Why high dal prices are not enough to increase production

Toor_Dal_Tur_dal

In response to yesterday’s column a reader on the social media concluded that it is obvious that farmers should grow tur dal which is priced at Rs 200 per kg, in comparison to sugar which is selling at a much lower price. He further said that businesses which tend to enjoy pricing power tend to do well.

Only if it were as simple as that. This is the classic, interest rate cut will lead to increased consumption, kind of economic theory—it doesn’t always work. In fact, in order to encourage farmers to plant more dal (pulses) the government in early November announced a significant increase in the minimum support price of gram and masur dal.

The minimum support price of gram was increased by Rs 250 to Rs 3425 per quintal (i.e. 100 kgs). The minimum support price of masur was increased by Rs 250 to Rs 3325 per quintal. Over and above this, a bonus of Rs 75 per quintal has also been announced.

Does this increase in minimum support price and a bonus to top it, mean that farmers will now automatically plant more dal in the rabi season, which is currently on. The government clearly thinks so. As the press release announcing the increase in minimum support prices (MSPs) pointed out: “The higher MSPs would increase investment and production through assured remunerative prices to farmers.”

In a world of lower interest rates leading to increased consumption kind of economics, this would have made perfect sense. The trouble is do farmers know about the government offering a minimum support price on dal? The Commission for Agricultural Costs and Prices (CACP), a part of the ministry of agriculture, suggests otherwise.

As the report titled Price Policy for Kharif Crops—The Marketing Season of 2015-2016 points out: “Two most important procurement agencies of the Government of India namely Food Corporation of India (FCI) and National Agricultural Cooperative Marketing Federation of India Limited (Nafed) were set up with the main objectives of procuring notified commodities at MSP, if and when the market prices go below MSP. These agencies have been in the existence for over 50 years and 30 years respectively. Yet, the benefits of MSP bypass a large section of farmers, rendering the pricing policy and procurement operations ineffective. As per Situation Assessment Survey (NSS 70th Round), only 2.57 million households were benefitted directly from procurement of paddy during 2012. The procurement of oilseeds and pulses is far worse.”

So the question is do the farmers know about these price signals being sent out by the government? And the answer is no. In fact, as can be seen from the accompanying table in 2014-2015, the Nafed barely picked up any tur, moong or urad dal.

Table: Procurement of Pulses by Nafed.

Nafed picked up 1543 tonnes of tur dal in 2014-2015. The total production of tur dal in 2014-2015 was around 2.78 million tonnes. The total production in 2013-2014 had stood at 3.34 million tonnes. What this tells us is that unlike rice and wheat, the government agencies are picking up very little of dal directly from the farmers at the minimum support price.

The fact that the government picks up rice and wheat and does not pick up dal has distorted the entire production process of dal. What does not help is that the average farmer has faced losses.

As a recent news-report in The Economic Times points out: “According to an analysis done by the scientists of the Mahatma Phule Krishi Vidyapeeth (Agricultural University), Rahuri, farmers who grew tur in 2014, suffered losses of 12.7 per cent.”

The news-report then goes on to suggest that most farmers had to sell the tur dal they had produced at below MSP in 2013 and 2012. And this explains why the production of tur dal fell from 3.34 million tonnes in 2013-2014 to 2.78 million tonnes in 2014-2015. What this also tells us is that high prices are not leading to increased gains for farmers, and it is the middle men who are gaining the most.

 

Imports are not a solution because the global market for dal is very thin. As the report titled Price Policy for Rabi Crops—The Marketing Season of 2016-2017 points out: “As per Food and Agricultural Organization (FAO), the total global production of pulses was 72.3 million tonnes in 2013, out of which about 19% is traded. India is the largest producer of pulses in the world with a share of 24.3 percent…India is the largest importer with a share of 27.3%.”

In fact, India’s import of pulses has gone up dramatically from 13.4 lakh tonnes in 2004-2005 to around 45.7 lakh tonnes in 2014-2015. Further any more jumps in imports will only lead to an increase in prices of dal. So what is the way out?

The farmers first and foremost need to be aware that there is something known as a minimum support price. As the report titled Price Policy for Kharif Crops—The Marketing Season of 2015-2016 points out: “This calls for giving wide publicity about MSP and procurement agencies on radios, television and vernacular languages in popular local dailies, at least 15 days before the start of procurement operations so as to reach farmers far and wide.”

Second, given that state agencies are procuring rice and wheat, they need to procure dal as well, in order to balance things out.  As the report titled Price Policy for Kharif Crops—The Marketing Season of 2015-2016 points out: “A pertinent question arises as to why farmers are not wholeheartedly diversifying towards oilseeds and pulses. Based on CACP’s interaction with a wide spectrum of farmers and also based on field visits, it emerged that farmers need a backup plan in the form of reasonably strong procurement machinery to be put in place to fall back upon when the prices fall below minimum support price.”

As the press release announcing an increase in the minimum support price of Rabi crops pointed out: “The Cabinet also directed that in order to strengthen the procurement mechanism for pulses and oilseeds, Food Corporation of India (FCI) will be the Central Nodal Agency for procurement of pulses and oilseeds.”

Let’s see how much impact this move has. In an ideal world, the market should do its own thing, but in this case government intervention seems to be the best way out, at least in the short-term.

(The column originally appeared on The Daily Reckoning on Dec 1, 2015)

Advertisements

About vivekkaul
Vivek Kaul is a writer who has worked at senior positions with the Daily News and Analysis(DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System , the latest book in the trilogy has just been published. The first two books in the trilogy were published in November 2013 and July 2014 respectively. Both the books were bestsellers on Amazon.com and Amazon.in. Currently he works as an economic commentator and writes regular columns for www.firstpost.com. He is also the India editor of The Daily Reckoning newsletter published by www.equitymaster.com. His writing has appeared across various other publications in India. These include The Times of India, Business Standard,Business Today, Business World, The Hindu, The Hindu Business Line, Indian Management, The Asian Age, Deccan Chronicle, Forbes India, Mutual Fund Insight, The Free Press Journal, Quartz.com, DailyO.in, Business World, Huffington Post and Wealth Insight. In the past he has also been a regular columnist for www.rediff.com. He has lectured at IIM Bangalore, IIM Indore, TA PAI Institute of Management and the Alliance University (Bangalore). He has also taught a course titled Indian Economy to the PGPMX batch of IIM Indore. His areas of interest are the intersection between politics and economics, the international financial crisis, personal finance, marketing and branding, and anything to do with cinema and music. He can be reached at vivek.kaul@gmail.com

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: