The following column was originally published in the The Financial Express.
BY: Devesh Roy and PK Joshi, IFPRI
Its pulses yet again. Relative to last year, prices of major pulses such as tur and urad have gone up by as much as 60-70%. The threat of a weak monsoon has compounded the risks of prices sky-scraping to new highs. The government has responded by trying to cool markets with imports and has also announced bonus laden higher minimum support prices (MSP) for pulses.
Few points are noteworthy in this pulse chronicle. First, after only a small period of dormancy, pulses have reared their heads again, indicating that there likely are structural factors ruling prices. Second, both wholesale and retail prices have been rising. What about farm-gate prices, how have they been changing just when retail and wholesale prices have been soaring? The only thing that one can say about farm-gate prices in pulses is that they have been somewhere around the MSP, mostly on the south-side of it.
There are two versions of MSP, one with procurement and one without. Pulses MSP falls in the second category. Without procurement, MSP can only be a benchmark price as has been the case with farm-gate prices hovering in the MSP’s vicinity. It might seem that even without procurement, MSP could spur production since farm-gate prices move in line with MSP and supply curves are upward sloping. Unfortunately, economics never is so simple.
When the government does not procure, the farmers depend on traders to buy from them. Suppose there is no MSP, i.e., no benchmark price. Each trader would have private information on the price to offer. A prisoner’s dilemma in the pricing game might ensue. While it will hurt the traders, it would benefit the farmers with better prices. Now, when there is MSP, it becomes the anchor on which a collusive equilibrium among the traders can be maintained. The possible prisoner dilemma game converts into a cooperative one.
Moreover, the incentive to collude is stronger when the market price is higher since the wedge between the price at which traders would buy and the one at which they would sell would be larger. Farmers would get a higher price if the MSP rises but, at the same time, they could lose by realising a price farther away from the market price. We call it an opportunity price. Ironically, if there were no MSP, strategic interaction among traders could result in higher farm-gate prices. Such effects would exist in other cases as well—where MSP is announced but procurement does not take place—for example, oilseeds. What the announcement of MSP without procurement does to the opportunity price for the farmers is very important from a policy perspective since the raison d’être for MSP is to improve farm returns.
What if procurement is introduced in pulses? Many commentators have argued in favour of such a system. From the point of view of impacts on farmers the relevant questions are: Who produces pulses, who knows about MSP and who utilises the system of MSP? Evidence from NSS data for rice and wheat shows that less than 6% farmers (mainly large) utilise MSP and a vast majority do not even know about them. Note that this is the situation after such a long history of MSP in cereals beginning in the mid-1960s.
Moreover, pulses are increasingly being grown in marginal, non-irrigated environments. If so few of the better endowed farmers avail of MSP in cereals, what hope may one nurse for pulse-farmers with regard to utilisation of MSP with procurement? Additionally, the political economy would be such that MSP of other crops would also need to change. It is not clear how the MSP competition would turn out to be if pulses were also in the fray. Instead of MSP, the government should focus on how to better transmit consumer prices to farm-gate prices. In this, ironically, MSP could actually be a stumbling block.
The best way to foster better price transmission in pulses is to better farm-fork linkages. Here, the pulse processing can play an important role. Unfortunately, pulses processing in India remain largely unorganised and characterised by small scale of operation with very few examples of firm-farm linkages. The gradually expanding organised retail in India also does not integrate directly with pulse producers.
Apart from this, instead of priming MSP, the government should focus on reducing variability in yields and make pulses a more attractive crop. Areas where watershed development has succeeded in recent years could be scoped out for pulses cultivation. This will only be possible if consistently high yields are observed and relative price distortions are mitigated so that more farmers are encouraged to adopt pulses.
In upstream as well as downstream links, in case of pulses, the private sector is conspicuous by its absence. Two areas in pulses in which the role of private sector can be augmented are: (i) strengthen seed sector for promoting high-yielding pulse varieties, and (ii) develop better market linkages so that farmers get competitive prices. If pulse production increases by only area (new) expansion, that will adversely affect the farmers as the prices would fall. Productivity increase is necessary to maintain the profitability of pulse production. Incremental gains due to yield increase should be greater than the fall in their prices, on account of rise in pulse production, to maintain (or increase) profit. How to enhance the engagement of the private sector in pulses is probably the main issue that government needs to address.
Roy is research fellow and Joshi is South Asia Director at the International Food Policy Research Institute.