Retooling policies to cool food prices

The government has got going on food prices, with the prime minister calling upon states to raid hoarders and rein in speculative futures trading. The farm minister has promised to bring down prices within 10-15 days! If this were so easy, why did it take so long?

We are trying to beat food inflation with the old rusty tools of 1950s, targeting ‘speculators and hoarders’. This strategy is not going to succeed, given weak governance, and in any case, that is not how market economies work. Indian policymakers need to re-tool themselves with a new policy box, where future markets and quick responding trade policy are an integral part and complement timely action whenever domestic supplies fall short. And encouraging direct buying by organised retailers from farmer groups, thereby compressing the value chain, can rein in prices. This will need reforming the APMC (Agricultural Produce Marketing Committee Act) and loosening the Essential Commodities Act, and encouraging (not strangulating) futures markets and dovetailing it with trade policy.

Here are a few specific suggestions to policymakers to tame food prices.

Cereal prices are easiest to roll back. On January 1, 2010, India had 48 million tonnes (mt) of foodgrains with public agencies as against the buffer stock norm of 20 mt. India’s total storage capacity in silos and under proper roof is not more than 27 mt, and all that is kept in the open under a tarpaulin suffers a damage of 10-15%. We can easily off-load 5-10 MT of wheat and rice in the next two-three months at prices paid to farmers, say, Rs 11/kg., without any state-level taxes or cesses. This will easily bring down atta prices to Rs 13/kg, from the current Rs 17-20/kg, as also the price of rice. If the government wants to bring the prices down further, it can offload stocks at APL prices.

For pulses —tur prices have crossed anyone’s imagination and touched Rs 90 per kg — one will have to look for innovative alternatives. We had earlier suggested importing and distributing through Mother Dairy network or the public distribution system (PDS) yellow peas, which should cost Rs 25 per kg at retail level. Happily, this has started. The other innovative way we had suggested to the agriculture minister and secretary was to distribute reconstituted soya dal, pioneered by Mother Dairy.

This reconstituted soya dal looks like split chana, and contains soya flour mixed with wheat flour or rice flour or both. This too should cost less than Rs 30 per kg, and should contain more protein than the average dal. It is ironic that India exports protein inherent in soya meal and consumes fat (oils). Soya meals can be put under 10% export tax to encourage product innovation at home for soya products. East and south-east Asia, especially China, Korea, Japan, consume lots of soya as tofu, which costs half as much as paneer and is healthier. This is the time to scale up soya consumption in India through mass media campaigns.

Fruit and vegetable prices are typically high due to weak and fragmented value chains. Farmers get less than one-third, and often one-fourth, the price that consumers pay. Consumer prices can be lowered and farmers prices raised, if we reform APMC, and encourage direct buying by organised retailers from farmer groups, removing all taxes and fees. The prices of most of the vegetables at Mother Dairy’s Safal outlets are lower than those of vendors, and at Big Apple (a private retailer in Delhi) lower than those of Safal in Delhi.

We need to encourage organised retailers, domestic and foreign, if we want efficiency in our value chains. Vendors need to be mainstreamed through government policy with organised retailers through the franchise route or direct employment. Import duties on fruits and vegetables typically hover between 30-50%, which can be lowered to 5-10%. We have ample foreign exchange to afford such imports.

Sugar tastes bitter at Rs 50/kg, primarily due to slow and complicated policy response in importing sugar, when it was known at least six months back that India would face a shortage of 6-7 million tons of sugar this year as farmers had shifted away from cane to grains due to lower returns in 2007-08 and 2008-09. The global prices of sugar are at historic high today, and domestic prices can be lowered only if government gives a subsidy and brings all taxes to zero. Deflecting the sugar price problem to a particular state, as is being attempted now with respect to raw sugar, is of little use. The Centre needs a bolder import policy.

Reform has neglected agriculture. And of whatever resources have gone to agriculture, almost 80% has gone to subsidies (fertilisers, food, power, credit, etc.) and only 20% as investment. This needs to be reversed. We need to raise investments and target, rationalise and contain these subsidies. Only then Indian agriculture can grow at 4% rate of growth, and only then food production can go up in a sustained manner and food prices can be reined-in the long run.

(Authors Ashok Gulati & Kavery Ganguly are with IFPRI)