The Hindu Business Line : And now, differential negative subsidies

I have maintained over the last 30 years that Indian agriculture has suffered from the burden of negative subsidies in the post-Independence period, with the possible exception being during the NDA regime of 1998-2004.

Agriculture is said to be negatively subsidised if the prices obtained for the produce are lower than those prevailing in an hypothetically free market totally rid of all governmental intervention. The governments of rich countries often intervene to give their farmers prices that are higher than what they would have normally obtained in the market. That is possibly why their farmers are richer.

Since it requires a fairly complex statistical exercise to determine what free market price is, a rough and ready indicator would be: If the domestic price is lower than the export price, the farmer can be said to be working under negative subsidies.

New phenomenon

Agitations by farmers for remunerative prices for agricultural produce arose because the domestic prices were artificially depressed by governmental fiat, obstructing the storage, processing, trade or export thereof. There were also instances of the government resorting to dumping and, thereby, against interests of its own agriculture, by procuring farm produce at much higher prices abroad and selling the same in the domestic markets at low prices. The imports of wheat hitherto represent government-driven dumping. Now, a new phenomenon is appearing on the horizon. It may be called differential negative subsidies.

Indian wheat prices are getting too high for the global market. On the other hand, Indian rice represents a good bargain. Wheat is getting into a regime of positive subsidies while rice continues to be negatively subsidised. As of May 2009, Indian wheat has become un-saleable abroad because the Minimum Support Price (MSP) fixed by the Government (Rs 1,080 per quintal) plus local taxes, mandi fees, bagging charges, and port and handling charges take the F.O.B. (free on board) costs $25 a quintal.

At the same time, the Russian and Ukranian wheat is offered at $18.5 a quintal. The US and Canada prices, when the harvesting is done, would be about $10 higher a quintal. Australian and Argentinean wheat is selling at $21-22.

At a time when the floor of the international market is collapsing, the Government, which jealously guarded its monopoly of exports of agricultural commodities, is now leaving the responsibility to the private sector. The plan is that private sector exporters who are supposed to procure the wheat in the open market should earn the odium for imposing low, unpopular prices in the market.

By a curious coincidence, at about the same time, Indian rice is cheaper than even the levy price paid to the rice mills. The domestic market has collapsed and the farmers are getting a price that is 11 per cent lower than the MSP of Rs 900. Even after computing the marketing and bagging charges, Indian rice will not cost more than $300-340 F.O.B. a tonne as against the lowest offers that can come from Thailand ($425 a tonne) and Vietnam ($400).

Remarkably, in the case of rice exports, the Government insists on trading on its own account. It is an open secret that the parastatal agencies will enter into deals with private operators to their mutual benefit. The new situation, where a major foodgrain is under negative subsidy and the other under positive subsidy, hides a number of paradoxes. The Government has been relatively cagier in fixing the MSP for paddy.

Bigger clout

The farmers’ organisations have a much heftier clout than those in the rice-producing regions. India has literally priced itself out of the international wheat market.

At the same time, the rice producing farmers are unhappy about the MSP they are getting. If the situation continues to deteriorate further, India might find itself dependent on wheat imports from temperate countries that can continue to produce despite global warming.

How can India escape from this Catch-22 situation, of high domestic costs and a falling world market for wheat and the mirror paradox in the case of rice? Continuing to increase the wheat MSP will be counterproductive for both the nation and the farmers, as it will result in domestic production of wheat going up further. A possible solution would be slowing the rate of the MSP for wheat accompanied by a deliberate pushing up of the MSP for rice, pulses and oilseeds. Politically, that would help contain the discontent amongst paddy growers who demand better prices as also the consumer unrest caused by skyrocketing prices of pulses and edible oils.

The challenges of the new era of differential subsidies will have to be met by skilful management of the structures of rice and wheat procurement and MSP systems.

(The author is Founder, Shetkari Sanghatana and Member of Parliament, Rajya Sabha. blfeedback@thehindu.co.in)

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