The price of food must figure in the policy
An agricultural policy must ensure that farming is profitable but not at the cost of a high price of food
The showdown between the farmers of north India and the Modi government may have ended, but the essential challenge of public policy for agriculture remains. This is the high price of food. For decades now, the price of food has not figured much in agricultural policy, when, actually, it should be the central focus in the presence of poor households. Successive governments have instead showcased the minimum support prices (MSP) they have offered to the farmers and the subsidy they have incurred in making a limited complement of food available to the consumer though the public distribution system (PDS). The now-repealed farm laws themselves were projected as a means of raising farm revenues via higher prices. But what was left unsaid was that a higher price of food increases poverty, especially as the rice and wheat supplied through the PDS constitute only a part of the total expenditure on food of the average Indian household.
The rising price of food in India
That a high price of food can trigger economic insecurity for the individual is widely understood but what is not immediately apparent is its economy-wide ramification. For the household, a high price of food crowds out expenditure on other items ranging from health and education to non-agricultural goods. This prevents the market for non-agricultural goods from expanding. The expansion of this market is necessary for the non-agricultural economy to grow.
This was one of the first discoveries in economics, made by the English economist David Ricardo about two centuries ago. Ricardo had prophesied that due to the scarcity of good quality land, the cost of production of corn, that is wheat, in England was set to rise, leading in turn to its rising price. The consequence of this was to be not only a certain worsening living standard for the working class but also a thwarted industrialisation, as the market for industrial goods cannot grow. What he failed to predict was the tremendous increase in agricultural yields that was to come about in the country with the Industrial Revolution. The rising yield ensured that the price of food was kept in check and the demand for industrial goods was not cramped. In fact, the price of food in England was not merely kept in check, its price relative to that of other goods actually declined. This pattern of a declining trend in the relative price of food has been the experience of all economies that have grown richer.
An indication of the elevation of the price of food in an economy is the share of food in a household’s budget. In a global comparison we would find that this share is very large for India. Data from the U.S. Department of Agriculture show that this share ranges from over 30% for India to less than 10% for the U.S. and the U.K. The figure for China is around 20%. More interestingly, we find that countries with higher per capita income have a lower share of food in consumption expenditure. This is in line with Ricardo’s understanding of how economies progress i.e., as food gets cheaper, growth in the non-agricultural economy is stimulated. The fact that the richest countries of the world have been able to produce food cheaper over time suggest that such a mechanism has been at work. It is something that we have paid scant regard to in India. Indeed, agricultural policy in India has remained quite unaccountable in the face of a rising relative price of food. For instance, the relative price of food has risen over 50% since 1991. The experience of food becoming more expensive over time is completely out of line with the global experience of development. When the success of the 1991 economic reforms is recounted, this contrasting experience in India never makes the news. Sections of the media too appear to prefer sensationalising a small rise in the administered price of cooking gas while remaining silent on the rising price of food. Arguably, the high price of food has been a factor in the disappointing lack of expansion of the manufacturing sector in India despite repeated efforts to bring it about.
Both from the point of view of food security for low-income households and the dynamism of the non-agricultural sector, agricultural policy cannot ignore the price at which food is produced. This is not to ignore the role of factors across the supply chain beyond production. We know of the wastage due to the lack of proper transportation and cold storage facilities, both of which lower the effective supply and keep prices high. But the fact of low agricultural yields in India by comparison with the rest of the world has been known for long, and little is done about it. India has had an effective MSP policy for the major crops for over 50 years; how giving it a statutory status now can change this feature is not obvious. A superior management of soil nutrients and moisture, assured water supply and knowledge inputs made available via an extension service would be crucial.
As agriculture is, unlike industrial production, an activity that is affected by fluctuation in the weather, it is risky. Given the importance of food for our survival, this justifies public intervention in agriculture. The issue is the design and scale of this intervention. In the mid-sixties, when India was facing food shortage that could not be solved through trade, a concerted effort was made to raise domestic agricultural production. The intervention succeeded in raising food production but it came with collateral damage. It introduced the strategy of ensuring farm profitability though favourable prices assured by the state. Further, it entrenched the belief that it is the farmer’s right to have the state purchase as much grain as the farmer wishes to sell to the state agency. This has resulted in grain stockpiles far greater than the officially announced buffer-stocking norm. Rising public stocks suggests that the intervention has succeeded in raising the price beyond what would have been generated by the market. These stocks have often rotted, resulting in deadweight loss, paid for by the public though taxes or public borrowing. Finally, with all costs of production reimbursable and all of output finding an assured outlet, supply has outstripped demand. This has led to an unimaginable pressure on the natural environment, especially water supply. There has been a prediction from credible sources that Punjab faces the prospect of desertification fairly soon.
Protect the interests of the poor
India needs an agricultural policy that ensures that farming is profitable but this cannot be at the cost of a high price of food. The ‘food problem’ should no longer be seen only in terms of the availability of food from domestic sources. Too high a price of food, reflected in a high share of food in household expenditure, is another dimension of the problem. This has never received the attention that it deserves, with governments pointing to the existence of a PDS. But a PDS is a roundabout and costly way of delivering food security. Raising yields will ensure profitability without raising producer prices, which will inflate the food subsidy bill. When negotiating with the farmers, the government must protect the interests of the poor of India.