For most of history, an agricultural crisis in India has meant scarcity. Today it means excess. We have a foodgrain mountain of over 60 million tones, as well as a mountain of unsold sugar. And unsold cotton stocks are so large so large that the Maharashtra monopoly cotton procurement scheme is bust.
The transformation from scarcity to excess should have made India a great agricultural exporter. Instead Indian farmers are angry and sullen, and the Finance ministry groans as it shells out ever larger subsidies to get rid of excess stocks. Agricultural exports are not an economic triumph, they are a bottomless hole: much grain has been exported at half the actual cost of procurement, stocking and transport.
Global agricultural prices have been falling for two decades. Look at the accompanying table. It shows that between 1980 and 2001, the price of rice crashed from $ 571/tonne to $ 179/tonne; of wheat from $ 219/tonne to $ 131/tonne; of cotton from 260 cents/kg to 109 cents/kg; of sugar from 80 cents/kg to 20 cents/kg; of coffee from 412 cents/kg to 63 cents/kg; and of soyabean oil from $ 759/tonne to $ 366/tonne.
Global agricultural prices are falling
|Soyabean oil ($/tonne)
Source: World Development Indicators,2002
The same steep downtrend is evident in other agricultural commodities like maize, tea, rubber, beef, coconut oil or palm oil. Only a handful of products, like tobacco and timber, have held their ground.
Why? Because every country in the world has subsidised agriculture so much for so long that surpluses have grown everywhere. As incomes rise, people spend an ever smaller proportion of income on foods. Meanwhile the spread of new technology the world over has revolutionized farm yields.The combination has meant rising gluts.
Some countries have diversified into non-traditional crops, creating further surpluses. Vietnam’s coffee exports are one such example. But the biggest reason for gluts remains huge subsidies in Europe, the USA, and Japan.
Subsidies in the European Union started on the premise that food was a strategic good and enemies (like the USSR) could cut off imports, so every country should be self-sufficient in food. But high European subsidies soon created mountains of butter and beef, lakes of wine and edible oil. How to dispose of these? Why by selling them to the very USSR that was supposed to be the strategic enemy! This, hilariously, delayed the collapse of communism by maybe a decade: it mitigated the disastrous consequences of communist agricultural policies.
Farmers are a powerful vote bank the world over. They force governments to keep subsidies and import tariffs high. The USA, which is supposedly committed to phasing out farm subsidies, has just enacted legislation for farm support of $180 billion over a decade. European subsidies now average $ 730 per cow annually. So European cows are richer than Indians, who have a per capita income of only $ 450 annually!
Every country is subsidising exports at less than cost, so prices are crashing. In such circumstances, global prices represent massive dumping. Had India been a food deficit country, it could have welcomed this development and imported ever more at falling prices. But India is now a surplus producer.
Obviously, India needs to diversify out of agriculture into industry and services. But 60 per cent of the population is still mainly in agriculture, and cannot be redeployed quickly. Besides, modern technology keeps reducing the employment potential of industry, and indeed of agriculture. So our agricultural crisis is becoming an employment crisis too.
The Commission on Agricultural Prices blames our food mountain on excessive increases in procurement prices in recent years. True: that has been a subsidy by another name. But please note that today’s procurement prices are generally lower than world prices were in the 1980s. The problem is as much an unwarranted fall in global prices as an unwarranted rise in Indian ones.
Farmers represent a powerful vote bank in all countries. So it is politically impossible for any one country to end agricultural subsidies and high import tariffs on its own. What is possible, though by no means easy, is global agreement to lower subsidies, so that global surpluses decline, prices rise and trade expands. We need a global market that is substantially open and competitive. Once that happens, India’s comparative advantage in agriculture will make it a profitable exporter. That will solve our problems of agricultural surpluses and rural underemployment.
In sum, few things are more important for India than a globally agreed reduction in agricultural subsidies under the World Trade Organisation. Predictably, India’s own stand at the WTO has been myopic and hypocritical. Murasoli Maran wants to protect Indian farmers while urging others to de-protect theirs. If everybody follows his example, the global glut will worsen. Fortunately India is too weak in WTO to lead by example.
Indian farmers do not need ever-rising subsidies. What they need is freer international trade. That is the path to prosperity.