Direct purchases by private trade from farmers will enable demand-supply imbalances to iron out faster across regions and over time.

That government policies can have distortionary effects on commodity markets is a well-established fact. But nowhere is this starker today than in wheat, where the government itself has become the ‘market’. Government agencies have procured almost 38 million tonnes (mt) out of this year's total production of 90 mt. If despite that, wheat is still selling at around Rs 1,150 a quintal in most mandis of Uttar Pradesh — as against the Centre’s minimum support price (MSP) of Rs 1,285 — it indicates two things. One, the MSP has become a ‘maximum’ price that only the government can afford to pay. So, in the mandis where it is not present, open market prices have fallen below the MSP. Two, government purchases, rather than setting a benchmark floor price above which other players trade, have become the sole source of trading in the market. The private trade has been crowded out not just by MSPs de-linked from market realities, but also mandi levies amounting to over 10 per cent in major producing States, and export bans imposed from time to time.

In contrast to wheat is the case of potato, where we have a completely ‘free’ market and organised buyers — private, government or cooperatives — do not handle even 5 per cent of India’s output; even the biggest player, PepsiCo India, hardly does 1.2 lakh tonnes. That imparts huge volatility to prices. In December, potato was being sold at Rs 2/kg wholesale, on the back of a bumper 2011-12 crop of 41 mt that cold storage owners were dumping on the roads to make space for the fresh harvest due for arrival. But the new crop turned out to be 10 per cent lower, largely because of poor price sentiment, inducing farmers to plant less and cut down on inputs. Since that news has filtered down, wholesale prices have shot up to over Rs 10/kg. Potato is now retailing at Rs 18-20/kg, compared to Rs 6-7 six months back. That works out to an increase of much more than 10 per cent.

What both wheat and potato point to is the need for well-functioning markets. While distortionary government policies have ensured that the country today has virtually no private trade in wheat, the problem in potato and most other horticulture produce is one of segmented markets, where information does not flow freely and are naturally prone to speculation. Potato farmers and consumers both stand to benefit from large players — whether Amul-like cooperatives or foreign retail chains — who would help consolidate a fragmented post-harvest value chain. Dispensing with high mandi taxes and outdated State laws banning direct purchases from farmers would give further fillip to creating a single national market, enabling supply-demand imbalances to be corrected faster across space and time. Governmental grain purchases and sales should be only at market rates, with any additional MSP or consumer subsidies being credited directly to the beneficiaries’ bank accounts.

(This article was published on July 1, 2012)
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