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A Curious Case

A sharp drop in food inflation is hurting food growers as the downward spiral keeps market prices well below the MSP.

During the last phase of the UPA-II regime, a major theme in the food economy was retail food inflation exceeding 10 per cent per annum. Even after the formation of the Modi government, retail prices of pulses continued to be high and packaged arhar touched Rs 150-180 per kg in Delhi in October 2015. Moong, masoor, urad and rajma were also priced above Rs 100 per kg at the time. It was feared that food inflation was here to stay.

And then, over the next three years, the unthinkable happened, and food inflation came down, primarily due to the government's proactive role in managing food stocks and increasing the minimum support price (MSP) of pulses that resulted in higher production and procurement of the same. The collapse of global commodity prices also helped. But the story of the downward spiral of agricultural prices is not limited to pulses alone (see graph).

Prices realised by farmers are best captured through wholesale price inflation data. In October 2018, YoY inflation of food articles was -1.49 per cent; YoY inflation of pulses and vegetables stood at -14 per cent and -19 per cent, respectively, and onion fell to -32 per cent. Potato was the only vegetable whose inflation was higher at 94 per cent, but it was due to the deflation in potato prices last year (45 per cent) and higher production this year. Wheat has seen quite high inflation every month (about 9.5 per cent YoY in October) since the crop arrivals peaked in May-June 2018. It may be due to the increase in procurement, from about 31 million tonnes last year to 36 million tonnes this year. Uttar Pradesh has traditionally met the private demand for wheat in recent years, but this year, the state procured just 5.3 million tonnes. So, the private stocks are lower than last year, contributing to inflation.

In fact, something very unusual has been happening in agro-economy. Food prices have contracted for 10 consecutive months (on a seasonally adjusted sequential basis), led by a fall in prices of fruits, vegetables, pulses, milk and sugar. But this deflationary trend regarding food items is only partly explained by higher production because per capita rural consumption remains significantly low.

During demonetisation, the mandi traders suffered high losses due to sudden price crashes. Consequently, in many mandis, farmers complain that traders are buying much less quantity than what it used to be before demonetisation. It seems that the cash-based rural economy has not fully recovered from the shock. Moreover, the contraction of rural demand due to a decline in wages may also have led to lower food prices. It is one of the major reasons for farmers' distress across the country - they rue lower realisation from their products while the cost of cultivation has gone up due to higher prices of diesel, phosphatic fertilisers, electricity and insecticides. From onion to tomato to garlic, and soybean to urad to tur, media reports regularly highlight the tragedy of extremely low prices of most crops in mandis across major producing districts.

When the government announced substantially higher MSP for Kharif crops in July 2018, it was generally thought that the authorities would ensure this time that the farmers benefit from it. Pradhan Mantri Annadata Aay Sanrakshan Abhiyan (PM-AASHA) was also announced in September this year with three components - a price support scheme (PSS), a price deficiency payment scheme (PDPS) and a private procurement and stockist scheme.

Interestingly, the price support scheme has been operational for several decades. Under the scheme, the National Agricultural Cooperative Marketing Federation of India (NAFED) has been procuring copra, groundnut, urad, arhar, mustard, sunflower, gram and more. It incurred substantial losses in these operations, and at one time, these exceeded Rs 1,000 crore. The central government has never reimbursed the losses expeditiously, and it is only to be expected that the PSS operations this year also will result in losses and NAFED will take years to get reimbursement from the government.

The PDPS was implemented in Madhya Pradesh on a pilot basis during last year's Kharif season. Since NITI Aayog has been pushing for PDPS as a serious alternative to physical procurement, it was thought that the central government would use it as the predominant method for delivering MSP to farmers. However, no state government has implemented the scheme for any major Kharif crop in 2018. Even Madhya Pradesh has abandoned although the state is in the middle of assembly elections. It could be due to operational difficulties that the state faced last year. Instead of PDPS, the state has announced a flat bonus of Rs 500 per quintal for soybean and maize. So, the scheme has been abandoned even before it took off.

The private procurement and stockist scheme has not taken off as payment to private companies was restricted to 15 per cent of the MSP, but actual prices were lower than that. So, no private company would have been interested in participating in the scheme. Moreover, detailed guidelines for private procurement were not issued either.

As a result of the above, farmers of most Kharif crops like maize, soybean, urad and moong have been left high and dry, and they have nothing but nirasha (hopelessness) as market prices doggedly continue to rule below the MSP for most crops. The downturn in prices of vegetables and fruits has only added to misery as these are mostly cultivated by small and marginal farmers.

In this depressing scenario, farmers would be hoping for the recovery of global prices of agri-produce, softening of diesel prices and the continuation of high import duty on pulses and edible oils. Early completion of scrutiny assessments (involving traders) by the IT Department may also help. But more than anything else, they would wish that the traders return to mandis with cash in hand.

The writer is former Secretary, Agriculture, Government of India, and currently, Visiting Senior Fellow, ICRIER

Published on: Nov 26, 2018, 10:35 AM IST
Posted by: Jatin Kumar, Nov 26, 2018, 10:35 AM IST