India- Losing the pulses

With each passing day this year, agriculture seems to be sagging and so is the Indian farmer. Deficit monsoon rains appear to be the trigger. Although rains offered some respite to Marathwada, the situation in India’s largest agri-state, Uttar Pradesh, has gone from bad to worse. Last year’s drought, with monsoon rains falling short of the long period average(LPA) by 12 per cent, saw foodgrain production fall by close to 5 per cent. This year, with an almost similar rain-deficit, the likely damage is anybody’s guess. The average agri-GDP growth in the first four years of the 12th Five-Year Plan is going to be below 2 per cent, way below the target 4 per cent. Lower growth is causing increased farmer distress and rising suicides. With agriculture still engaging almost half of India’s labour force, any political party that brushes it aside will do so at its own peril. The Narendra Modi sarkar seems to be losing the pulse of the Indian farmer. We want to focus on real pulses, which are significant sources of protein to the Indian population. This year, pulses prices are going through the roof. The government appears optimistic, but traders are not. Tur/ arhar (pigeon pea) prices on September 18 hovered between Rs132 per kg in Delhi to Rs142 per kg in Raipur, with Mumbai, Kolkata and Chennai falling within this range. Compared to the same date last year, this amounts to an increase of 69 per cent in Delhi and 114 per cent in Raipur, with Mumbai at 73 per cent, Chennai at 74 per cent, and Kolkata at 78 per cent.

The average price increase, in the five centres combined, is 82 per cent in a single year! But tur is not the only one on fire. The five centres saw chana (chick pea), urad (black gram) and masoor (lentil) retail prices rise 51 per cent, 40 per cent and 28 per cent, respectively. Thankfully, pulses didn’t follow suit with onions, whose retail prices have gone up by 84 per cent in Delhi and 206 per cent in Chennai. The government has tried out various policy instruments, but there is no foreseeable relief. The standard policy tools are three-fold: One, restrict/ ban exports of these commodities and open up imports at zero duty; two, invoke the Essential Commodities Act (ECA) to impose stocking limits, forcing private trade to liquidate stocks immediately; three, suspend/ ban forward and futures trading. This is what the government has been doing since 1955. Nothing has changed. The cabinet has cleared the invoking of the ECA; the agriculture minister went on record about importing 5,000 tonnes of tur; and there is news of the impending suspension of commodity trading in futures. These are sensitive commodities and employing these archaic tools today reveals the government’s ignorance of how to run a market economy. We are not a socialist state of the 1960s. The tool box needs innovation and greater alignment with market forces. Take trade policy first. Allowing import of pulses at zero duty and imposing export controls reflect an inherent consumer bias. With an open export-import policy, prices of a commodity will settle between its export and import parity prices — and if our domestic prices are higher, nothing will go out. But if our farmers/ traders can get a better price outside, it will only incentivise the peasantry to produce more. Consumers can be protected through an income policy instrument. So, abolish all export controls on pulses. Importing and selling pulses in domestic markets at prices below the import parity price is anti-farmer. What one fails to understand is that, despite knowing in advance about a two million metric tonne (MMT) fall in pulses’ production in 2014-15 and being able to foresee the pressure on prices, the government failed to import enough to bridge the supply gap.

To manage price volatility, the government needed at least one MMT of pulse imports. Private trade imports about four to five MMT of pulses. About 0.6 MMT of tur is imported. Consider stocking limits under the ECA. To support the consumption, spread through the year, of a commodity harvested within a short-span of one to two months, someone has to stock. By putting stocking limits, all large stockists are converted into “hoarders” overnight and compelled to offload in a few days. This offloading may give temporary relief, but the resulting low private stocks will haunt future markets. In the long run, this tool will discourage the creation of storage capacities. Farmers will sell immediately after harvest and, in the absence of storage incentives, there would be a glut and prices will plummet. The role of commodity exchanges is least understood by our bureaucrats and policymakers. A robust commodity exchange should facilitate price discovery and spot prices/ premiums should be reflective of future volatilities. With regulations through the FMC/ Sebi, the exchange can act as a messenger of short- to medium-run future prices. But shooting the messenger by suspending/ banning futures is like shooting yourself in the foot. Here is our submission: Abolish export controls on pulses, abolish stock limits, and let forwards and futures flourish. Keep imports open and let the government hire some stocking facilities (about one MMT) from the private sector for pulses. Let the government also play in forwards and futures to ensure some price stability. To do this, the skills of our bureaucracy will have to be upgraded to understand how to manage commodity prices in a market economy. Is there anyone to bell the cat?