Wednesday, May 18, 2011

“Economic reforms have an adverse effect on food security.” Comment.

“Economic reforms have an adverse effect on food security.” Comment.

Most of the things that I will be presenting are from a paper about economic reforms in agriculture liberalization program point to urban India and there is a tendency to believe that reforms not targeted to agriculture. Reformers, however, felt that they were targeting agriculture indirectly and that what they were doing would be beneficial to agriculture. In international development circles there is a view that when you protect industry by having high tariff rates, you are discriminating against agriculture because you are shifting the terms of trade in favor of industry. In 1950 we decided that industrialization and that was possible only if industry was protected and that's how we got high tariff rates. The principle manifestation of liberalization since 1991 if you ask any economist is that the tariff rate has been reduced for industry. The argument is that if tariffs for industry were lowered, industrial goods prices would be lowered and that prices of agriculture products would now be higher relative to industrial goods. Let me read out an address by Manmohan Singh to the Indian association of agriculture economists in 1994. "The policy of excessive protection of Indian industry hurt Indian agriculture in several ways. It raised the prices of industrial products relative to agriculture products that hurt the rural sector of the economy as consumers of industrial products. You also increased the profitability of industrial production compared to agriculture production thus drawing away inevitable resources from agriculture.

This shift takes place in various ways. Low returns in agriculture activity reduced the ability to pay economic prices for many inputs such as power, water and credit. Instead of continuing with the subsidies for these inputs it would be much better to reduce the protectionist bias against agriculture by lowering tariffs favoring industry and altering relative prices in favor of agriculture. This would create potentially a more profitable agriculture which would be able to bear the economic costs of technological modernization and expansion". In some sense, this argument of agriculture being worse off because of protection is not entirely correct because inputs that Manmohan Singh speaks about are not traded on the international market and the prices of this are set by the government in a way that is reasonable favorable to farmers or actually not priced at all such as in water. Let us take a look at some data and see if what they say is borne out. Let us take a loot at Table 2 titled protection and relative prices.

Year Tariff Rate Price
1990 87 108.5
1991 * 116.4
1992 64 113.2
1993 47 111.6
1994 33 114.4
1995 27.2 112.8
1996 24.6 117.5
1997 25.4 116.7
1998 29.7 126.3

Notes: 'Price' is the ratio of the index of agricultural prices to the ratio of index of manufacturing prices, base 1981-82=100; the tariff rate is the import weighted average percentage rate for the economy as a whole; the tariff rate for 1991-92 was not computed in the source.

Source: Economic Survey 1998-99 and the World Bank: 'India 1998: Macroecomonic update'

In a broad sense it is true but it comes about only after the second half of 90s. The question to ask is whether this bias has improved due to the process that the government had in mind of due to some other process. I think that it is not because what the government had in mind but due to the deliberate intervention by the government. Interestingly when we talk about the reducing of the government involvement as part of liberalization, government intervention in some sectors has been increasing.

Let us now talk about reforms and growth -what has happened to growth? While we all know that growth by itself is not enough, purchasing power is also important. Table 1. shows the annual rate of growth before and after 1991.

Table 1: Growth, Before and After 1991
1949-50 to 1964 2.93 3.54
1967-68 to 1989 2.74 2.72
1970-71 to 1979 2.08 1.66
1980-81 to 1989 3.54 4.84
1990-91 to 1997 1.66 2.36

Note : Annual Compound growth rate, except for non-food in th 1990s where it is the
average of the year-to-year change Source: Rows 1-2 from 'Area and Production of Principle Crops in India 1989-90' Directorate of Economics and Statistics, GoI;the rest from Economic Survey 1998-90, and author's estimates

The point is that in comparison to the 3 decades 70s, 80s and the 90s, the 1990s performs worse than 80s both in the growth of food grains and nonfood grains. The 80s was a period that grew exceptionally well. The 80s was a period when poverty declined at the fastest rate.

Even casual empiricism shows that general levels of prosperity in the economy rose quite rapidly. The point is that agriculture growth is very important for overall growth. Table 4 shows the progress of selected agriculture programs. It shows that the rate at which they all increased between 1970 and 1990 is faster than its increase in the 90s, the programs being area under HYVs, irrigated areas, fertilizer consumption, public investment.

Table 4: Progress of selected agricultural development programmes

Program 1970 1980 1990 1996
Area under HYV 15.4 43.1 65 76.4
Irrigated area 38 54.1 70.8 80.7
Fertiliser consumption 2.2 5.5 12.5 14.3
Public Investment 2.1 4 2 1.8

Note: Area is in million hectares, fertilizer consumption is in million tones and public investment is as a share of sectoral GDP. Source: Economic Survey 1998-99 and National Accounts Statistics', Summary tables It is quite very worrying to note that public investment in the mid 1990s is lower than in 1970-71. One of the broad conclusions is that even though the relative price seems to have moved in the favor of agriculture exactly as the finance minister predicted, the rate of growth of agriculture has not improved. And as much as prices, development programs are a driver of growth of which public investment being one of them. Table 5 shows gross private capital formation and you will find that in the private sector there is a substantial increase in private investment as a share of total output and by 1996-97, private capital formation is higher than before.

Table 5: Gross Private Capital Formation
GCF 1970 1980 1990 1996
Volume 1969 2840 3440 5867
Rate 5.5 6.7 5.6 8.1

Notes: 'Volume' is in rupee crore at 1980-81 prices, 'rate' is volume as a percentage of sectoral GDP. Source: Economic Survey 1998-99 and National Accounts Statistics',CSO There are 2 ways to interpret all this data. One is to say that the future is yet to come. Or you could say that that is a matter of faith and that unless public investment really improves, growth will not improve. Table 3 shows the intervention price.

Table 3: Intervention price (Rs quintal on a crop year basis)

Commodity 1980 1990 1994 1998
Paddy 105 205 340 440
Wheat 117 225 360 550
Cotton 304 620 1000 1440
Jute 160 320 470 650
Source: Economic Survey 1998-99

Even though relative price of agriculture has improved, you may want to ask if it is because of why the architects of reform had said. For most crops, intervention prices had grown faster in the 1990s than in any other period. So the relative price increase is because of intervention.
Most crops where there has been no intervention have been doing worse off. And I keep emphasizing this because I strongly believe that it is this form of intervention that has made food security even more tenuous after 1991 than before. Let us now discuss reforms and welfare. The simplest approach to this is the price of food in relation to your income. Given the price of a commodity, it is your income that determines your access to that commodity. It could be completely independent of the availability of the commodity according to Amartya Sen. The price of food is very important in determining the food security, especially in India where poverty is highest. If reforms don't improve poverty at a faster rate than before then it is useless. So will the reforms be able to reduce it at a faster rate? Let’s talk about the factors by which the reduction in poverty is being slowed down in the economy. It is related to the nature of intervention of the government in the economy.

Table 7 gives data about 4 indicators -procurement price, market price, general price level (general price of all commodities in the economy which is how inflation is measured), stocks in the economy.

Table 7: Foodgrain price, inflation and stocks

Foodgrain price, inflation and stocks
Year Procurement price Market price General price level Stocks MnTn
(index) (Index)

1980 100 100 100 16.7
1990 193 179 185 11.3
1991 225 216 218 17.9
1992 261 242 235 13.9
1993 296 261 251 11.8
1994 314 293 283 22
1995 333 313 304 30.3
1996 375 354 328 28.5
1997 406 363 340 20
1998 455 384 379 18.2

Notes: (1) The procurement price index is based on a weighted average of the price of rice and wheat, the weights being the quantities procured. (2) Stocks of rice and wheat are as of January 1s; the prescribed norm for the buffer stock is 15.4 million tones. Source: Economic Survey, God, various issues.

Once again by the mid 90s the procurement price had increased as much as it had increased in the entire 80s. So procurement prices are rising at a very fast rate. Same for market price of food. The general price level has not risen quite that fast. Which is the point that I want to make? In India the relative price of food is rising. This is happening precisely at a time when reforms are being carried out which are meant to make the economy more modern. A high relative price of food is a feature of a very under developed economy. If you look at international trade market, from 1940-80 the relative price of food is declining at a steady rate and from that point of view the Indian experience is contrary to the rest of the world and it is extremely worrying. So for those sections whose incomes are fixed or not rising as fast as the rest of the economy, it is a matter of even more concern. This is no doubt the result of the nature of government intervention in the market. The government is pegging the price of food and raising it from year to year at a rate higher than the inflation rate for which there can be no justification except for placation certain lobbies. Especially when the stocks of food are quite high. That explains the whole puzzle. Stocks are piling up because the government is raising the price above what the market will bear. And because there is a procurement policy where the government will take up whatever is given to it at the MSP that cannot be sold because most of the population is tightening is belt because they cant afford the food and are getting poorer and that results in greater stocks. So the point that I want to make is that there is a conflict between producer prices and consumer welfare. All this is happening at a time when the food subsidy is ballooning. It is happening not because more is being distributed but more is being held. The ballooning subsidy does not prove that the government is doing good work and giving more to our fellow citizens but the fact is that the food policy is being conducted in the maniacal sort of way where the price of food is constantly being raised and many sections are getting priced out. The stocks are also rising relative to total production and not just in absolute terms. The reason I mention food subsidy is that the argument from any economist cannot be from the level of subsidy but the use of the subsidy -in the Indian case it is just the operational loss of the FCI -it is not used to feed people. It is better to just go out and give the money to people who need it rather than buying food at a price determined at a political level and not being able to sell it.

There is a great deal of debate about the PDS. Well, there is some debate and there should be more in my opinion. There is the PDS being the answer to the high stocks. That is only the partial solution according to me. Generically, can PDS do anything much about poverty in the long term? I'd say no. The PDS is a supply side arrangement. It is giving you a certain amount of grain at a fixed price but it is getting the grain out of somewhere else in the economy. It is getting grain that the FCI has procured. If the FCI keeps getting grain at a higher price then unless it keeps increasing the subsidy to the PDS then it cant maintain the price of food in the PDS. In an accounting price it is not feasible to do it without subsidy. So my thought is that the PDS is some sort of an afterthought. The principle purpose is to ensure a high price to the farmers, everything else is an afterthought. If maintaining food consumption levels was the primary purpose then you will not keep doing that by raising producer prices. It is not sustainable. There is a complete contradiction between the 2 policies. There is lot of talk about Kerala's levels of living having improved due to the PDS;

Let me wind up by making another argument in the PDS. I have looked at some measure of the PDS and a measure of poverty. Table 6 has a ranking of the states in terms of the PDS and poverty
PDS and poverty: Statewide ranking
PDS Poverty
Andhra Prades 5 12
Bihar 11 2
Gujarat 4 10
Haryana 12 13
Karnataka 7 8
Kerala 1 11
Madhya Pradesh 9 5
Maharashtra 6 7
Orissa 10 1
Punjab 13 14
Rajasthan 8 9
Tamil Nadu 3 3
Uttar Pradesh 14 6
West Bengal 2 4

Source: The estimates, pertaining to the years 1986-87 and 1987-88 by ShikhaJha and thePlanning commission respectively, are as reported by Mooji(1999) If the PDS were an important element in combating you would expect a positive relation. The poorer should have a greater PDS. If you take off Punjab and Haryana, which are very rich states, then the correlation is negative. What it shows you is that the PDS is not where it is needed most. I'd like to relate my own experience when I lived in Bangalore. I went to the civil supplies office close to my house. You will really have a shock if you go there because the staff there have no idea what is happening and you can’t blame them. The government is not giving them any support. They are in no position to monitor what is going on. And this is the case for a person who was living with a valid address and paying income taxes. What if you are migrant labor? What if you live in a slum? I'm not sure if the PDS will help in its current state. My more general point is that a system that gives you food at a fixed price when the input prices are rising cannot work. The origins of the PDS were in Bengal when the government was pumping in a lot of money for the war effort and demand for food soared and prices spiraled. So in order to maintain urban prices, the government procuredgrain from the farmers at any price. So it benefits the people in the urban areas. But what about the people in the rural areas who grow chills or fish or whatever? They are affected because their access to grain is limited because prices are being bid up. Hence the PDS's viability is questionable.

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