Knee-jerk reactions won't do

India's farm trade policy must strike a balance

After proffering some sane counsel to the government on the proposed food security law through a discussion paper, the Commission for Agricultural Costs and Prices (CACP) has now offered similar advice on external trade policies concerning agricultural products. Its suggestions make immense sense. Doing some plain speaking, this government think tank has found many flaws in farm trade policies, which have been marred by knee-jerk reactions to domestic price indicators. Such responses cause a frequent clampdown on the export and import of agricultural commodities, mainly to protect the interests of consumers, even if these moves prove counterproductive in the long run. The CACP paper maintains – and for good reasons – that a pro-consumer bias of this kind in trade policy prevents farmers from realising remunerative prices for their produce, thereby discouraging investments in agriculture and slowing down the sector’s growth. Such caps on cross-country trade prove harmful, given that the government most often errs in choosing the right time for imposing and lifting them — mostly doing so when the best opportunities for tapping the international market are already lost.

The remedy outlined in this paper, although not hitherto unknown, involves putting in place a stable and liberal long-term farm trade policy, with moderate duties and no room for sudden bans and administrative curbs. Any correction in external trade should be carried out through special safeguards and tariff modifications permitted under the global agreement on agriculture brokered by the World Trade Organisation (WTO), rather than through quantitative restrictions. This suggestion seems well founded, considering that Indian agriculture has already begun to globalise and this trend needs to be encouraged. The surge in India’s share of world agricultural exports from 0.8 per cent in 1990 to nearly 2.1 per cent in 2011 bears out the global competitiveness of the country’s farm sector. Another indication of this is the country’s positive trade balance in agricultural commodities — the total agricultural exports in 2011-12 were estimated at $37 billion, more than twice the net imports of $17 billion.

However, it is important to realise that exposure of any sector to global market forces is seldom risk-free. This is more so in the case of agriculture, given the difficulties in promptly aligning domestic production and prices of different commodities with international trends. Thus, the CACP discussion paper suggests regular monitoring of international and domestic prices. It also recommends undertaking moderate revisions in import and export duties, in the range of five to 10 per cent, to safeguard local interests. However, such tariff adjustments should be made only if global prices either fall below a pre-identified mark – say, 15 to 20 per cent lower than the long-term trend – or rise above a similarly set threshold. Therefore, the key to getting agricultural trade policy right is the judicious identification of trigger points for effecting policy changes, rather than arbitrarily determined responses to an emerging situation. Policy thus framed will help India emerge as a major player in global agricultural trade. At the same time, it will ensure the much-needed balance in the interests of domestic producers and consumers.