Price and Trade Policies in Indian

Agriculture: Overdue for Reforms

Ashok Gulati
Director in Asia, IFPRI

Intn. Conference on ‘India and the Global Economy’

ICRIER’s Silver Jubilee Celebrations
Vigyan Bhawan, Nov. 6, 2006
 Key issues covered in this presentation
 What is the prime function of price and trade policies?

 The nature of domestic agl. price and procurement

policy (wheat and rice as examples) and its
consequences

 Trade policy reforms and how have they affected

farmers’ incentives (agl. Vs. manufacturing)

 Dovetailing domestic price policy with trade policy

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 What is the prime function of price
and trade policies?
 To promote efficient allocation of resources,
which in turn helps the sector to become
competitive and thereby trigger growth.

 The more price and trade policies are used to

promote equity objectives, farther away they
go from their main role of promoting efficiency

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Nature and Objectives of Indian Agl. Price
policy (example wheat and rice)
 MSP to provide incentives to farmers (basically a cost plus
pricing by CACP)

 Open ended procurement through FCI to make MSP

effective

 Buffer stocking for food security and to feed PDS

 Subsidized price for consumers through PDS

(Thus trying to achieve multiple objectives of food

security and equity)

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 How remunerative is MSP policy?
State Wise Cost Competitiveness of Indian Wheat
Production (TE 2002-03)

800 HP
750
700
MSP= 620
650 Cost-C2
Unit Cost (per qtl)

600 GUJ MP
550
BH
500 HR
PB RAJ
450 UP
400
350 MP HP GUJ
300 RAJ BH Cost-A2
250 HR PB UP
200
0 20 40 60 80 100
Cumulative Production (% )
Source: CACP
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 How remunerative is MSP policy?
State Wise Cost Competitiveness of Indian Paddy
Production (TE 2002-03)
800
750
700
MP
650
HR Cost-C2
600
Kar Ker
Unit Cost (per qtl)

550 MSP= 523

TN
500
AP
450 WB
OR AS Ker
BH UP
400
PB
350 Kar MP
HR TN
300 Cost-A2
OR WB
PB UP BH AP
250 AS
200
0 20 40 60 80 100
Cum ulative Production (%) Source: CACP

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Results of this price and procurement policy:

Massive inefficiency in grain management

 Massive accumulation of stocks in July 2002 (64 m.t.)

 Massive Subsidies to liquidate stocks

 Actual exports of wheat much lower (12 m.t) than the

amount lifted for exports (18 m.t) during 2001-02 to
2004-05.

 And in 2006 importing wheat at a cif price of about

$200/ton (about 5 mt.)

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 Rice: How is the domestic pricing in
relation to world prices?
Fig 4
INDIA 1965-2005: DOMESTIC PRICES AND WORLD REFERENCE PRICES FOR RICE
8500
8000
7500
DOMESTIC
7000
REFERENCE (IMP)
6500
REFERENCE (EXP)
6000 DOMESTIC INCLUDING SUBSIDIES
RS/MT IN 1981 PRICES

5500
5000
4500
4000
3500
3000
2500
2000
1500
1000
500
0
1965

1966

1967

1968

1969

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005
INDIAN CROP YEARS

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 How is the pricing of 11 major crops
in relation to world prices?
Fig 3
India 1965-2005, 11 crops. Aggregate domestic price versus reference price under
importable hypothesis except rice under exportable hypothesis

5800

4800
Rs/MTat 1981 Prices

3800

2800

1800

800
1965

1969

1971

1975

1979

1985

1989

1993

1997

2001

2005
1967

1973

1977

1981

1983

1987

1991

1995

1999

2003
Domestic Prices Reference Prices domestic price Inclusive of subsidy

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 Trade policy reforms and Incentives:
Getting prices right
 ‘Anti-agriculture bias’ removed through

• Correction of over-valued exchange rate

• lowering tariffs, especially industrial

• lifting controls on exports of agl. products,

including food grains, and subsidizing
exports of wheat and rice during 2001-04

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Agriculture vs. Manufacturing Protection: 1965-2005

Fig 7
India 1965 to 2005: Agriculture versus Manufacturing Protection

120

100 Manufacturing NRA

Agriculture NRA 11 crops

80
Agriculture DRA 11 crops
60
Protection Rate

40

20

-20

-40

-60

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Reduction in industrial Tariffs, but agl. tariffs high
(lot of water in agl. Tariffs)
Fig 1
India 2002/03-2006/07: Unw eighted average tariffs
50

45

40

35
T a r if f %

30

25

20

15

10

0
2003 2004 2005 2006 2007

All tariff line s

Agriculture HS 01-24
Non-agriculture HS 25-99

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 Does it make sense to have high tariffs in agl. When
we have comfortable Import capacity (Trade surplus
within Agriculture)?
Agriculture Exports and Imports (In Billion $)

10 Imports

8 Exports

0
1990-91

1991-92

1992-93

1994-95

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2003-04
1993-94

1995-96

2002-03

2004-05
Note: Rupees converted into dollars using exchange rates (from Economic Survey,2005)
Source: Agriculture Statistics at a glance, 2005
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 Dramatic change in Import Capacity:
Cereal import values as percent of Foreign Exchange
Reserves
300
275
In 1960s India could buy only 5 m.t. of
250 wheat using all its FERs, Today India
225 In 1960s
can buy 40 m.t. of wheat by using less
200 than 5% of its FERs – Quite a Contrast!
175
Percent

150
125
100
75
50
25
0
1971

1986
1962

1965

1968

1974

1977

1980

1983

1989

1992

1995

1998

2001
Year
Cereal import value as % of FC reserves 100 percent
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Source: Rashid et al 2005, IFPRI
 The Way Forward
 Use Income policy to achieve Equity
objectives, and

 Price and Trade policies to achieve

efficiency objectives

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 The Way Forward (Cont..)
 Domestic Price Policy
 De-link Support price from Procurement price

 Support price should be based on cost-A2

• Risk Mitigating
• Returns on own land, own capital and own labour
should be decided by market forces

 The procurement price should be determined

by free market forces (FCI should compete
with private trade without stifling markets)

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 The Way Forward (Cont..)
 Dovetailing of Domestic price policy with Tariff
Policy (Use futures markets to play with tariff policy
to keep domestic prices between fob and cif)

 Change CACP to Agriculture Tariff Commission

Procurement
 Open ended only at MSP (at cost A2 and not C2)
 Targeted procurement; move from north-west to
eastern states

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 The way Forward (contd.)

 Stocking
 Introduce warehousing receipt system;
 Private sector stocking to be encouraged
 Abolish Stocking Limits permanently
 Strengthen Futures trading
 Tendering for delivery for PDS
 Distribution
 TPDS
 With spread of Employment Scheme, PDS can be
gradually phased out. Introduce cash transfers, if
needed.

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 The Way Forward (Cont..)
 External
Keep exports and Imports free. Only
use tariffs as an adjusting instrument

Tariff bindings are high enough to

neutralize the impact of high subsidies
in OECD countries

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