before explaining what happened in the 1960s would be jumping the gun. The import of foodgrains had seen a declining trend between 1951 and 1955. It started rising again in 1956. India had imported around 2.4 million tonnes of foodgrains per year, on an average, between 1950 and 1955. This rose to 3.4 million tonnes between 1956 and 1960. It further rose to 5.1 million tonnes per year, on an average, between 1960 and 1965. Interestingly, wheat accounted for a major part of the foodgrains being imported. Its share increased from 66 per cent between 1950 and 1955 to 85 per cent between 1956 and 1960, and 89 per cent between 1960 and 1965.710

  It was this imported wheat, along with the rice being produced within the country, that was distributed through the PDS to meet the shortage of foodgrains in the country throughout the sixties.

  In 1964-1965, India produced 12.3 million tonnes of wheat. Over and above this, it imported 6.6 million tonnes. Much of this wheat was imported under PL-480 (Public Law 480).711 PL-480 was an American law which allowed the sale of wheat to developing countries in their local currencies.

  India had started importing wheat from the United States in the 1950s. In fact, this imported wheat had come in especially handy when the monsoons failed in 1957 and 1959 and there was a huge scarcity of wheat. Nevertheless, the country became addicted to this imported wheat. Between 1960 and 1964, India imported 16 million tonnes of wheat. As Gurcharan Das writes in India Unbound: “Because of these imports, India began to be seen as a ‘basket case’ in the world’s eyes, especially in Washington.”

  Getting back to 1964-1965: India imported 6.6 million tonnes of wheat then. This at a time when the landed price of wheat in India would have been around $76.80 per tonne. At this point of time, India had around $524 million of foreign exchange reserves. If all the foreign exchange had been used to buy wheat, it would have allowed the country to buy around 6.8 million tonnes of wheat, which was just a little more than the 6.6 million tonnes that were eventually imported.

  Of course, given that much of the wheat was being bought under PL-480, foreign exchange reserves were not used since India was allowed to use rupees to buy the wheat. Nevertheless, this was more like aid and had its own political repercussions.712

  During the year 1965-1966 the situation became even worse. The production of wheat fell to 10.4 million tonnes from 12.3 million tonnes in the previous year. At the same time, the import of wheat increased to 7.8 million tonnes from 6.6 million tonnes in the previous year.713

  This led to multiple actions at the government level. First, it set up the Agricultural Prices Com
mission in 1965 (called the Commission for Agricultural Costs and Prices (CACP) since 1985). The job of the Commission was to come up with two types of administered prices for crops, the minimum support price as well as the procurement price.

  In the same year, the government also set up the FCI “to secure a strategic and commanding position for the public sector in the foodgrain trade”. As the World Bank report points out: “The Corporation was expected to act as a countervailing force to the speculative activities of the private traders. The Government of India had also transferred the functions of procurement, storage and distribution to the Corporation heretofore [i.e., before then] performed by its department of food in several states. Since then, the Corporation has been undertaking the purchase, storage, movement and distribution of food at the national level. It has also [been] handling all imported grain and its distribution.”

  And this is how the government of India got into the procurement of foodgrains. But the question is: What did it procure, given that India wasn’t producing enough foodgrains in the first place and was dependent on imports to meet its food needs?

  In 1966, the Indian government imported around 18,000 tonnes of high-yielding variety seeds of wheat from Mexico. These seeds were distributed free to farmers in order to encourage their production. These seeds ultimately ushered in India’s famous Green Revolution. Within a period of a few years, the wheat imports almost came down to zero. By 1971-1972, India’s wheat production had jumped to 26.4 million tonnes from 10.4 million tonnes in 1965-1966. Imports were down to 0.5 million tonnes.714

  In fact, the FCI played a major role in this increase in the production of wheat. It provided price support in the wheat-growing areas of Punjab and Haryana by buying wheat. This essentially convinced the farmers to grow wheat, given that there was a ready buyer for it. This procurement of foodgrains initially started with the noble motive of helping the farmers who were taking part in the initial phase of the Green Revolution. But that is not how things remained in the years to come (as we shall see).