New CEA Subramanian's first Eco Survey may suggest big regulatory changes to solve agrarian distress

This is one of the bigger ideas that the economic survey this year would concentrate on - how to use technology and reduce regulations to bring markets closer to the farmers

April 24, 2019 / 05:27 PM IST

Away from the din of election slogans, a team of policy wonks led by newly appointed chief economic adviser (CEA) Krishnamurthy Subramanian is  assiduously seeking to write a prescription for a lasting remedy for the Indian economy’s biggest chronic weakness: agrarian distress.

Subramanian, who was appointed as the new CEA in December, is authoring his maiden Economic Survey that the new government will table in Parliament ahead of the full Budget presentation in July.

"Across different sectors, we have a fragmentation in markets. The focus now needs to be on make India an integated market. For that, lots of regulatory and logistics barriers need to be removed," a senior government official told Moneycontrol, obliquely hinting that the Survey will likely contain pointed policies to deal with infirmities in India’s farm economy.

Over the last two years, farmers have been protesting in several states, demanding better prices and debt write-offs. Low retail prices may be heartening to consumers, but persistently low food prices, have meant that farmers’ income have remained flat.

India’s long slowdown in food prices – "disinflation" in economists’ jargon – may well be symptomatic of a problem of abundance.

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Low growth in farmers' income has been attributed to the ruling Bharatiya Janata Party's (BJP) loss in the latest round of Assembly elections, particularly Madhya Pradesh in December.

Real or inflation-adjusted gross value added (GVA) in agriculture grew 2.7 percent in October-December, from 4.6 percent in the same quarter of the previous year, and 4.2 percent in July-September.

The worrisome bit, however, is that GVA in agriculture in current prices grew 2 percent, sharply lower than the previous year’s 9.1 percent in the same quarter, and also lower than 3.4 percent in July-September 2018.

It is not always that one finds nominal GVA at current prices is lower than the inflation-adjusted or real rates. The answer to this could well be hiding in the very inflation rates.

The current price crash is partly due to a bumper winter-sown crop that have flooded mandis. With few buyers, the glut has forced farmers to dump products at throwaway prices to clear up a piling mount of vegetables.

This is showing up in food inflation, a proxy to measure how costly or cheaper commonly consumed items have become on an annualised basis, which has moderated sharply.

Vegetables, potatoes and onions do not attract minimum support price (MSP)—where the government purchases crops from the farmers at a certain assured price.

In July 2018, the Centre has also announced a sharp rise in minimum support prices (MSPs) for 14 summer-sown kharif crops. The government has set the MSP at a minimum of 1.5 times the cost of cultivation, a proposal made in the budget for 2018-19, based on Commission on Agricultural Costs and Prices (CACP) calculations

This was the biggest increase in the Narendra Modi government’s tenure.

A state-supported MSP mechanism acts a cushion, cuts the dependence on private wholesale buyers, and helps fix a minimum floor price that farmers are almost guaranteed to get even if markets are swamped by an abundant harvest collapsing mandi rates.

High inflation hurts people's buying power, while low levels can indicate poor demand and weak economic activity. Currently, it is the latter that seems to be playing out in the rural economy.

Latest price trends show that market prices are lower than inflation-adjusted prices. Market prices at wholesale mandis seem to be clearly ruling at significantly lower levels than the MSPs.

This is symptomatic of a lower farm income, something that lies at the core of the current rural distress in many parts of the country.

One of the reasons behind the glut is also because production is increasing at a pace higher than a corresponding increase in population. India, psychologically because of a history of famines, has been production centric but now the focus needs to shift to supply, the official said.

"The main focus has to be on the marketing side, to bring the markets closer to the farmers," the official said.

This is one of the bigger ideas that the economic survey this year would concentrate on - how to use technology and reduce regulations to bring markets closer to the farmers.

"The aim now has to be on removing regulatory and logistics barriers. The aggregation on markets happen on a big picture level. If demand is in one place in the country and supply in another, they have to be brought together," the official said.

The implementation of the Goods and Services Tax (GST) has provided a condition to implement an integrated market place.

The next step towards making it a reality is to identify what makes prices of products so different at different locations.

"If market clearing is happening across states then the only difference in prices would be just because of the transportation costs. For example, a farmer in Delhi could potentially go and sell something in Uttarakhand, the difference in prices should only be in storage cost and transportation costs. But it's not that. So he's not able to reach the consumers in Uttarakhand. So that's something we will work on," the official said.

Successive CEAs have used the Economic Survey, often referred to as the government's official report card on the economy, to recommended policy changes, sometimes even sweeping measures.

In 2017, for instance, the survey articulated the need for a Universal Basic Income (UBI), a poverty alleviation plan involving direct money transfer to people’s bank accounts.

The government is not bound to follow these recommendations and only serve as a policy guide. The Economic Survey, in the past, has favoured policy moves that come into conflict with the official line of thinking of the government in power.

These do not necessarily serve as pointers to what to expect in the annual budget. On many occasions, policy changes recommended in the Economic Survey have not been reflected in budget proposals.
Kamalika Ghosh
first published: Apr 24, 2019 11:44 am

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