Agricultural reform is not merely the opening up of the economy to imports and liberalising trade in general. Unfortunately, on the ill-advise of organisations like World Bank, we are hell bent on going the wrong way. The error is very much in the strategy. The received wisdom is that with better infrastructural support, a liberal agriculture is the best thing for India. Infrastructural constraint while significant in reducing values for farmers has been overstated. It is not because of lack of storage and slow transport that farmers suffer.
The blame must go squarely on the actions that arise out of the notion that free trade is good for Indian agriculture. A handful of multinational corporations and global traders control much of the international markets in grain, oil and fertilisers and the impact on price, when we enter to buy or sell in the market for these commodities, is large enough to deny us imports per se. Subsidies in some developed countries, such as France, Japan and the US, continue to be very large despite World Trade Organisation commitments to reduce them.
The liberal school, in pointing out the inefficiencies of the procurement system, has missed the point. Buffer stocking is most crucial to the economy given the vast inter-regional and inter-temporal variations in output that monsoon in India is subject to. The ability to use international trade beneficially is anyway contingent on buffer stocking. As such, the simplistic computations of the desired level of stocks by the liberal scholars would invite disaster upon the economy.
Recall that in 2002-03, when foodgrain output fell after having remained stagnant for a while, it was only the large buffer stocks that allowed us to overcome a potential crisis. Stocks of 50 million tonnes are very much warranted, rather than the low estimate of 15 million tonnes being put out. Now, if inflation picks up in food, it is only to be expected.
Imports are no answer since that destroys the basis for domestic output. Indian farmers need procurement linked to buffer stocking to not only overcome market failures but also the ‘endowments failure’, since without procurement and subsidised sales, the total sales of food would come down dramatically, perhaps by as much as 15%. In other words, the demand side problems now bind the economy, hence focussing on supply side (better infrastructure) in itself would not work. Of course, there are vast economies to be realised in direct and right subsidisation and abolishing the public distribution system, but that does not mean giving up buffer stocking.
It costs the government Rs 6.22 to deliver Re 1 of subsidy to the poor. A direct transfer scheme could do the same for a cost of Rs 1.15 at most, saving the government Rs 7,000 crore, and in kerosene through direct subsidy the government could save as much as Rs 14,000 crore annually while ensuring the benefits to the poor of around Rs 10,000 crore at a transfer cost of less than 0.10 per rupee that is delivered.
Irrigation subsidies, by moving away from price-based subsidies to entitlement subsidies, could save at least Rs 10,000 crore for the society. Electricity supply to farmers costs the sector Rs 45,000 crore to deliver Rs 9,000 or so crore of ‘benefit’ annually. By giving direct subsidies of Rs 15,000 crore, all farmers would quit protesting electricity reform, the price of electricity would become non-arbitragable and the system could gain annually over Rs 25,000 crore. All this money saved could enhance general infrastructure and spending on health and education and on proper irrigation.
Instead, what is the government doing? It wants to hurt farmers by removing tariffs. It continues to promise ‘free power’ while curtailing supplies. It reduces food security through ‘free imports’. It announces debt forgiveness that can destroy the banks, if implemented as stated.
Workable strategies for agriculture would have to be simultaneously politically rewarding as direct subsidies are.