AGRICULTURAL pricing is a subject of lively debate. It has evoked divergent views, ranging from a forceful advocacy of support prices for key agricultural commodities and subsidies for major inputs to complete liberalisation of prices and reliance upon the market mechanism to achieve efficiency and competitiveness.
Successful integration with the international economy has also been considered an important factor.
An objective analysis of the issues involved in this debate is necessary so that appropriate policy prescriptions can be adopted.
Agriculture is critical to economic growth and poverty reduction. It accounts for close to a quarter of the GDP and employs over 44 per cent of the workforce. The average annual growth of agricultural output at more than four per cent has been quite impressive.
Future growth will, however, largely depend upon increasing productivity which in turn requires major changes in systems, policies and institutions for agriculture. One of the key government policies, which directly impact upon agricultural growth, relates to pricing.
Agricultural price policy refers to government’s role in influencing prices of agricultural inputs and outputs. Output pricing includes fixation of support or procurement prices of various agricultural crops, while input pricing refers to subsidies on seeds, fertilisers, pesticides, machinery, water, electricity, fuels, and farm credit. These two aspects of pricing are inter-related as cost of production is an important element in the determination of output prices.
Agricultural price policy, being a sub-set of the overall macroeconomic policy, impacts upon the allocation of resources, income distribution, industrial productivity and exports.
The rationale of input pricing policy is to provide production incentives to encourage adoption of new technology and greater investment by farmers. It is argued that high output prices may be diverted to consumption rather than investment expenditure. This policy continued throughout the 1960s and 1970s.
Subsidies on fertiliser, pesticides, seeds and farm mechanisation have been phased out since the mid-1980s. A significant subsidy on canal water, however, remains, together with some subsidy on electricity used by tube-wells in Balochistan.
Evidence suggests that the benefits of the subsidies are mostly availed by big farmers as they make larger use of modern inputs than small and medium farmers who face numerous constraints. This has led to a realisation about the inadequacy of subsidies as a policy instrument and a greater focus on augmenting timely supplies of inputs.
It is in this context that output pricing policy is considered a more feasible option. The concept of a minimum guaranteed price, known as support price, has been introduced since the early 1980s to protect the farmer from price fluctuations and ensure a minimum return in view of post harvest glut, fragmented commodity markets, and poor holding capacity of the farmer.
Advocates of price support system argue in terms of farmer protection against price fluctuations of agricultural commodities due to (a) low price elasticity of demand; (b) biological cycle of production in that production cannot be adjusted to price changes owing to time lag; (c) seasonal nature of output in that prices are depressed at a time of glut and rise off-season when farmers due to lack of holding capacity had sold off the crop; (d) distress sale by small farmers, who account for 80 per cent of total farms, to meet their consumption and investment needs; (e) fragmented commodity markets dominated by middlemen and processor cartels; and (f) uncertainty on account of the weather factor.
The support price programme primarily aims at providing a floor to market prices in the post-harvest season and initially covered eight crops, namely wheat, rice, cotton, sugar cane, potato, onion, gram, sunflower, safflower, soybean and canola. The implementation of support prices of various crops has evolved over time and undergone policy and institutional changes. There was a strong implementation of the programme during the 1980s.
The importance of agricultural price policy has dwindled with the onset of market and price liberalisation as an integral part of the economic reforms since the early 1990s. Since 2001, support price for only four crops i.e. wheat, rice, cotton and gram is being notified. The policy of selective intervention on need basis to protect the farmer against extreme price volatility is being followed and market forces generally allowed a free play.
The relative efficacy of input subsidies and output pricing has been debated by experts. The role of output support price in enabling producers to use inputs flexibly has been underscored, while input subsidies encourage the adoption of certain technology and higher use level of inputs. Output prices at the same time are relevant only for those having a marketable surplus, while input subsidies benefit all those using the technology.
It would be worthwhile to dwell on the rationale and implications of the policy of price liberalisation of outputs and inputs being followed as part of economic liberalisation since the early 1990s, and the policy recommendations that flow from it. The support price policy is considered inadequate in terms of a) its contradictory objectives of providing incentive to the producer and subsidising the urban consumer; b) leading to allocative inefficiency in resource use and giving rise to trade distortions; and c) mismanagement by public sector procurement agencies and fiscal cost.
Empirical studies of nominal protection coefficients – ratio of domestic to international prices – prior to price liberalisation have shown an implicit tax on wheat, cotton, and basmati rice, a subsidy on sugar cane and no tax on IRRI rice. Since the early 1990s, however, relative prices of wheat, cotton, and basmati rice have improved and subsidy on sugar cane reduced.
As a result, transfer of surplus from agriculture sector has reduced since the 1990s due to price, trade and exchange rate liberalisation. There is a shift from implicit taxation towards improved prices of outputs. It may, however, be stated that productivity impact of policies is not easy to determine as complex interactions are involved.
As we press ahead with the policy of price liberalisation of both agricultural outputs and inputs as part of our overall economic reform strategy to improve efficiency and to facilitate integration with the world economy, we should not lose sight of the ground realities faced by the farmer. One, farmers in the developed world are still benefiting from huge subsidies. Second, agricultural market structures are far from competitive and marred by glaring imperfections. Third, the peculiar nature of agricultural production, price volatility of agricultural commodities, and lack of vital storage and marketing infrastructure are serious constraints in effecting a full transition towards market based policies.
A host of policy measures need to be effectively implemented to realise the positive outcomes of price and market liberalisation and to lessen the pain of adjustment. First, market and storage development is critical. The government should provide incentives to the private sector for storage development which is critical to price stability. Adequate support to develop private marketing channels for greater competition should be provided.
Second, small farmers should be provided greater access to credit to improve their productivity. Third, periodic government intervention to hedge against extreme price volatility should continue. Fourth, the prevalent system of general subsidies, which leads to leakage of benefits to the non-deserving, should be replaced by targeted subsidies to poor and indigent consumers.
Finally, effective policies for income redistribution should be pursued to ensuring that the long-term benefits of structural adjustment reach the lower segments of society.