OBSTRUCTION AS POLICY- India’s foodgrain policy must be reformed

Writing on the wall - Ashok v. Desai

India was born with a chip on its shoulder: it felt that it had been hard done by, that its British rulers had kept it backward, and that it needed to cut corners to catch up with the world. Industrial countries indulged it. It was christened the first underdeveloped country. When that appellation was found derogatory, India was promoted to being the first developing country. A line of other countries followed India as they were freed by their colonizers.

When industrial countries began talks after World War II to bring down trade barriers, India claimed exception: it had been kept underdeveloped for two centuries by the British, and needed trade restrictions to catch up. Again they yielded: they gave India special and differential treatment. It could keep its arbitrary import restrictions, and enjoy the benefits of trade liberalization by other countries. It took Indians four decades to see that they were hurting themselves: the protection they gave was keeping their industries backward, and that they would never catch up with the industrial world if they continued to mollycoddle their industries. Gripped in a crisis, India made a bonfire of quantitative import restrictions in 1991.

It continued to claim a right to copy patents given by advanced countries without having to pay for them. By then, however, the advanced countries had learnt how to deal with a recalcitrant India: they promised other underdeveloped countries that they would let their textiles in without duty, and told India they would give it the same concession only if it recognized their patents. India was forced to promise it would. Murli Manohar Joshi sat on it as long as he could. But then he was forced out of his seat by the 2004 election, and slowly, reluctantly, the Congress government reintroduced product patents.

But that did not mean that India had grown up. It has been claiming special and differential treatment for its agricultural protection. It goes on raising agricultural prices to make its big farmers happy. It goes on buying foodgrains at those high prices, and then sells them at throwaway prices to those it chooses to call the poor. It gave these shady practices a fancy name: food security. And it tells other countries that it will agree to another round of trade negotiations under World Trade Organization only if they promise in advance that it can keep its Food Security whatever they all agree eventually.

Earlier this year, India got a new government. The Bharatiya Janata Party is supposed to be more liberal, more pro-business and less populist. So it should logically have taken a less arbitrarily protectionist stance. The BJP is full of great speakers and Hindu ideologues; but they have no clue of economics. On having suddenly to take a position, the new government just put on the clothes of the old one.

That is a shame. As long as it was in opposition, the BJP could get away with all kinds of stupidity. Now that it is in power, however, its mistakes will harm the entire nation. If it does not have good economists, it should hire them. It has just imported an (Indian) economist from Washington; it can import more. It can appoint a committee to advise it. Whatever it does, India’s foodgrain policy is outdated and inefficient, and must be reformed.

India is not the only stupid country when it comes to agriculture; major industrial countries also subsidize agriculture — not because farmers are a big electoral lobby there, but to save a dying industry. No one wants to live in the countryside, away from bars and multiplexes, and do backbreaking work in rain and cold. So young people have left villages, and farms have become derelict. In France and Italy, agriculture accounts for less than 3 per cent of GDP; further north, it is less than 2 per cent. But it takes more than 40 per cent of EU’s budget; and most of the subsidies go to big farmers, who are millionaires anyway. In the US, farmers’ and insurance companies’ lobbies bribe legislators to give subsidies to crop insurance. The Americans do the strangest things: since they do not want to be accused of restricting sugar imports, the government buys up imported sugar so that it would not bring down the price of sugar at home, and sells it to make ethanol, which it then gives to oil companies to mix with their petrol. So when it comes to agricultural subsidies, India is in the company of equally distinguished sinners.

But others’ sins make not one’s sins less sinful. Even if one enjoys sinning, one should do so intelligently: a womanizer would have to be mindless to indulge himself in his marital bed. India must ask itself what it wants to achieve, and what is the most efficient way of achieving it.

First, India must not restrict agricultural imports, because imports are just one way of obtaining goods. If imports are cheaper than grains produced in the country, they save money for the consumers — and for the government, if it subsidizes grains. It should buy grains by tender open to everyone in the world.

Second, food security lies in sufficiency of domestic stocks. Most stocks are kept by traders — and big farmers who sell grains. They will keep stocks if they think that prices will go up and they will make a profit. This will happen in a market without government intervention: from the maximum they reach at harvest time, grain stocks will go down as it is consumed, and reach a minimum just before harvest.

Third, the government must step in only when prices rise or fall too fast. What is too fast has an elaborate definition; but in simple terms, it means faster than is required for traders to make a “reasonable” profit after covering costs of borrowing and holding stocks — let us say, 2 per cent a month.

Fourth, grain stocks deteriorate; hence the government must sell off its stocks during the year and buy new grains.

Fifth, the stocks should be enough just to stabilize prices. One can make a more precise estimate, but it is unlikely to exceed 10 per cent of consumption. What is more important is the rules about when to buy and sell.

Finally, foodgrains are not the only products; prices depend on many factors besides foodgrain policy. Hence it must be made as a part of overall economic policy. The government is divided up into a large number of ministries and departments to accommodate politicians who want power. But it is not possible to give them autonomy and make good economic policy. In most capitalist governments, it is made by the finance ministry. India created a planning commission to take a long-term view and coordinate ministries. It has now abolished it, and so returned to the standard capitalist model. But it can work only with strong central direction. It may come from the prime minister’s office, the finance ministry, or the two working together. But policy direction requires technical competence; it has to be built into the two — preferably into the finance ministry, since the PMO would have its plate full.