A return to food mountains?

The new conventional wisdom, after the general election, is that we must do more for agriculture. Politicians are determined to increase public investment in agriculture. Agricultural credit is to rise by a whopping 30% this year.

Power tariffs have been slashed, and the fertiliser subsidy is skyrocketing. This reflects the myopia of politicians. Yes, farmers are indeed a disgruntled lot, but their main problem is not lack of public investment or subsidies. Their real problem is that, despite supposed neglect, one or two good monsoons are enough to create unsold mountains of agricultural produce. Where no official procurement takes place, prices crash. We face a return to those days.

As recently as July 2002, the government had an unsold mountain of 63 million tonnes of foodgrains. The Maharashtra state government’s monopoly procurement scheme for cotton had saddled it with huge unsold stocks. Sugar production had scaled such heights that mountains of sugar were bankrupting sugar mills, and the government had to come to the rescue by financing a buffer stock.

Those agricultural mountains have gone, thanks mainly to the worst drought for half a century in 2002. Besides, the government encouraged unprecedented foodgrain exports (10 million tonnes in 2002-03 alone) through unprecedentedly high export subsidies. Enormous quantities were dumped on the public distribution system at below-cost prices, and shopkeepers diverted this to the open market (maybe partly into private stocks).

In consequence, the government’s food stock in January ‘04 was down to 20 million tonnes, not far above the formal buffer stock level of 16.7 million tonnes. So subsidies for grain export were halted.

The sugar mountain has depleted mainly because arrears of payment to cane farmers, caused by lack of sugar sales, induced farmers to slash acreage this year. So, the sugar mountain is expected to become a molehill by the next crushing season. Yet a recent apex court judgement will almost certainly lead to high state-advised prices for cane, a big rise in production, and yet another sugar mountain.

In sum, talk of agricultural neglect is overdone. When the existing system so easily generates unsold mountains, incentives for additional production are not solutions. Indian farmers are generally efficient and should be able to export surpluses. Sadly, agriculture remains the most protected and least globalised sector of all.

Rich OECD countries spend billions of dollars on agricultural protection. Europe’s spending per cow exceeds the GNP per capita of some developing countries. Global prices for agriculture generally reflect massive dumping, making exports by Indian farmers unprofitable.

There are some signs of hope recently. The World Trade Organisation has just struck down US cotton subsidies. This could spur the resumption of Doha Round talks on reducing agricultural subsidies. Nobody expects these to end immediately, but a steady trimming will let world prices rise and exports become profitable. A WTO deal could do far more for Indian farmers than additional public investment or subsidies.

Meanwhile, other strategies have to devised. Experts have long talked of diversifying agriculture away from traditional crops to horticulture, dairy and vegetables. A recent article by P K Joshi, Ashok Gulati and others in Economic and Political Weekly shows an acceleration in the 1990s in the annual production of milk (5.17%), chickens (5.66%), fruit (5.61%) eggs (4.49%) and fish (3.5%) compared with cereals (2.52%). Yet this diversification was not rapid enough to prevent the rise of food mountains.

Large-scale increases in fruit and vegetable production will require export capability. In theory, India could become the main fruit and vegetable supplier to the entire west Asia. In practice, it lacks the infrastructure. It has no cold chain to ensure that produce goes straight from fields to shops in west Asia without deterioration. Maharashtra has generated a partial cold chain that enables it to export grapes and Alfonso mangoes, but that is not enough.

We cannot have a reliable cold chain without reliable power. And populism had made the electricity system so comprehensively bust in almost all states that reliable power is a pipe dream. We are now told “reforms with a human face” mean ever-rising power subsidies. If so, there will never be reliable rural power, and farmers will remain trapped in producing cereals for which there is no demand.

Many global companies have come, looked at India and gone away without investing. Abroad, they can buy thousands of acres and set up plantations. In India, land ceilings make that impossible. For global sales, quality control is essential. Each row of vegetables has to be grown from specified seeds, planted in rotation and then harvested in rotation after an exact number of days in the field. This is impossible if farming is left to hundreds of unorganised farmers.

In Punjab, attempts have been made to create farmers’ groups with scale economies that can undertake contract farming for agribusinesses. Progress appears limited so far, yet this is surely the way to go.

The global market requires quality, but the mandi system cannot ensure that, and needs to be replaced by contract farming that enforces stern quality standards. This, in turn, requires that state governments must not pressure companies to accept sub-standard produce from farmers. I do not think politicians are mature enough for that yet, so this avenue will remain clogged with hurdles.

We do indeed need public investment in rural areas. After 57 years of independence, every village should have an all-weather road, electricity and running water. Traditional village tanks and hundreds of miles of canals are silted up, and we need public investment to rehabilitate these systems.

Yet none of this will help if the outcome is the creation of unsold mountains of grain, sugar and cotton. We must have reliable cold chains and contract farming to help farmers diversify away from traditional crops. And we must give the highest priority — including changes in our bargaining positions in WTO — to reduce global protectionism in agriculture, and enable our farmers to export profitably.

What do you think?