Why poor Indian farmers stay poor
India's obsession with keeping food prices low for the middle-class means farmers can't get rich
Zia Haq
Farming is gloriously uncertain, thanks not just to uncertain weather, but also unpredictable policies. Let’s zoom into the finances of Bhupinder Pal Singh, a horticulturist from Babbain, a village in Haryana, a state that counts itself among the first places where India’s Green Revolution of 1960s began.
In good years, Singh would earn enough revenue to get by from his potato farm ringed by tall eucalyptus trees and bushy greens on the edge of a village inhabited mostly by fellow Sikh farm households. To top up his farm income, he also rents a mango orchard owned by a relative who is an army veteran.
In the summer of 2017, his tuber was ready for harvest on time. The prevailing market rates, however, delivered a jolt. He was unable to sell a third of his 4,400 quintals (100 kg each) of potato harvest in May of that year. The unsold produce soon began to melt into a mountain of rotten slush.
Singh had said, when this correspondent visited his farm that year, he lost all hope when he managed to sell 40 quintals for just Rs 2,306 to a local trader, meaning he got a mere Rs 57.65 for 100 kgs. It was clear he would incur far more costs transporting his produce to the nearest market than what he would be earning by disposing of the stocks.
Singh had no idea why the markets had crashed without warning. It turns out the seeds of the 2017 potato crisis had been sown in 2014. It had to do with a knee-jerk farm trade policy that tends to clamp down on exports at the slightest hint of rising domestic prices.
In June 2014, to rein in a spike in potato prices, the government had imposed a minimum export price (MEP) on potatoes, put the commodity under the Essential Commodities Act and also allowed duty-free imports.
MEP is a price floor set by the government under the Foreign Trade Act, 1992. It is designed to make a commodity expensive for foreign buyers. Such MEPs force exporters of a particular item to quote higher than globally prevailing prices to prospective buyers. This means importers elsewhere looking to buy Indian produce would not be willing to buy for such a high price (mandated artificially of course by a government fiat). They would instead look for markets where the item would be cheaper.
The whole idea of an MEP, as you would have realized, is to discourage exports, if not ban them, so that domestic availability increases and prices at home come down quickly. This potato policy choked off exports immediately and caused domestic prices to crash, which later contributed to a glut of 48 million tonnes.
The policy cooled inflation no doubt and benefited potato buyers in cities, but ruined farmers like Singh. This is an example of how structural hurdles are created by inflation-targeting trade policies, which have kept farm incomes low.
Government policy on agricultural trade is anchored in controlling inflation, rather than boosting farm earnings. The government has talked of using export curbs more sparingly now and sought to enhance farm exports.
In December 2018, the Cabinet cleared an exclusive policy, a first, to boost farm exports to $60 billion by 2022, from about $30 billion currently. It talked of creating exports infrastructure, standardization, more free trade and avoiding “knee-jerk decisions” (read MEP).
Indeed, the most important consideration for any importing nation (seeking to buy from India), other than price, is long-term reliability. For instance, if a wheat-deficit country wants to import the item from India, it would want an assurance that it can rely on India to fulfill its annual wheat import requirements. For this, we need a consistent policy. Of course, policymakers will have to regulate exports if our domestic production takes a hit for some reason or food prices rise ominously and show no signs of abating.
Short inflationary spells, driven by temporary supply-side constraints, should not warrant panic unless there’s a threat of a generalized high inflation. Economists usually know why a particular food item has seen a price spike and whether its elevated prices will hold out longer than what the people or the larger economy can tolerate.
Yet governments do intervene strongly and often disproportionately because they don’t want public backlash over costly onions or potatoes.
This month, the government re-imposed a minimum export price of $850 per tonne on onion exports because prices have risen somewhat in some cities. This is the sort of “knee-jerk decision” that the government sought to avoid in the first place.
The current increase in prices of onion is seasonal. Existing stocks have depleted. Prices will stabilize shortly when fresh harvests reach markets in a few weeks’ time. The export curb on onion is unwarranted because there’s no inflationary pressure on the economy. In fact, given the slowdown – growth has plunged to a five-quarter low of 5% -- a little bit of inflation is what the economy requires. Moreover, only certain varieties of very high-quality onion are usually exported. These are not the onion varieties middle-class consumers like you and me consume.
Our farm exports have been sluggish anyway. Agricultural exports grew five times from about $8.7 billion in 2004-05 to $42.6 billion during 2013-14. This however fell to $33 billion in 2016-17.
The Modi government’s ‘Doubling Farmers’ Income report (Volume IV)’ too says India’s exports policy “does not promote agricultural trade but is mainly used to control prices in the domestic market”. According to a government report, a three-year ban on non-basmati rice exports during 2008-11 amid a rice glut led to a “notional loss of $5.6 billion”.
The farm sector hasn’t been generating enough revenue for nearly two decades now, according to a study by researchers from the Organisation of Economic Cooperation and Development (OECD), a group of 36 countries, and the New Delhi-based economic think-tank ICRIER. According to the study, India is only one of three countries (of the 26 tracked) where this has happened.
The study shows that India’s obsession with keeping food prices low is one of the structural reasons why farmers stay poor. Despite India’s agriculture being heavily subsidized, the ICRIER-OECD study, led by economist Ashok Gulati, found farmers suffered a “negative market price support”. Total prices farmers received during 2006-16 stood at minus 14%, meaning agriculture in India suffers “negative total revenues”. Put simply, it means total prices paid by those who belong to the farm economy (on anything they purchase from the market) are more than total prices they get (from anything they produce and sell). Farming therefore is, on a net basis, a loss-making activity.
Restrictions on where farmers can sell and to whom, as mandated by the country’s Agricultural Produce Market Committee Acts, in various states, still continue to thwart farmers. An earlier paper by Gulati and his colleague Shweta Saini, of the think-tank ICRIER, analysed ten-year data to show that India’s food trade policy has a “pro-consumer bias”, rather than it being pro-farmer.
Subsidies to the farm economy do somewhat offset the profit-dampening effect of these policies, but not so much. In the policy trade-off between prices consumers pay and prices farmers get, government policies have had the effect of keeping farm incomes lower than their full potential.
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