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Resource centre on India's rural distress
 
 

Policy Distortions Hurt Agriculture by Bibek Debroy

Food price inflation, and inflation in general, has become less of an issue. But it isn’t an issue that will go away. Give it till June and inflation is likely to inch up again. Competition is a good antidote against price increases. It ensures efficiency and reduces price volatility. Logically, food price inflation should trigger and stimulate agricultural reform, so there is competition and supply-side changes can occur. But in practice, it often leads to greater distortions and state intervention, at least in short term. 

What is the core issue? That is one of investing in agriculture and rural sector and injecting competition into market access by farmers, reducing intermediation. But the point is that government policies often prevent this. In output markets, producer price controls exist in several developing countries. Triggered by food price increases, across a range of countries, there have been interventions on consumption side, including price controls, consumption subsidies, food aid, food for work, cash transfers and elimination of taxes on consumption. Are these fiscally sustainable? Do they lead to additional distortions? Do they lead to supply-side adjustments or are they knee-jerk reactions? 
 
To take but one example, in several countries, minimum support prices (MSPs) for agricultural commodities have been increased. Apart from contributing to food price inflation, this increases spread between prices paid to producers and subsidised prices charged to consumers, increasing the fiscal burden. Since MSPs need not always extend to all agricultural commodities and public procurement need not cover all commodities either, this creates perverse price signals and distorts resource allocation. 

Just because other countries have introduced knee-jerk reactions, that doesn’t mean they are rational. The proposed Food Security Bill needs to be considered against that backdrop. A Commission on Centre-State relations, set up on this, submitted a report in 2010. One of the sub-reports focused on lack of harmonised domestic market in agricultural products. This sub-report has the following kind of numbers from unification and harmonisation of agricultural markets: 

• Reduction of post-harvest losses by 5-7% for grains and 25-30% for fruit and vegetables. 

• Static gains of 10% through harmonising standards of farm products across states. 

• Static efficiency gains of up to 20% because of disintermediation of distribution chains, resulting in higher prices for farmers and lower prices paid by consumers (welfare gains are roughly distributed in a ratio of 40% for farmers and 60% for consumers). 

• Savings in compliance costs by 5% after fiscal unification. 

• Savings of up to 20% if there is a transition to a complete and unified GST and revenue gains of 25%. 

• Increase in tax/GDP ratio by 1%. 

• 30% reduction in transportation costs. 

• Incremental growth in agriculture and allied activities by 2% because of static gains. 

• Static increment to GDP growth by 1% because of removal of inter-state barriers alone. 

• Increment by 2% if broader agricultural-cum-rural sector reforms are undertaken.

• Increase in export volume (not value) of agricultural products by 20%. 

• More direct employment generation by five million a year. If one includes indirect employment, additional employment generation rises by 12 million a year. One can quibble about modelling used or specific numbers in this sub-report. But that’s not the point. 

A Draft National Competition Policy has now been prepared. This states, “It has been observed that certain policies and laws at the state level sometimes tend to artificially segment markets in India. Policies and/or laws, which interface with a large section of the country’s population, such as agriculture, power, etc, may erode substantial benefits potentially emanating from a national market and the presence of competition across all sectors.” What are these policy-induced distortions? First, there are physical government-imposed restrictions on production, marketing and distribution. These are usually through Essential Commodities Act (ECA), and its orders. Second, there are MSPs and procurement policies in favour of food grains. Third, there are the APMC Acts. Stated simply, APMC Acts require buying and selling of agricultural products to be done through regulated markets, with mandated fees to be paid to market committees. Fourth, there is a lack of harmonisation of indirect taxes on agricultural products across states. Fifth, because of ECA, APMC and fiscal anomalies, there are physical checkposts, which are particularly serious for perishable agricultural produce. 

In addition, there are physical checks on trucks thanks to environment-related laws like Indian Forests Act, Forest (Conservation) Act and Rules, Air (Prevention and Control of Pollution) Act and Rules, Manufacture, Use, Import, Export and Storage of Hazardous Microorganisms/Genetically Engineered Organisms or Cells Rules, Wildlife Protection Act and Rules and Biomedical Waste (Management and Handling Rules) and lack of uniformity under Motor Vehicles Act and its assorted rules. The problem is with multiplicity, rather than clearances per se. That list is only for output markets. But competition in agriculture isn’t only about the farm-to-fork supply chain, it is also about input markets. Seeds, pesticides, agrochemicals and fertilisers are obvious examples. Power and water belong to a slightly different category. In each, there are policyinduced distortions. Some argue FDI in multi-brand retail will solve supply-side problems, reduce intermediation and check food prices. FDI in retail is a small part of the jigsaw. It will be a disaster to claim this is a magic wand. It doesn’t mean FDI in retail shouldn’t be opened up. But there are other important anti-competitive policies and one latches on to FDI because one can’t address those. 

(The author is professor at the Centre for Policy Research)