The art pricing of pulses

It all started with my stumbling upon Seetha Parthasarathy’s critique of the Arvind Subramanian (AS) committee report on the pricing of pulses in India. He is the Chief Economic Advisor (CEA) to the Government of India. On Saturday, my good friend Praveen Chakravarty had already flagged my attention to that report. But, I had to leave for a get-together of some of my batch-mates visiting from India.

Seetha did not appear particularly thrilled either with the report or with the press conference in which the report was released. She thought that recommendations to increase either the Minimum Support Price for pulses or raise the procurement quantity were standard solutions. Further, she was disappointed that the CEA was not forceful enough on market solutions – on abolishing export quotas, restrictions, ban on forward and futures trading on commodities, etc. She had a point.

Sunil Jain had written a slightly more positive comment on the AS Committee Report (ht: Aashish Chandorkar). However, he was wrong in one respect. Contrary to what he wrote, the report did not officially recommend a reduction in Minimum Support Price (MSP) for Paddy. It discusses it and mentions it as a desirable recommendation but stops short of putting it in its list of recommendations. Pages 5-6 and 36-37 summarise the recommendations (yes, twice). But, the recommendation to cut the MSP for paddy is not there.

I went through the report. First, the CEA had consulted widely. Second, the report does a good balancing act, in my view, between the politically possible and economically sensible and tried to find the middle ground by opting for incremental improvement while retaining some recommendations that politicians are familiar and comfortable with.

Third, the report was understated on export bans, stock limits and raids. Yet, there is a full page on the need to rethink the Essential Commodities Act 1955 (appendix 3, page 40). But, I think that is the politically correct thing to do. To beat up the politicians for what they have done, from an economist’s perspective, might be intellectually satisfying but politically unlikely to get the recommendations accepted.

Some of the highlights of the report:

Yields in India are relatively low compared with those abroad. For example, tur yields average close to 725 kg/ha whereas in Myanmar it is nearly double that.

Pulses, in contrast, are grown by small and marginal farmers in dry-land areas. They are not as wealthy as cereal farmers and are less able to mobilize.

arvind-subramanian_subsidies-for-pulses-and-grains_sept-2016

The debate over feasible vs. ideal policy proposals does not have a conclusion. Perhaps, pushing the boundaries of what is possible may lead to a better than expected outcome whereas setting goals lower means leaving a lot more for the future. Alternatively, pushing the limits of what is feasible might lead to an outright rejection of the proposals shutting out the possibility of incremental progress. What is the right approach? There is no universal answer. The context and the personalities of the individuals involved will determine the context-specific answer.

Having seen the commentary from Seetha and Sunil Jain, I checked the web to see if others had written something. On September 2nd, Harish Damodaran had written a brilliant commentary on why restrictions on stockholding and export of pulses must go. It is a master class in development economics. I recall this very well from the course on Development Economics that I audited while I was at the University of Massachusetts in Amherst early in the 1990s. It was taught by Professor Mohan Rao who was quite a Marxist. Nonetheless, I learnt quite a bit from that course. One of them is the feature of ‘urban bias’ in policymaking.

Tomes of literature in Development Economics on the urban bias in policymaking are summarised in that Op.-Ed. by Harish Damodaran. Sample this:

There is a clear pattern in all this. Any price increase in farm produce is immediately followed by government action, invariably violating every rule of free trade. In the meantime, farmers themselves respond to higher prices by ramping up production, as they did for potatoes in 2014-15 and for onions in 2015-16. Prices crash as a result, yet the restrictions remain; by the time they go, it’s too late for farmers. The alacrity in imposing controls, and the lack of urgency in withdrawing them, is a reflection of the larger political economy, where the voices of urban consumers carry far more weight than that of rural producers.

He is unfortunately very right. As I mentioned earlier, Harish Damodaran not only summarises the literature on urban bias in policymaking that is very familiar to development economists but he also shows up the inability and the failure of the policymaking establishment (that includes bureaucrats too) to appreciate lags in policy and impact.

Finally, he reminds us of the unintended consequences on Consumer Price Index (CPI) inflation targeting in an economy where CPI has a 46% weight assigned to food and where production structures are fragmented.

Does it lead to price ceilings on farm produce for the sake of meeting a numerical inflation target? Will RBI take the broader view and be prepared to write letters to the Government even allowing for an overshoot up to the upper limit of the band? Or, should the Government and the Reserve Bank of India (RBI) have gone for a core CPI target that excluded food but not energy?

Alternatively, would it have been better to wait until food became progressively less important to CPI basket, so that what happened to farmers’ prices did not affect CPI so much, giving more policy freedom on boosting farm income and productivity? That would happen when the economy roughly doubles from the current size of Rupees 13,40,000 crores (USD2.0trn).

His column throws up these questions.

That said, Harish was not entirely right (nor entirely wrong) in his piece written in June on Raghuram Rajan and RBI’s CPI target pointing to deflation in wholesale prices (Wholesale Price Index or WPI). That was an extreme example as WPI is not representative of the overall economy. It is heavily skewed towards manufacturing whereas the economy is dominated by services. So, he is not very correct in using WPI as the deflator to calculate real rate. But, he is right to point out that, given the importance of food to the CPI basket, a CPI target imparts an anti-farmer bias to monetary policy. RBI should be mindful of that.

He again is wrong in attributing farmer-unfriendly policies to the inflation target of RBI: “It naturally predisposes policymakers towards freezing minimum support prices, imposing curbs on farm exports and stocking limits at the slightest indication of prices going up, and opening up to duty-free imports”.

The simple fact is that these were being resorted to even when India did not have a CPI inflation target for monetary policy.

The urban bias in policymaking has been an endemic feature in India and in other developing countries too. Well, they are the ones who made it to civil service and they had no clue about the rural side. The solution is not to replace one bias with another by only hiring candidates from rural India – affirmative action – although that can be one part of the solution, as long as minimum standards of competence are maintained.

It is trite but not wrong to stress sustained education and exposure of policymakers and incentives to get it right and disincentives for getting it wrong. Writing Op.-Eds. is easier.

(This was published in ‘Swarajya’)

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