Calcutta Notebook


Agreement has been reached between India and the United States on the contentious issue of Minimum Support Price (MSP) given by the government of India to Indian farmers for procuring food grains for the food subsidy programme under the Food Security Act. Last year agreement had been reached in the WTO on this issue. The developed countries wanted uniform rules to be followed at ports across the countries so that goods could move seamlessly. This was called "Trade Facilitation Agreement." Presently countries have prescribed different formats which make it difficult to undertake trade. India had agreed to this. In return India had won a four-year reprieve on paying higher prices to its farmers for procuring food grains under the MSP programme. That, however, will not be sufficient to provide lasting relief to the farmers.

Presently Government of India is purchasing food grains from the farmers at rates fixed administratively under the MSP programme. Wheat, for example, is being purchased at about Rs 15 per kilo and supplied to Ration Shops for distribution at Re 1 per kilo to BPL households. Food exporting countries had objected to this. Their contention was that India should purchase the wheat in the global markets and dismantle its MSP programme. A country like Australia was being deprived of the opportunity of supplying wheat at, say, Rs 12 per kilo. By purchasing wheat from Indian farmers under the MSP programme, India was depriving Australian farmers of an opportunity to export to India, they said.

A give-and-take agreement was reached in the WTO last year. India agreed to sign the Trade Facilitation Agreement. In exchange, the developed countries agreed not to challenge India's MSP programme for four years. This agreement was to be signed this year. But the government in New Delhi changed and NDA came to power. The NDA decided that the reprieve of four years was not sufficient and wanted a permanent arrangement by which it could pay higher price to its farmers. The NDA Government decided not to sign the Trade Facilitation Agreement. The WTO talks got deadlocked. Now, unconfirmed reports indicate that the United States has agreed not to challenge the MSP programme in perpetuity. This has removed the roadblock to the signing of the Trade Facilitation Agreement. The WTO can move forward; and Indian farmers can enjoy the benefits of the MSP programme for times to come.

There is flip side to the MSP programme, however. MSP is provided to select crops such as wheat, rice and sugarcane. Indian farmers have increased the production of these crops because they are assured of a decent price. This success has shifted the farmer's attention away from other crops that could provide higher returns such as vegetables, fruits, timber, flower and orchids because of uncertainty of price here. The government must, therefore, work out ways to move the farmers from low-value MSP crops to high-value market-oriented crops. In particular it is important to support crops that have a huge international demand such as flowers, organic food and designer vegetables. The NDA should put in place a programme for providing skill development in advanced agricultural technologies such as tissue culture to enable cultivation of these crops. Climate in India varies from Kerala to Kashmir. It is possible for India to become global flower and vegetable hub and supply these items across the year. Problem is that prices of these market-based crops are uncertain while those of the MSP-based crops are certain. NDA must work out a system to cover the risk of the farmers in cultivation of market-based crops. A subsidized insurance system which covers against price decline would be one option.

There is a need to reconsider other agriculture sector policies as well. India is asking for dismantling of domestic agricultural subsidies by the rich countries under the WTO in pursuance of this policy. The idea is that opening of the markets of rich countries will provide opportunities for Indian and third world farmers. But the final benefits of this strategy are doubtful because these markets will be opened not only for India but for other players as well. The resulting increase in supply from other producers can wipe out most of the expected gains in price from opening of these markets. For example, the entry of Vietnam in coffee and black pepper has wiped out the gains for Indian farmers from free trade. What is needed is an altogether different policy. India must make cartels for specific agricultural commodities just as OPEC has done for oil. India and Malaysia can join hand to increase the world price of rubber. India can likewise cooperate with Bangladesh in jute, Sri Lanka in tea and Pakistan and Egypt in cotton. This will certainly provide high prices to Indian farmers. Then India will have to dissociate itself from the WTO in the process.

The Government is trying to increase the flow of credit to the farmers under the impression that lower interest rates will provide relief to them. No relief is likely to be got, however. The rural areas are flushed with funds. The credit-deposit ratio of rural banks is typically 15—for every Rs 100 of deposits the loan given out is only Rs 15. Rural banks have plentiful depositors but few applicants for loans. Farmers have the money but no opportunity to deploy it productively because of absence of profitable opportunities in villages. Expansion of credit will serve no purpose in this situation. It is like pouring tap water into the waterfall. The Government must focus on specific areas such as floriculture where the profits are high.

Public investment in agriculture also needs a close study. Mere building of more canals and increasing area under irrigation will not help because, as mentioned previously, the prices are declining. If anything most farmers' suicides are taking place in irrigated areas. Public investment must be fine tuned to support value-added agriculture. For example, the global demand for organic foods—guavas, mangoes, coffee and tea—is increasing. The Government must create a certification mechanism in each district to promote this. Export subsidy may be provided to private exporters of value-added agricultural commodities to help them penetrate this lucrative global market.

The Government is trying to reduce agricultural subsidies on food, fertilizers, water and diesel to contain its fiscal deficit. The need is to turn these subsidies towards areas that lead to a multiplier effect. For example, instead of subsidizing electricity for extracting ground water, the same money can be better utilized to provide subsidy for water recharging by building check dams, ponds and anicuts. The conditions of Indian farmers have continued to decline over the last few decades because of these faulty policies despite massive investments by the Government.

Vol. 47, No. 23, Dec 14 - 20, 2014