[op-ed snap] Food for reform

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Mains Paper 3: Agriculture | Issues related to direct & indirect farm subsidies & minimum support prices

From UPSC perspective, the following things are important:

Prelims level: Price stabilisation policy, Essential Commodities Act, Union, Concurrent and state list of constitution

Mains level: Reforms required in Agricultural sector


Context

  1. Extreme volatility in the prices of some food commodities has, in recent years, been hurting producers as well as consumers, while also disrupting certain economic activities
  2. The reason for this appears to be the waning influence of non-price factors (technology, irrigation, extension) in driving growth, and the role of prices having become stronger

Reversal in trend

  1. Till mid-2000, the trend in output growth drove price trend (higher growth associated with lower price)
  2. During the last 10 years, price trends have driven output growth
  3. The so-called Cobweb phenomenon is becoming more apparent, leading to a price-production spiral

Price stabilisation policy and measures adopted by India from time to time

  1. Price instability at the macro-level is caused by supply shocks
  2. Trading and stocking up are the two options to stabilize supply and by extension, prices
  3. India has historically relied heavily on buffer stock to maintain price stability in staple food
  4. It was due to its policy of maintaining buffer stock that India ensured remarkable price stability during the global food crisis, when almost all countries, including the developed ones, faced a steep price rise

Should India use a similar option to achieve price stability in pulses?

  1. Some gains from the steps taken by the government to create a buffer stock of pulses are already visible
  2. The buffer stock, mainly aimed at stabilising consumer prices, has made it possible to procure pulses
  3. Last year, India recorded an unprecedented 40 percent increase in total pulses production over the previous year
  4. This kind of spike in production would have led to a serious crash or even a collapse in prices had the government not intervened
  5. Based on the experience of rice and wheat, the pragmatic approach appears to be to use the buffer stock option along with the trade option to stabilise the price of pulses

Other factors leading to price volatility

  1. Regulation and competition in the market also affect price volatility
  2. When there is a glut, there is a disproportionate price spread between retail and farm
  3. Price spikes are also sometimes created by cartels of traders, especially at the local level
  4. The reason for such price fluctuations is poor market integration across regions/states over time
  5. If there is an Essential Commodities Act with stock limits on traders, it will rule out the possibility of the private sector mopping up more than the normal marketed surplus, forcing prices to go down

Measures required

Price volatility and low and unremunerative prices for farm produce can be addressed to a large extent through competitive markets. This can be via

  1. Removing various restrictions under the APMC Act
  2. Facilitate private sector participation and investment in agri markets
  3. Promote storage, and
  4. Link the processing industry to the farm through contract farming

Remove agriculture from state list?

  1. Due to the delay and reluctance on the part of states to implement market reforms, it looks imperative to bring agricultural marketing into the Concurrent or Union list and implement a national-level model market act with all the required reforms
  2. Bringing marketing under the Concurrent or Union list is also justified on the ground that a large proportion of farm produce is sold and consumed outside the states they are produced in
Rural Distress, Farmer Suicides, Drought Measures
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