Pricing that neglects demand side will see trouble: Ashok Gulati

Interview with Chairman, CACP

Ashok Gulati took over as chairman of the Commission for Agricultural Costs and Prices (CACP) when food inflation was rising, as were government grain stocks. Ahead of the end of his three-year term, Gulati tells Sanjeeb Mukherjee the government should announce minimum support prices (MSP) for only the five-seven items it can procure in case of a price slump. Edited excerpts:

At the end of your three-year term as CACP chairman, what are the tasks that remained unfulfilled?

When I took up this job, I had only two objectives — get the prices right and get the markets right. On the prices front, we feel major correction has been carried out but agri markets remain distorted. The process of distortion starts with export controls, preventing free movement of commodities across India, restricting the private sector’s stocks, announcing very high taxes or giving a very high bonus on MSP. All these distort markets and ultimately, harm the interests of farmers. While the government has opened up exports of wheat and rice, for which it needs to be complimented, for many other agri-commodities, export restrictions continue (for example, pulses, oilseeds and edible oils in bulk). All this speaks of a consumer bias in the system. This has to change; we need a trade policy that is neutral to producers and consumers.

India’s agricultural sector is passing through a challenging phase, with a bumper harvest and limited export avenues pulling down prices. On this front, what challenges will the new chairman have to face?

When world markets are down and you have surpluses at home that cannot be exported, obviously, CACP cannot announce hefty increases in MSP, as this will further lead to accumulation of stocks with the government. I think the new chairman will have to account all these factors in CACP’s recommendations, which are part of our mandate.

What should CACP’s primary task be? Should it merely look into cost of production and ensure reasonable returns to growers or should there be a change in the outlook towards price determination?

Cost is only the supply side of the picture. Prices are determined by the interplay of demand and supply. The government’s job is to give some sort of assurance to farmers that in case of any price crash, it will come and buy. Accordingly, the MSP is generally kept, say, 10 per cent below the expected market equilibrium price, provided markets are fully open and free. Any pricing that neglects the demand side will run into trouble very soon.

Largely, CACP’s price recommendations are relevant for three-four major farm products. For the rest, these have little consequence. Mostly, the market price is more than the price fixed by the government. In such an environment, how should the organisation change itself to make it more relevant?

MSP is primarily relevant for wheat and rice (paddy) and that, too, in five states —Punjab, Haryana, Andhra, and lately in Madhya Pradesh and Chhattisgarh. In many other areas, especially in the eastern belt (east of Lucknow), market prices often fall below the MSP, even for paddy and wheat. I urge the government to reduce the number of commodities from 23 to just five-seven, but erect an effective procurement machinery to support MSP. It does not give any credibility to the government to announce MSP for a large number of commodities, while effectively, it cannot support even two commodities.

Many economists have said the sharp increase in the MSPs of wheat and rice during the initial period of your term was the major reason for the sharp increase in food inflation. Do you agree?

Not really! Our MSPs for wheat and rice are below the freight-on-board (FoB) prices. Also, these are below the prices in most competitor countries. For 2014, our MSP is about $225/tonne. Our FoB price for wheat has been $275-310/tonne during the last six months. In Pakistan, wheat MSP is about $280/tonne; in China, it is about $380/tonne.

The case of rice is similar. So, I don’t think we have been reckless in increasing the MSP. Food inflation has been more for vegetables and high-value products such as milk, meat, etc.

Cereal inflation has resulted from the government’s large stocks, which need to be liquidated, at least by 15 mt. Our research shows food inflation is primarily caused by high fiscal deficit, high global food prices and rising farm wages. Remember, we broadly follow the markets, not lead the markets.

The last few years have seen state governments announce their own bonus over and above the MSP of wheat and rice. How does this impact market dynamics and what should be done to ensure a level playing field?

Yes, this distorts the markets, leading to accumulation of excessive stocks with the government. It also disturbs the production patterns, making these cereal-centric. It is not good for the country or the farmers. We have suggested state governments that want to give bonus should, instead, give investment support to farmers on a per-hectare basis, which is crop-neutral. It will be a win-win situation.

 

You have been strongly advocating against all-encompassing Food Security Law because of the fiscal and logistical problems faced in undertaking such an exercise.Now that the act is in force, what could be the measures to ensure that Indian agriculture and also government's fiscal space do not spiral out of control in the coming years?

 

National Food Security Act (NFSA) is a reality now. The challenges are many: can we plug the leakages in PDS at an early date? Can we make our procurement, stocking and distribution mechanism more efficient? Can we innovate and have alternative options that can be even more useful to consumers. I still feel India should gradually move towards conditional cash transfers. It will help them to save at least 30% subsidies, and avoid market distortions. I fear that we should not get into such a mess where efficiency losses of market distortions outweigh the welfare gains that this Act is trying to achieve.

     

The average annual growth rate in India agriculture has been pegged at 4% for long. Do you think there is a potential to push it upwards. If yes, what could be the sectors which can take the average annual growth rate beyond 4% and how should it be done?

 

Yes, as I said above, I feel that Indian agriculture has a potential to increase by five% per annum. Some states' agriculture (notably Gujarat, Rajasthan, Madhya Pradesh, Chhattisgarh, Jharkhand) has been growing by more than 7% per annum for the last 10 years.  At all India level, larger part of this growth will not come from cereals or foodgrains. It has to come from fruits and vegetables, dairy, poultry, and marine products. This would require a paradigm shift in our approach to treat agriculture not as farming alone, but as a value chain where farming is linked to processing and organized retailing. And that's where a big business opportunity lies too.  

 

Going forward what kind of challenges Indian agriculture will face and what could be the solution to overcome those challenges?

 

There are several challenges that agriculture will face in the years to come--from shrinking size of the holding to climatic variability affecting yields to rising costs of labor. We need to free up the land lease market, encourage farm mechanization and invest more in R&D and irrigation to bring resilience to agriculture. It is a big agenda.  

 

Public investment in agriculture is gradually showing a declining trend, and the major role is being played by private sector. Going forward do you think it will remain the same or there can be major shift?

 

Private sector investments respond to price signals. Improvement in the ratio of agri-prices to manufacturing prices from 100 in 2004-05 to 142 in 2013 has led to a major change in private investments in agriculture, which has improved the performance of agriculture. I feel if the investments in agriculture hover around the current levels (about 20% of agri-GDP), then agri-GDP should be growing by 5% per annum, assuming an incremental capital output ratio of 4:1. I feel we can stabilize at that level for the next 5-10 years, and that would be a significant 

achievement.