As in the past, in its bid to pre-empt higher food inflation, the establishment has misread the signals and generated a crisis of lower prices for the farmers.
Onions and potatoes take centrestage again. Having secured a mandate based on people’s unhappiness with continuously high and painful food inflation, the government’s inability to control prices is, understandably, sending shivers down the BJP’s spine. Fulfilling the aspirations of urban voters and winning over a thoroughly exacting Delhi electorate, where re-elections are due, are essential to the BJP’s game plan to succeed. By and large, the prices of most vegetables, like tomatoes, bitter gourd, sponge gourd, green peppers and such others are lower than last year. However, in an earnest bid to pre-empt higher food inflation, the establishment has misread the signals and generated a crisis.
Potatoes and onions have one common peculiarity. They can be stored easily but not for prolonged periods of time; five to six months at most. Beyond that, they start to rot. This implies that the leftover stock from the last crop would have to be offloaded in the market within three months. If policymakers knew this simple fact, they would have realised that there was no need to impose the Essential Commodities Act (ECA), 1955, on potatoes and onions. In any case, the existing laws provide state administrations with sufficient powers to check hoarding, should they need to or have the will to do so.
It is beyond any farmer’s comprehension why the government would want to restrict export of potatoes when only one per cent of the crop is exported. Such small quantities do not distort the market. The UPA’s arbitrary import-export policy was its bane and it seems the same style of decision-making continues in the new set-up. The UPA-II government tweaked the cotton export policy several times from 2010 onwards. As a result of this fluctuating policy, Indian cotton now sells at a discount because of the unreliability of delivery. Indian potatoes seemed to be headed in the same direction.
The futures market sends signals about the expected gap between demand and supply — this indicates the need for intervention. However, futures trading in potatoes is banned. If hoarding was rampant, the price of potatoes in the futures market would have been more than its spot price in anticipation of a price rise. However, the day that the ban on fresh trades was imposed, June 18, the spot price of potatoes, at ₹15 per kg, was higher than the futures price for July at ₹12.50 per kg. So, cheaper potatoes could have been contracted in the futures market.
It is common knowledge that the ECA is nearly impossible to enforce due to corruption and governance issues at the lower levels of administration across states. If, however, it is successfully enforced by some miracle it will prove counterproductive. The produce in cold storages will be forcibly pushed into the market within a month and consumption of potatoes will rise substantially because of the artificially lowered prices. Old stocks are likely to run out faster and before the arrival of the new crop in December. The gap of a few months before the new crop is harvested and arrives in markets could see prices spiralling out of control.
Interestingly, after the government fixed a minimum export price (MEP) of ₹27 per kg and banned futures trading for potatoes, prices actually went up because it sent the wrong signal to market players that they are in short supply. To mitigate farm distress, it is only fair to expect a bare minimum MSP of ₹9 per kg, which, incidentally, is lower than the MEP by as much as three times. As the saying goes, “by their fruits ye shall know them”. Any idea is only as good as its results. The government panicked because potato prices increased by 25 per cent over three months but this annual feature does not warrant overreaction. Prices and costs at the time of fresh arrivals will always be lower than three months later when cold storage charges, moisture losses, rot and miscellaneous extras add up.
Experience shows that potatoes are in short supply about only once every five years. Prime Minister Narendra Modi may remember the glut of 2011 and 2009, when farmers were dumping potatoes on the road because prices had crashed to ₹1 per kg in Deesa and Bijapur in Gujarat and elsewhere in Punjab. There was no hullabaloo during those pitiful times to “save the farmer” or demand an MSP for potatoes. Punjab farmers will suffer the most because even though Pakistan is allowing duty-free imports of Indian potatoes after many years, exports will not materialise due to the MEP restrictions. These export restrictions are like a tax on Indian farmers. The Punjab chief minister has reportedly asked the central government to lift the MEP restrictions. Instead, the centre put potatoes on the ECA.
If the monsoons are delayed, the shortage will get exacerbated and market availability will be affected from October onwards. Should they fail, the government will be forced to import; a solution advocated incessantly by agricultural economists to control inflation. The continued political expedience of sacrificing the farmer is worrisome. The PM cannot be blamed for the challenges that he has inherited but he must solve the riddle before it is too late.
Why things have come to such a pass is not difficult to understand. There is a disconnect between the government and the governed. The finance minister called for a meeting of agriculture sector experts. The North Block officials also called farmer organisations for consultations. They did not ask the agriculture ministry for names of farmer organisations who ought to be called but chose those that suited their convenience, whatever they may be; a practice followed by the UPA as well. While there is faith that the BJP can deliver, it will be belied if it follows in the UPA’s footsteps.