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Resource centre on India's rural distress
 
 

Reform markets to tame food prices by Ashok Gulati and Kavery Ganguly

The food price inflation in India, measured by the wholesale price index of food items, touched a 10-year high for the week ended November 28, 2009 when it crossed 19% on point-to-point basis over the corresponding week a year ago.

The cereal prices were up by about 13%, but pulses are up by 42%, and vegetables by 31%, although potato prices shot up by 102%. This is getting way beyond the tolerance limit of Indians, especially the poor. If it is not contained and brought down quickly, it has the potential of creating a major political problem, spoiling the otherwise spectacular recovery of the economy which just registered an overall GDP growth of 7.9% for July-September quarter, 2009.

Why the food prices across the board have suddenly flared up? Policymakers often cite drought as the main culprit. But smart policy making requires early action to minimise any such adverse impacts.

While in the long run, India has to invest more in agriculture to feed its growing population, what could be the actions in the short and medium run that can help contain food inflation below 5% mark or so? First, the government needs to unload the large wheat stocks that it has in its godowns to immediately bring down the atta prices by about 20-25 %.

Simultaneously, allow the private sector to freely import and store wheat at zero import duty. Second, lower import tariffs on a host of commodities ranging from grains to vegetables and fruits, and remove all hurdles on private trade to import and stock those commodities. This is critical to augment the overall supply of agri-commodities in the country.

There are ample foreign exchange reserves to do this. Farmers’ incentives can be maintained by giving them direct income support, especially where they have lost their crops due to droughts or floods. Third, taxes and various cesses that are often imposed on primary commodities need to be urgently abolished, and replaced only by value-added taxes beyond the primary commodity stage.

In a state like Punjab, even on primary commodity such as wheat, these taxes and cesses add up to more than 10% of the price that farmer receives. States will not give up their mandi taxes (or purchase taxes, etc) for obvious reasons of losing revenue. The Centre needs to devise a system of direct transfer of resources to the states equivalent of their potential revenue loss.

Fourth, and this is the most important of all, is to usher in market reforms by compressing the value chain of agri-commodities. Linking farmer groups directly to processors and organised retailers needs to be taken up on high priority.

This is crucial in high value agriculture such as fruits and vegetables, etc, which are perishable in nature, but it can also go a long way in basic staples too. This will, however, require a real reform of APMC and its widely publicised notification (so far it has been more cosmetic, barring a very few states), removing all controls on processors and organised retailers (both domestic and foreign).

This would make the agri-system much more efficient and the efficiency gains can be shared between the farmers, consumers, processors and organised retailers.

It is time to learn a few lessons from China in this regard, where big organised retailers are increasingly getting connected to farmer groups for direct sourcing , and also upgrading their mandis. For example, Wal-Mart together with the ministry of commerce in China is all set to take forward the Direct Farm Program by linking up with as many as one million farmers.

With this, by 2011 Wal-Mart China is likely to offer its customers, better quality, sustainably-harvested produce, and better returns to farmers.
 
Wal-Mart entered China in 1996 with a Supercenter and Sam’s Club in Shenzhen, opened its global procurement office in 2002, and by 2009, it has 146 stores in China, covering 89 cities, and creating direct employment for 70,000 people in its retail operations in China.

Wal-Mart is not the only big retailer in China. There are several other foreign players fiercely competing amongst themselves as well as with the local organised and traditional retailers. Carrefour has been operating in China since 1995, now with nearly 135 stores and 40,000 employees. Tesco having entered in 2004 through a joint venture has grown up to 58 hypermarkets with a staff of more than 17,000.

What more, these retailers have been lining up with local suppliers; as many as 20,000 by Wal-Mart , and 22,300 by Carrefour, supporting and strengthening the local economy.

The benefit of this competition goes directly to Chinese people. Less wastages in the value chain, stable and expanding markets to Chinese farmers, and wider range of good quality products at reasonable prices to its consumers.

But in India, we are a debating society, and keep debating for years without any tangible reforms in agriculture marketing . So far, in India, while Wal-Mart has succeeded in opening one cash-and-carry outlet since its alliance with Bharti, Tesco has entered into a franchise agreement with Tata Trent, and Carrefour is still scouting for a suitable partner.

In the meantime, farmers are robbed in the mandis, while consumers pay through their nose to retail vendors, who operate on high margins and low volumes.

In the Azadpur mandi in Delhi, for example, officially, the commission is 6% while in practice it goes up to 10%. Situation is even worse in Vashi market in Mumbai, where the commissions go even up to 15% while the official notified rate is 8%. But even these official rates are ridiculously exorbitant for an auction that takes just five minutes in a chaotic environment of Indian agrimandis .

At the retail end, the push-cart vendors often operate with 20% to 30% margins due to their low volumes. No wonder then, farmers and consumers both are losing. This needs to be replaced with ‘low margins-high volumes’ strategy , and for that major reforms in agrimarketing are a must.

(Ashok Gulati is director in Asia and Kavery Ganguly, a senior research analyst at International Food Policy Research Institute, New Delhi)