Ashok Gulati is probably India’s most well-known agricultural economist, who combines academic rigour with insights from first-hand knowledge of what is happening in farm markets both in India and globally.

In this interview with Business Line, the Chairman of the Commission for Agricultural Costs and Prices — a body that recommends, among others, the minimum support prices (MSP) fixed for various crops by the Government — suggests that Indian farmers may have to brace themselves for tougher times with a softening global price trend in many commodities.

Do you feel we are entering a bear cycle in agri-commodities here?

I wouldn’t say that. But we are probably seeing a price moderation happening. For that, we should understand what has been happening globally as well as India.

Food inflation in India averaged less than 4 per cent annually from 2001 to 2007. Globally, food prices erupted in 2007-08, while peaking in May/June 2008. At that time, we could temporarily insulate our food prices by clamping a ban on wheat and rice exports in late-2007. But from 2008-08, our prices, too, started catching up with global levels. Remember, in 2006-07, India had imported six million tonnes (mt) of wheat and the very next year, global prices of both wheat and rice skyrocketed to record levels. Consequently, the Government was forced to announce hefty increases in the MSP of wheat and paddy.

Moreover, the Government also launched the National Food Security Mission (NFSM) in 2007, with the objective of increasing our foodgrain production by 20 mt over the next five years to meet the growing domestic demand. That again required our farmers to be incentivised through higher MSPs. This strategy delivered and the NFSM helped raise the country’s foodgrain by 40 mt — double the target — in five years.

But MSP hikes weren’t the only factor. Following the global economic crisis in 2008, the Government doubled the size of the fiscal deficit. The massive fiscal stimulus gave us good GDP growth in 2009-10 and 2010-11, but also pushed up food inflation to double digits from 2008 onwards (from the earlier sub-4 per cent levels). Here, it did not help that global prices, following a temporary dip from July 2008 to mid-2009, started soaring once again to cross even the previous peaks. The FAO food price index, in fact, hit an all-time-high in February 2011.

On top of these, a new factor was added to the contributors of food price inflation. Farm wages grew by 18 per cent per annum during the last five years, which had never happened before. Our research has revealed that it was again actually linked to the overall higher GDP growth rates, especially in construction. MGNREGA also played a role, but the pull of growth was much stronger.

So, where are we now?

As far as the global situation goes, food prices, I mentioned, peaked in 2011 and eventually triggered huge supply response from producers. As a result, the output of every agri-commodity has gone up to the point of affecting prices. So, you have palm oil prices today trading at $800 a tonne (against their 2011 peak of $1,100), while wheat has fallen from $400 to $285-290 and corn from $300-plus to $225-285.

The effects of these, I believe, are starting to show up in prices here as well. Just as our prices went up with a lag after global food prices began their climb from 2004 (before really flaring up in 2007-08), we are perhaps seeing them drop also now with a lag. A bumper crop due to very good monsoon rains this time might contribute even more to this trend.

Which are the crops where this trend is visible?

Well, is anybody now complaining about prices of sugar, edible oils or pulses? Maize and groundnut are actually selling even below their MSP. This was witnessed even during the last rabi harvesting season for chana . Whether it is pulses, coarse cereals or oilseeds, prices are on a declining trend. Even the cotton crop is a real bumper one this time. While maize prices have been falling because they cannot be exported as easily as before at current global prices, cotton is holding up above MSP so far only because of demand from China. I expect the mustard and chana crop in the coming rabi season to also be good because the extended monsoon has ensured good soil moisture.

And which are the crops where inflation is a continuing worry?

I think mainly fine cereals (rice and wheat) and the fruits and vegetables (F&V) complex.

The price increases in the first have entirely to do with the mismanagement of public stocks. My estimate is that the Government is holding surplus stocks to the tune of 20 mt of rice and wheat. I don’t understand why these cannot be straightaway offloaded in the market. If the concern is that it will all come back to government godowns, just sell it at the MSP. This will not only take care of the artificial inflation we are having today in cereals, but also reduce the Government’s own cost of carrying all this surplus grain.

In fact, I would say that you can even export the surplus grain lying with the Government. Wheat is currently fetching an export price of $285-290 free-on-board. That works out to more than the MSP of Rs 1,400 a quintal or roughly $225 per tonne. Similarly, non-basmati rice is getting exported at $390-420 or, say, Rs 24,000 a tonne. The equivalent paddy price, at Rs 1,600 a quintal, is again higher than the MSP of Rs 1,310.

That leaves only F&V.

How do you sort that out?

The problem here is once again Government policies that do not allow produce to be bought directly from farmers. Also, you have very high market levies in most States. The exception probably is Gujarat, where the arhatiya (commission agent) fee is just 50 paise for every Rs 100 or 0.5 per cent in groundnut and cotton. The total levies in Gujarat do not add up to more than 3 per cent, whereas in Punjab, the arhatiya commission alone is 2.5 per cent and the total levies add up to 14.5 per cent even in wheat and paddy.

It is worse in F&V, where the official arhatiya commission is 6 per cent (of price) at Delhi’s Azadpur mandi and 8 per cent in Mumbai’s Vashi market. Unofficially, these charges go as high as 10 to 14 per cent.

I don’t think you can do much about F&V prices without radically restructuring the current marketing regime centred around Agricultural Produce Market Committee (APMC) regulations. For this, the Centre will blame the Opposition and the States. But then, what has stopped the Centre from addressing antiquated APMC laws or high mandi levies in the States where it is, or was until recently, in power?

Also, I think we need to think more in terms of consuming horticultural products in processed form — say, dehydrated onions or tomato puree.

These will also be aided by marketing reforms that make it easier for processors to source raw produce directly from farmers.

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