On Onion Prices, Modi Government's Got it Wrong

The Modi government has come under attack from its sympathizers on the Economic Right for dragging its feet on  key economic reforms. The trigger was the government's complete U-turn on the Land Acquisition Bill. This and its failure to display the required statecraft in getting the GST (tax reform) passed has dented this government's credibility to carry out rapid and bold economic reforms. The pro-market reformers who thought Modi was a true Thatcherite stand chastened now, their enthusiasm tempered.

Critiques, notably, have missed out certain anti-reform actions and pronouncements related to agriculture sector. Recently the central government banned onion exports following the rise in domestic prices. Thus the Modi government too followed in the footsteps of its predecessors, buckling under pressure from the vocal urban media. It is difficult to make a case against an export ban when inflation in onions is making headlines. However, certain facts need to be stated.

Restricting exports is objectionable on three counts. One, it hasn't checked prices. Two,  such actions damage India's credibility in the international market. Lastly, this signals a message that farmers' access to global market will continue to depend on political expediency and not on their competitiveness in the global market. Additionally, this action was a major jolt for thousands of poor onion producers who had suffered a big crop loss due to untimely rain.

Certain facts about onions warrant attention here. The onions now reaching the market were harvested in the summer, and are the only crop with a long shelf life. Farmers can store these, hoping for better prices in the future. In fact, storage, often derided as 'hoarding', ensures future supply. On the one hand, the government encourages farmers to invest in storage and then breaks their price expectation by thwarting exports.

Of course, the government has to respond to an inflation in onion prices. And a rise in productivity is the only response that can benefit consumers without hurting farmers. Instead of knee-jerk reactions like banning exports, the government should focus its attention on technology transfer through effective extension services and expanding irrigation. Research has conclusively showed that productivity growth responds quickly and significantly to such measures.

And finally there is a political issue. Shouldn't farmers expect a supposedly 'strong, decisive and a pro-reform' leader to stand up to urban consumers' pressure and communicate the adverse impact of suppressing the prices of agricultural commodities on the rural economy? Yielding to populism is certainly no mark of a decisive leadership.

We see a far more absurd idea being advanced in the case of the cotton trade. Scrapping of the Cotton Monopoly Procurement scheme of Maharashtra has led to the creation of an integrated cotton market in the country.  Was this a bad idea? The revenue minister of this BJP-ruled state thinks so. Speaking in the State Assembly, Eknath Khadse stated that repealing the Cotton Monopoly Procurement Scheme was a mistake and that it would be reinstated.

Understandably, the BJP government in the state is under pressure as the agrarian crisis in Vidarbha, the cotton belt of Maharashtra shows no signs of improvement. The region is also a strong support base of the BJP. The political sensitivity of the issue is obvious.  But is the return of Monopoly Procurement an answer to the problem, or a prescription for further worsening?  Why hit the panic button?

The Maharashtra Cotton Monopoly Procurement Scheme (CMS) that lasted for three decades entailed the purchase of all the cotton production in the state by the State Cotton Federation. The premise of the scheme was that the state control over the entire value chain of cotton production would enable it to pass on a fair share of the profit to farmers by offering them prices higher than the Minimum Support Prices offered by the central government. This system was supposed to encourage the setting up of ginning and pressing units in the State.  But the result was exactly the opposite as is expected from any monopsony system, i.e. a scheme where the buyer has monopoly power.

This scheme vested enormous power in the hands of the government officials who procured the cotton. The prices received by the farmers depended on the quality of cotton, and the quality was decided by government officers! The corrupt nexus that emerged eroded the premium for quality production. Deterioration of cotton quality in the state naturally discouraged development of processing units in the state. The corruption and the inefficiencies induced by this scheme became a huge drain on the exchequer.

Repealing this scheme in 2004 allowed the creation of a competitive environment in the state's cotton sector. Incentive for quality was restored.  New ginning and pressing units using modern technology were set up, raw cotton quality in the state improved.

Unfortunately all this was not matched by an expansion of irrigation. The result was the continuation of low yield and the vulnerability of dry land cotton growers. Like the onion belt, the cotton belt of Maharashtra has a huge untapped potential for irrigation. With a little assured water, the productivity of cotton can be raised five to six times. For a small dry land cotton farmer, the gain through irrigation-induced higher productivity far outweighs the supposed gain through higher prices that monopoly procurement promises.  The thousands of crores eaten up by the Monopoly Procurement Scheme could have brought huge areas of cotton under irrigation.

However, in recent times, the biggest political support for the demand for state-controlled prices was provided by the Prime Minister himself. In all of his rallies in rural Maharashtra in the run-up to the parliamentary elections, Modi promised Minimum Support Prices (MSP) for farm  produce that would ensure fifty percent profit. Usually the promises given during the election campaign don't retain their political sway for too long. But here was the Prime Ministerial candidate giving an unambiguous support to a demand that had already caught farmers' imagination. Narendra Modi provided it huge political traction. The idea of Monopoly Procurement of cotton  is a logical extension of Modi's promise to the farmers. How can free markets ensure fifty percent profit all the time?

Both on the issue of the onion and cotton trade, the BJP's response smacks of deep suspicion of markets. Its supposed commitment to economic reforms becomes questionable on other fronts too. The party remains opposed to FDI in multi-brand retail.

If the government that is free from any compulsion of coalition politics continues to falter on the agenda of economic reforms, what is the hope for the agriculture sector?

(Milind Murugkar is a food and agriculture policy analyst)

Disclaimer: The opinions expressed within this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of NDTV and NDTV does not assume any responsibility or liability for the same.