Price and Trade Policies in Indian Agriculture: Overdue for Reforms

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Price and Trade Policies in Indian Agriculture
Overdue for Reforms

• Ashok Gulati
• Director in Asia, IFPRI
• Intn. Conference on India and the Global
  Economy
• ICRIERs Silver Jubilee Celebrations
• Vigyan Bhawan, Nov. 6, 2006

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Key issues covered in this presentation

• What is the prime function of price and trade
  policies?
• The nature of domestic agl. price and procurement
  policy (wheat and rice as examples) and its
  consequences
• Trade policy reforms and how have they affected
  farmers incentives (agl. Vs. manufacturing)
• Dovetailing domestic price policy with trade
  policy

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What is the prime function of price and trade
policies?

• To promote efficient allocation of resources,
  which in turn helps the sector to become
  competitive and thereby trigger growth.
• The more price and trade policies are used to
  promote equity objectives, farther away they go
  from their main role of promoting efficiency

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Nature and Objectives of Indian Agl. Price policy
(example wheat and rice)

• MSP to provide incentives to farmers (basically a
  cost plus pricing by CACP)
• Open ended procurement through FCI to make MSP
  effective
• Buffer stocking for food security and to feed PDS
• Subsidized price for consumers through PDS
• (Thus trying to achieve multiple objectives
  of food security and equity)

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How remunerative is MSP policy?State Wise Cost
Competitiveness of Indian Wheat Production (TE
2002-03)
Source CACP
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How remunerative is MSP policy? State Wise Cost
Competitiveness of Indian Paddy Production (TE
2002-03)
Source CACP
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Results of this price and procurement policy
Massive inefficiency in grain management

• Massive accumulation of stocks in July 2002 (64
  m.t.)
• Massive Subsidies to liquidate stocks
• Actual exports of wheat much lower (12 m.t) than
  the amount lifted for exports (18 m.t) during
  2001-02 to 2004-05.
• And in 2006 importing wheat at a cif price of
  about 200/ton (about 5 mt.)

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Rice How is the domestic pricing in relation to
world prices?
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How is the pricing of 11 major crops in relation
to world prices?
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Trade policy reforms and Incentives Getting
prices right

• Anti-agriculture bias removed through
• Correction of over-valued exchange rate
• lowering tariffs, especially industrial
• lifting controls on exports of agl. products,
  including food grains, and subsidizing exports of
  wheat and rice during 2001-04

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Agriculture vs. Manufacturing Protection
1965-2005
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Reduction in industrial Tariffs, but agl. tariffs
high(lot of water in agl. Tariffs)
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Does it make sense to have high tariffs in agl.
When we have comfortable Import capacity (Trade
surplus within Agriculture)?
Note Rupees converted into dollars using
exchange rates (from Economic Survey,2005)
Source Agriculture Statistics at a glance, 2005
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Dramatic change in Import Capacity Cereal
import values as percent of Foreign Exchange
Reserves
In 1960s India could buy only 5 m.t. of wheat
using all its FERs, Today India can buy 40 m.t.
of wheat by using less than 5 of its FERs
Quite a Contrast!
In 1960s
Source Rashid et al 2005, IFPRI
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The Way Forward

• Use Income policy to achieve Equity objectives,
  and
• Price and Trade policies to achieve efficiency
  objectives

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The Way Forward (Cont..)

• Domestic Price Policy
• De-link Support price from Procurement price
• Support price should be based on cost-A2
• Risk Mitigating
• Returns on own land, own capital and own labour
  should be decided by market forces
• The procurement price should be determined by
  free market forces (FCI should compete with
  private trade without stifling markets)

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The Way Forward (Cont..)

• Dovetailing of Domestic price policy with Tariff
  Policy (Use futures markets to play with tariff
  policy to keep domestic prices between fob and
  cif)
• Change CACP to Agriculture Tariff Commission
• Procurement
• Open ended only at MSP (at cost A2 and not C2)
• Targeted procurement move from north-west to
  eastern states

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The way Forward (contd.)

• Stocking
• Introduce warehousing receipt system
• Private sector stocking to be encouraged
• Abolish Stocking Limits permanently
• Strengthen Futures trading
• Tendering for delivery for PDS
• Distribution
• TPDS
• With spread of Employment Scheme, PDS can be
  gradually phased out. Introduce cash transfers,
  if needed.

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The Way Forward (Cont..)

• External
• Keep exports and Imports free. Only use tariffs
  as an adjusting instrument
• Tariff bindings are high enough to neutralize the
  impact of high subsidies in OECD countries