New Delhi's flawed policies weaken pulse on Indian farms
Higher productivity and freer trade needed to stabilize prices for key food group
Beans, peas and lentils, collectively known as pulses, are the main sources of protein for most Indian households. But short-sighted regulations aimed at protecting consumers from food price inflation are hurting farmers, and may fail to address long-term supply deficits. The solution lies in raising productivity and freeing internal and external trade.
India's food grain output during the last Kharif (summer crops) season, which runs from July to October, rose by 8.9%, boosted primarily by a 60% increase in the output of pulses. That compared with a 3.2% decline in the comparable period of 2015.
That has led India's official forecasting agency, the Central Statistical Organization, to predict a 4.4% growth rate for the agriculture and allied sector in the financial year to March, in contrast to meager growth rates of 0.8% and - 0.2% in the financial years 2015-2016 and 2014-2015.
Despite this positive picture, however, producers of pulses are getting a raw deal. Drought-induced production shortfalls in 2014-2015 and 2015-2016 caused the prices of major pulses to rise, with retail prices soaring by about 150% by February 2016. To deal with the surge in prices New Delhi took a number of predictable measures, including the imposition of stock limits on food processors, traders and retailers.
Raids were carried out throughout the country to curb hoarding of stocks for black market sales. Futures trading in chickpeas (the only pulse category traded on India's futures exchanges, which accounts for 43% of total pulse production) was banned. The import of pulses at zero duty was extended to all categories, while exports remained prohibited except for white chickpeas and 10,000 tons of organic pulses and lentils a year.
India spent $4 billion importing 5.8 million tons of pulses to supplement domestic production of 16.5 million tons in 2015-2016. This was roughly double the amount spent in 2014-15. Yet the prices of most pulse categories did not fall much, or remained sticky until May 2016. The reason is simple: India is the world's largest consumer of pulses; news of its intention to import led to a price surge in international markets.
It was obvious that only an increase in domestic production could help to moderate prices. Thus, to boost domestic production, the government announced hikes in minimum support prices (government-supported price floors) for various crops, including rises of 200 rupees per 100kg for pigeon peas, and 150 rupees per 100kg for green gram (known locally as moong) in the Kharif season.
Many states offered an additional bonus to further incentivize production. For instance, Maharashtra announced a bonus of 425 rupees per 100kg for pigeon peas. The government also announced that it would maintain buffer stocks of pulses, as it does for rice and wheat, to rein in prices.
Farmers were galvanized by high prices in the pre-sowing period, forecasts of a better monsoon, hikes in support prices, and a 25% increase in the area under cultivation, leading to a whopping 58% increase in the output of pulses during the 2016 Kharif season.
Predictably enough, the increased supply led to a fall in prices in the later part of 2016. Reports of increased Rabi (autumn season) hectarage further added to the slide. In the last 10 months prices of most pulses (except chickpeas) have almost halved. The chickpea price is also declining, however, and will go down further when there is more clarity on Rabi season output.
From surge to crash
The anticipation of a record output of pulses in 2016-2017 has reversed the position facing farmers from price surge to price crash, with the prices of major Kharif pulse categories falling below minimum support prices across 12 states, according to an analysis by India's top agricultural commodity exchange, NCDEX. By Dec. 30 pigeon peas were selling at 11% below the support price, with green gram 19% below.
None of this should be a surprise. Over-production often leads to price crashes in agricultural commodities markets, especially when trade is restricted. The government should have supported farmers by increasing procurement to check the slide in prices. However, procurement by government agencies remained insufficient due to a lack of storage facilities and high costs (the cost of the commodity, plus transport and wastage).
There was some procurement, but most Indian states (except in the south), have shown little interest in taking stocks from the federal government because they do not have the necessary infrastructure to store and distribute the crops. Compounding the problems for farmers, the government has maintained the export ban, stock limits, and restrictions on futures trading. This cuts prices for consumers, but at the cost of farmers.
These policies cannot be sustainable. Such trade-distorting government measures are likely to induce farmers to switch to producing rice and wheat, which are backed by effective government procurement. That would translate into lower supplies of pulses next year. The situation could be made more acute if there is a monsoon rain deficit, since 84% of the area under cultivation for pulses is dependent on unpredictable rains.
Ideally, the government should free up exports and trading in the domestic market. It seems illogical to support farmers through hikes in minimum support prices on one side and continue the export ban on the other while imports are entering the country with zero duties. Allowing exports might help to check the slide in prices and minimize farmers' losses. Removing the ban on futures trading would allow farmers to sell in futures markets, and help buyers of fast-moving consumer goods to hedge their risks.
The government should also ensure the immediate removal of pulses from India's archaic Agricultural Produce Marketing Committee laws to allow farmers to sell their produce wherever they want and improve their net price realization.
Low productivity remains a serious problem. For instance, pigeon pea yields average 725kg per hectare in India -- roughly half the yield in Myanmar. Long-term measures to shore up the sector should include reducing dependency on unpredictable monsoon rains by improving irrigation facilities, raising productivity through increased investment in research and development, and encouraging genetically-modified technologies to overcome the vulnerability of pulse crops to pests and disease.
Surprisingly, only 12% of Finance Minister Arun Jaitley's budget allocation for agriculture and the rural sector is targeted on productivity-boosting investment, while the rest goes in subsidies and hand-outs. A higher share of the budget outlay for investment in agriculture would make a great deal of sense.
Prerna Sharma is vice president and head of agriculture, food and retail at Biznomics Consulting, a research and policy advocacy specialist in Mumbai. The views expressed are those of the author.