The Hindu Business Line : Agriculture hostage to knee-jerk actions

The United Progressive Alliance (UPA) came into office in May 2004 with a comfortable public foodgrain stocks position. Now, as it demits power, the ruling alliance leaves behind burgeoning granaries.

The country was heavily deficit in sugar when Mr Sharad Pawar took over as Union Agriculture and Food Minister; the situation is as bad, if not worse, towards the end of his innings. It’s no different in edible oils and pulses. We were massive i mporters then; so we remain today.

For the Rip van Winkles who went off to sleep between mid-2004 and woke up nearly five years later, nothing much may have changed in Indian agriculture. That impression could, however, be deceptive. For, a lot actually happened during this interregnum, so much so to force renewed policy attention on a sector long ignored and bypassed amid all the hype surrounding reforms and the so-called New Economy.

Panic reactions

For the UPA Government, things began going wrong with a poor wheat crop in 2005-06 on top of a similarly dismal harvest the year before.

As wheat stocks in the Central pool dipped to just above 2 million tonnes (mt) on April 1, 2006 — as against 4 mt, 6.9 mt and 15.6 mt on the same date of the preceding three years — corporate buyers and traders sensed a killing. By paying slightly more to farmers and taking advantage of the Government’s laxity in announcing a higher procurement price, the trade ended up mopping most of the wheat arrivals in the mandis.

Once realisation dawned, it engendered a series of panic reactions and crisis management measures: From import of some 7.2 mt of wheat on Government account during 2006-07 and 2007-08 to a ban on wheat and non-basmati rice shipments along with suspension of futures trading in them.

By the middle of 2008, the entire farm sector had been placed on a tight leash. Exports of not just rice and wheat, but even pulses, milk powder (briefly), maize and edible oils were banned or subjected to stringent licensing (cotton).

This was accompanied by delisting of futures contracts in everything from cereals to tur, urad, chana, potato and natural rubber.

The clamping of export restrictions on these commodities (as opposed to steel or cement, which also saw steep price increases) was justified in the name of augmenting domestic availability and protecting consumer interests.

At the same time, their imports were freely allowed at zero duty — making a complete mockery of liberalisation and exposing the limitations of not just the cricket-obsessed Mr Pawar, but even ‘reformers’ like Mr P. Chidambaram, Mr Montek Singh Ahluwalia and the Prime Minister himself.

Volatility in global prices

The Government’s expediency with regard to agricultural liberalisation was largely conditioned by the extreme volatility in global commodity prices seen during 2006-08.

In February 2006, when it first floated tenders, imported wheat was contracted at $178.75 a tonne. In December 2007, the landed price had shot up to $400.19 a tonne — way above what Indian farmers were being paid for their wheat.

At their mid-2008 peaks, world prices of rice scaled $1,000 a tonne (compared to $320-325 a year back), while palm oil prices correspondingly jumped from $650 to $1,100 a tonne, respectively.

Moreover, it was not only farm produce, but even inputs such as fertilisers that faced the heat: import prices of di-ammonium phosphate doubled within a year to $1,300 a tonne.

The unprecedented bull-run in world prices — an outcome of commodities emerging as an ‘asset class’ on a par with equities, bonds and currencies, rendering them attractive to speculative investment funds — humbled ardent liberalisers within the Government. Plans to rationalise minimum support prices of crops, phasing out fertiliser subsidies, exposing domestic farmers to international competition by fully opening up exports and imports, and extending futures trading were plainly shelved.

Instead, it was decided that farmers needed to be encouraged to produce more. Between 2004-05 and 2008-09, support prices of wheat went up from Rs 640 to Rs 1,080 a quintal, while being enhanced from Rs 560 to Rs 900 for common paddy.

And as farm-gate prices of fertilisers were left unchanged, the subsidy bill mounted from Rs 16,000 crore to Rs 96,000 crore over this period. The result: Farmers delivered record harvests of wheat, rice, maize, soybean and cotton in 2007-08. With the onset of the global financial meltdown, global farm commodity prices have eased considerably.

This, in turn, could embolden the reformers in the next Government to put liberalisation back on the agenda (though there may be equal pressure to raise tariffs as well, in the light of restoration of agricultural subsidies and protectionism by advanced countries).

Issues to address

But before that, there are immediate issues to be addressed. The first concerns public grain inventories, where the old problem of plenty has resurfaced. The second relates to sugar prices, which are threatening to breach the Rs 25-a-kg level.

Sugar represents a classic case of knee-jerk actions causing long-term damage. In July 2006, the Government banned sugar exports in response to a mild hardening of prices. It was a disastrous move that failed to see the huge expansion in cane area and installed capacities taking place because of favourable prices.

The ensuing glut, aggravated by the export ban, led to a price crash and accumulation of cane arrears. By 2007-08, the tide had changed and the Government ended up subsidising sugar exports to the tune of 5 mt.

But the damage had been done, as growers planted less area, resulting in the current situation where imports are a limited option for a country that is both a large producer as well consumer of virtually every agro-product.

What is the lesson that the next Government can draw from all this? Well, it can be summed up in one sentence: Thou shalt not take the ryot for granted, for agriculture is no ordinary game of cricket.

(This is the eighth and last in the series of articles assessing the UPA Government.)