"Agriculture and the reforms: Welfare", 'The Hindu', December 21, 1999

We have so far been discussing production. However, production is of itself a poor measure of welfare which is really what we are ultimately interested in.There is a substantial opinion in India that on balance government intervention in the agricultural sector is welfare enhancing. I understand that what is being referred to is the public distribution system (PDS). However, while the PDS cannot reasonably be seen in isolation from the other interventions in the agricultural economy, notably procurement, even taking the PDS on its own we are able to see that only from a narrow perspective and only upon a static count is it at all an instrument of poverty alleviation. The perspective is narrow in that while given consumer incomethe PDS can fix consumption possibilities by determining the real purchasing power, the PDS cannot ensure adequate nominal purchasing power to start with. To focus exclusively on the PDS would be static in that, absent an autonomously engineered decline in the PDS price, this intervention cannot contribute to a continuing improvement in the level of individual welfare. It is a supply-side measure. On an earlier occasion, in these pages, I have referred to it as a `safety net’. It now appears to me that even that is only partially correct, for the PDS has no scheme of income generation associated with it. Even were it a safety net, it would be far from wise to mistake its existence as evidence of a dynamic economy, dynamism here being seen as the ability to continuously generate opportunities for income generation, and thus raise living standards. In my view this error of ascription is constantly being made in the case of the Kerala, which has received a great deal of attention ever since Professor Amartya Sen had spotted its uniqueness in combining high social indicators with low levels of income.

            On the whole, a somewhat cockeyed view of the PDS may have led to an exaggeration of its contribution to poverty alleviation and the viewing of it in isolation failed to recognise its near irrelevance from the point of view of the attainment of the same objective. I have already stated that a crucial aspect is missed when the PDS is viewed in isolation from the complete matrix of government interventions undertaken in the name of food policy, and now turn to this issue. It has a bearing on the dynamics of welfare. I refer to the fact that, on a regular basis, the PDS in India is supplied through domestic procurement rather than through imports. Under such a regime, the price at which government procures grain determines, barring a rising per unit subsidy, the price at which consumers receive grain through the PDS. From the outset, the government has made it clear, through pronouncement and practice, that remunerative prices are to be a central feature of its policy towards agriculture. While the necessity of ensuring a profitable environment for producers is inescapable it is possible that the manner in which the state has dealt with this imperative is detrimental to consumer welfare, especially of the poorest. Procurement prices have been raised almost on an annual basis. Fiscal considerations at the Centre have meant that the issue price, being the price at which the Food Corporation of India is permitted to release the grain, has been raised too, albeit perhaps with a lag. This implication for the PDS of the implementation of the government’s producer-price policy is missed when it is studied in isolation and not seen as part of the larger system of intervention in agriculture. The link has implications for welfare; it is that except in situations of full indexation of incomes this aspect of government intervention in the Indian economy may have contributed to increasing poverty. Harking back to the discussion of the issues related to the role of the PDS earlier on in this address, we are able to see now that the role of the PDS in enhancing welfare could not have been great.

It is odd to find a championing of the PDS as a major factor in ensuring individual food security. It must be seen for what it is, at best a supply side arrangement providing, for those with access (in terms of supply and demand), at a fixed price quantities upto a maximum. While in the short run, so long as stocks last and individuals possess the necessary purchasing power, the PDS can prevent the `failure of exchange entitlements’ and thus starvation that might arise from price increases, as visualised by Sen, it is not an instrument that can raise the consumption level of those currently with access to it. This can only be achieved through a rise in incomes, for which task a supply-oriented rationing system is not equipped. Thus an evaluation of the PDS in relation to the overall requirement for food security would reveal that its role is quite limited constitutionally even, quite independently of coverage. Even a widespread coverage of the PDS cannot take away from the fact that the prevention of inflation is, after all, only a second-best policy. From the point of view of individual food security in a context of widespread poverty the first best is the one that raises income. Taking into account the set of interventions constituting food policy, it is not clear that the PDS is even a safety net. How can it ever be if it is maintained through a procurement policy which is based on raising offer prices to the surplus farmers, a policy that is inherently inflationary and has been shown, among others by me, to be so? Indeed, even were the interventions of the government succesfully anti-inflationary by focussing exclusively on the public distribution system is to mistake fire fighting for house building. Finally, all this is only saying that the PDS very likely achieves less than is claimed for it. We are yet to even consider the negative impact on those among the poor who are excluded from it – the majority that is – of the operation of a system based on political considerations in its supplying and on shoddiness in its delivery. This counter-intuitive suggestion is based on an extensive analysis of the relationship between PDS prices and market prices undertaken by Bharat Ramaswami and myself.

In the Table are presented data believed to summarise the principal developments in the foodgrains economy since 1991. First, notice that procurement prices have risen faster in the nineties than was the case during the preceding decade. Secondly, exactly as over the period of the eighties, in the nineties too, procurement prices have led the market price of foodgrains. When combined with the additional information that the procurement price has led the general price level, it leaves us in no doubt as to the distributional consequences of government intervention. Moreover, it gives us reason to believe that the inflation of the nineties is largely related to the hiking of procurement prices. Thirdly, in the nineties the price of foodgrains have led the general price level implying that the welfare consequence of price policy is likely to have been damaging to the poor. At another level this development cannot be comforting to some, for a rising relative price of agriculture is usually identified as the attribute of an underdeveloped economy setting out on the path of development not as the sign of an economy emerging as a major industrial power internationally, which status many in India appear to believe the economic reforms are set to usher in. Finally, the average level of stock holding appears to have

Table: Intervention, prices and stocks

Year

Procurement Price (Index)

Market Price

(Index)

General Price

Level

Stocks

(Mn. Tonnes)

1980-81

100

100

100

16.7

1990-91

193

179

185

11.3

1991-92

225

216

218

17.9

1992-93

261

242

235

13.9

1993-94

296

261

251

11.8

1994-95

314

293

283

22.0

1995-96

333

313

304

30.3

1996-97

375

354

328

28.5

1997-98

406

363

340

20.0

1998-99

455

384

379

18.2

Notes: 1. The procurement price index is computed as a weighted average

ofthe price of rice and wheat, the weights being the quantities procured.

2. Stocks, of rice and wheat, are as on 1 January; the prescribed norm for

thebuffer stock is 15.4 million tonnes. Source: `Economic Survey’, GoI.

increased in the nineties, supplying the evidence that procurement has acted as a market-support force and thus influenced the price of foodgrains. By implication, welfare considerations could not possibly have been very high on the agenda of the Indian policymaker in the era of reforms.

            In the international market the real price of food has systematically declined over the past five decades. This cannot be said of India, where the world’s largest concentration of poor live. We need to seriously review the official approach to the conditions of agricultural progress, one that has depended excessively on prices as incentives without considering alternatives that would generate cheaper food while sustaining a profitable environment for producers. Alternatives exist.