In the name of poor: at the cost of poor - Milind Murugkar - |
The architect of India’s historical economic reforms has begun his second inning as the Prime Minister. While relatively high growth rate of Indian economy despite global recession is being praised, it is also recognized that the growth has failed to include the vast majority of the poor in the country. Benefits of reforms through liberalized trade were supposed to benefit not just the corporate sector but even the smallest and poorest competitive producer in the country was expected to reap its benefits. It was also expected that the reforms would also threaten the vested interests in the system blocking the way of smart market based approaches to welfare schemes for the poor in the country.
We have miserably failed on both this fronts. We have continued to deprive our food grain producers from the benefit of liberalized trade and continue to leave our poorest population to fall prey to the corrupt vested nexus in our system.
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Recently government banned the export of food grain ,once again denying Indian farmers the benefit of international prices. The government announcement has stirred up no debate. The opposition is silent and so are the NGO activists who never tire of protesting against real as well as imaginary injustices to farmers. Should we treat this as a sign of maturity and attribute this silence to the deeper understanding of the present food grain situation? Not really! During the UPA regime, the ban on food grain exports has been in effect more often than not. In fact, this is nothing other than a continuation of the pre- reform policy that is always justified on the grounds that high food grain prices will hurt the poor and is never challenged in a political debate.
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The policy discourse on food security issue in the country has generally bypassed the discussion of adverse consequences of measures such as export ban for farmers and for agricultural growth in general. We simply refuse to find a just solution to the policy dilemma between protecting the poor consumers from inflation and safeguarding the interests of poor producers. The preferred solution of our policy makers has always been to make the farmers bear the brunt of the cost of protecting the poor.
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Does the ban on food grains exports help the Indian poor or hurt them?
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Our answer to these questions would depend on our time horizon. In the short run, the price rise will certainly hurt the poor, even the rural poor. If the food grain prices rise suddenly, it is unlikely that their wages will rise just quickly enough to accommodate this price rise, especially in urban areas. There is no doubt that in the short run the poor will be hurt quite badly. In fact, Amartya Sen’s account of some of the famines in the 20th century is precisely about this sort of sudden rise in the price of staples.
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What about the long run? Government policy since independence has been to protect the urban consumer at the expense of the farmer. Farmers are seldom allowed to gain from a strong market demand for their produce. The Essential Commodities Act put additional constraints on farmers, preventing them from taking advantage of market opportunities.
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It is not just the policy of curbing exports through which the government lowers the farm gate prices, governments policy of imposts has also sometimes amounted to unfair state sponsored dumping for the food grain producers.
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| Two years ago Indian government imported wheat at nearly double the price than what it offered to the domestic producers. Indian farmers were denied international prices through an export ban and also the exclusion of domestic suppliers of wheat from participating in the bidding for contracts to supply wheat. The imports of grain by the government have always been plagued by controversy. Isn’t there a simple method to determine the right import price? The fact is, as long as the government is importing, one can never be sure if the import price is appropriate. The issue is not that of corruption. The international market is volatile. And government by its very nature is not equipped to make correct decisions in such volatile situations. The wheat prices indicated by the Chicago Board of Trade (CBOT) indicate only trends in the future international prices. It is important to be aware that most of the wheat consumed in India is not traded there. Therefore, it is intrinsically impossible to know reliable futures prices to make the import decisions. |
Why not leave the decision of import to the market forces? Whenever the government fails to procure enough for the Public Distribution System or for maintaining the minimum buffer stock, it surely has to buy from the open market. The bidding should be open for domestic traders as well. The least quoted price should be awarded the contract. It should be immaterial whether the supplier is foreign or Indian. It should also be irrelevant where the supplier sources the grain. This automatically rules out discrimination against Indian farmers because if the price in any part of the country is competitive, the grain will surely be sourced from there. The system will allow domestic trading companies to acquire the skills to compete at the international level.
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We should learn from the experience of edible oils imports. We import close to five million tones of edible oil annually, but one rarely hears about ‘edible oil scam’. This is because the imports there take place on private accounts. The lesson is, the job of price discovery and bearing risks in a volatile market should be left to the traders.
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The ostensible reason for not sourcing the grain from the domestic market is the possibility of a ‘price bubble’ — a steep short-term price rise following the government’s decision to enter the market as a giant buyer. This is the result of speculative hoarding in anticipation of a subsequent sudden increase in market demand as a result of the government entry as a large purchaser. And the price rise, however short, could still hurt poor consumers. But there are two ways to tackle the issue. One, the government should do its procurement in a number of installments rather than in one swoop. Two, the government should declare its intention to procure well in advance so that the market has time to adjust and farmers can decide to wait to sell their grain. The prices, after all, reflect the demand and supply conditions. If the market receives the reliable future demand signal, the prices will be adjusted to this new demand level, avoiding price ‘spike’ or ‘bubble’. The government is better off staying away from a job that it is ill equipped to perform.
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Unfortunately the debate about grain imports has revolved around the ‘scam’ theory.
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Food grain production has rarely been a profitable business for farmers outside the original green revolution belt of Punjab, Haryana and Western Uttar Pradesh. The long-run impact of an anti-farmer policy, with low expected returns and consequently low investment in agriculture, is that we have some of the lowest food grain yields in Asia. A significant majority of the poor in India make their living off agriculture and they will never do well if profitable opportunities are denied to farmers. There is widespread agreement among development economists across the world that poverty in India is a result of the poverty of our agricultural sector. Isn’t that the reason why we have so strongly opposed the European and American subsidies to their farmers during all the recent WTO ministerial meetings? We argued that these subsidies lower international prices – a policy blatantly unfair to our farmers. This is a very reasonable argument but it hardly makes sense if we are never going to let our farmers benefit from international prices.
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One way to resolve the dilemma is to allow farmers to have the benefits of international market prices and to protect the poor consumer with a direct subsidy through smart cards or food stamps. The present system wastes a great deal of taxpayers’ money over the infrastructure needed for the Public Distribution System. Also, since a large part of food grains meant for the poor is illegally diverted to the open market, the system has become virtually non-existent for most poor in the country. Under the proposed system, the day to day movement and storage of food grains will all be carried out by private agents and the government will enter the market only if the prices slide below MSP. The Food Corporation of India would have some chance of becoming a lean and efficient organization. But the reforms of such a radical nature require massive political support as they threaten equally massive vested interests in the present system. Poor consumers and farmers are not an organized political force to overcome such vested interests. Enlightened politicians and civil society groups can play a major role in bringing about this reform. Unfortunately, smart cards or food stamps smack of a market oriented solution and as such is anathema to the well-meaning leftist activists who continue to dominate the discourse on the issue of food security.
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| It is heartening to see that the pre-budget economic surevey made a clear mention of food stamps . However, the hopes were dashed when Pranab Mukharjee chose not to touch this point I his budget speech. |
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Food stamps and smart cards offer a promising options to end the conflcting nature of the interests of two poor sections of the society. It is high time that we radically reform our food policy through introducing these alternatives if we are seriously concerned about poor.
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