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Resource centre on India's rural distress
 
 

Farmers and food prices

Even as concerns are emerging about generalised inflation gripping the economy, with reports of rising wage rates, food price inflation remains the citizen’s core concern. Macroeconomic authorities have been chasing a variety of targets – monetary, fiscal and supply-side constraints – to get a better grip on prices. It is often hoped that higher prices would translate into increased production since farmers would respond positively to price signals. What then accounts for the higher-than-average food prices? The latest theory is: market imperfections are the real villain. Union Finance Minister Pranab Mukherjee in his Budget speech said “shortcomings in the distribution and marketing systems” had denied the consumers the benefit of the usual seasonal fall in prices. The government’s inter-ministerial panel on inflation, headed by Chief Economic Advisor Kaushik Basu, has an explanation for why similar shortcomings on the other side of the supply chain – mandi to farm – are price signals to farmers, thereby not facilitating the expected supply response. The panel believes food price inflation can be reduced by preventing cartelisation at the wholesale trade level and ensuring a smooth flow of goods from farms to retail outlets. Though the explanation has merit, the solution offered by the panel to reform agricultural marketing does not seem workable.

It involves invoking the competition law to prevent cartelisation and seeking amendments to Agricultural Produce Marketing Committee (APMC) Acts to smooth the flow of goods from farms to fork. To begin with, it is not clear if the charge of “cartelisation” in the manner in which the competition laws understand that term can be applied to APMCs, in which hundreds of traders are operating in real time with limited scope for covert conspiracy. Moreover, the ability of a central competition commission to curb cartelisation in APMCs is circumscribed by the fact that APMC laws fall within the domain of states. The Centre has been prodding the state governments for over a decade to amend their respective APMC statutes on the lines of the Model Law circulated by it. This has been a vain attempt. The Punjab government’s decision this week to raise the purchase tax on wheat from 4 per cent to 5 per cent to yield an additional revenue of Rs 100 crore in the ensuing wheat procurement season – ignoring the prime minister’s call to abolish market levies to bring down agro-goods prices – best exemplifies this syndrome. That said, the hard truth about food price inflation this past year is that the supply has not always responded adequately to higher prices. This does suggest that it is not the farmers who are benefitting from higher food prices, but intermediaries, especially traders and moneylenders who have secured a vice-like grip on trade and are not passing higher returns on from trade to direct producers. Unless means are found to ensure that farmers benefit from higher prices, there is no reason to assume that market dynamics would work automatically to augment supplies.