1. Price and Trade Policies in Indian Agriculture: Overdue for Reforms Ashok Gulati Director in Asia, IFPRI Intn. Conference on ‘India and the Global Economy’ ICRIER’s Silver Jubilee Celebrations Vigyan Bhawan, Nov. 6, 2006

2. Page 2 Key issues covered in this presentation  What is the prime function of price and trade policies?  The nature of domestic agl. price and procurement policy (wheat and rice as examples) and its consequences  Trade policy reforms and how have they affected farmers’ incentives (agl. Vs. manufacturing)  Dovetailing domestic price policy with trade policy

3. Page 3 What is the prime function of price and trade policies?  To promote efficient allocation of resources, which in turn helps the sector to become competitive and thereby trigger growth.  The more price and trade policies are used to promote equity objectives, farther away they go from their main role of promoting efficiency

4. Page 4 Nature and Objectives of Indian Agl. Price policy (example wheat and rice)  MSP to provide incentives to farmers (basically a cost plus pricing by CACP)  Open ended procurement through FCI to make MSP effective  Buffer stocking for food security and to feed PDS  Subsidized price for consumers through PDS (Thus trying to achieve multiple objectives of food security and equity)

5. Page 5 How remunerative is MSP policy? State Wise Cost Competitiveness of Indian Wheat Production (TE 2002-03) Source: CACP

6. Page 6 How remunerative is MSP policy? State Wise Cost Competitiveness of Indian Paddy Production (TE 2002-03) Source: CACP

7. Page 7 Results of this price and procurement policy: Massive inefficiency in grain management  Massive accumulation of stocks in July 2002 (64 m.t.)  Massive Subsidies to liquidate stocks  Actual exports of wheat much lower (12 m.t) than the amount lifted for exports (18 m.t) during 2001-02 to 2004-05.  And in 2006 importing wheat at a cif price of about $200/ton (about 5 mt.)

8. Page 8 Rice: How is the domestic pricing in relation to world prices?

9. Page 9 How is the pricing of 11 major crops in relation to world prices?

10. Page 10 Trade policy reforms and Incentives: Getting prices right  ‘Anti-agriculture bias’ removed through Correction of over-valued exchange rate lowering tariffs, especially industrial lifting controls on exports of agl. products, including food grains, and subsidizing exports of wheat and rice during 2001-04

11. Page 11 Agriculture vs. Manufacturing Protection: 1965-2005

12. Page 12 Reduction in industrial Tariffs, but agl. tariffs high (lot of water in agl. Tariffs)

13. Page 13 Does it make sense to have high tariffs in agl. When we have comfortable Import capacity (Trade surplus within Agriculture)? Source: Agriculture Statistics at a glance, 2005 Note: Rupees converted into dollars using exchange rates (from Economic Survey,2005)

14. Page 14 Dramatic change in Import Capacity: Cereal import values as percent of Foreign Exchange Reserves In 1960s In 1960s India could buy only 5 m.t. of wheat using all its FERs, Today India can buy 40 m.t. of wheat by using less than 5% of its FERs – Quite a Contrast! Source: Rashid et al 2005, IFPRI

15. Page 15  Use Income policy to achieve Equity objectives, and  Price and Trade policies to achieve efficiency objectives The Way Forward

16. Page 16 The Way Forward (Cont..)  Domestic Price Policy  De-link Support price from Procurement price  Support price should be based on cost-A2 Risk Mitigating Returns on own land, own capital and own labour should be decided by market forces  The procurement price should be determined by free market forces (FCI should compete with private trade without stifling markets)

17. Page 17  Dovetailing of Domestic price policy with Tariff Policy (Use futures markets to play with tariff policy to keep domestic prices between fob and cif)  Change CACP to Agriculture Tariff Commission Procurement  Open ended only at MSP (at cost A2 and not C2)  Targeted procurement; move from north-west to eastern states The Way Forward (Cont..)

18. Page 18 The way Forward (contd.)  Stocking  Introduce warehousing receipt system;  Private sector stocking to be encouraged  Abolish Stocking Limits permanently  Strengthen Futures trading  Tendering for delivery for PDS  Distribution  TPDS  With spread of Employment Scheme, PDS can be gradually phased out. Introduce cash transfers, if needed.

19. Page 19  External  Keep exports and Imports free. Only use tariffs as an adjusting instrument  Tariff bindings are high enough to neutralize the impact of high subsidies in OECD countries The Way Forward (Cont..)