Extending the folly

The Maharashtra monopoly cotton procurement scheme's colossal financial losses of over Rs 1,500 crore do not seem to have deterred the Centre from further experimentation in this area.

This year, it has roped in other agencies to undertake an inherently loss-making procurement operation. Its directive to the Cotton Corporation of India (CCI) to buy all the cotton offered to it all over the country is likely to entail a loss of over Rs 300 crore, which the Centre will have to reimburse.

Besides, the government has given similar instructions to the National Agricultural Cooperative Marketing Federation (Nafed) with the assurance that it will not only make good the losses, but pay it service charges for the favour.

Issues of fiscal prudence apart, the open-ended procurement of cotton or, for that matter, any other commodity can be questioned on several other counts.

For one, the concept of government procurement (read: market intervention for price support or manipulation) is incompatible with the new economic regime. It is also contrary to the main objectives of futures trading, especially the ones concerning price discovery and price stability.

Besides, it is tantamount to supporting inefficient production and inventory build-up, perpetuating price slumps""precisely what monopoly procurement is intended to combat. Though procurement operations are ostensibly undertaken to safeguard the interests of farmers, they often end up doing the opposite.

It is no coincidence that the incidence of suicides among cotton farmers is greater than other crop growers. Maharashtra, where monopoly procurement has been in vogue for over three decades, is no exception.

On the other hand, it is not as though cotton growers are thrilled with the functioning of the procurement agencies. Many of them prefer to deal with private traders, who may pay less but compensate for this by making instant payments for the produce and also lend them money when needed.

The official procurement agencies suffer from mismanagement and indulge in various malpractices, including payment defaults, manipulation of product grading, and undervaluation of stocks.

There have been times when the cotton growers of Maharashtra got lower returns than their counterparts elsewhere because of limited selling options.

In the current year, international and domestic cotton prices have tended to remain relatively low in the wake of higher production, but the slump is unlikely to last long. International prices have already begun to look up as a result of lower cotton planting in several countries. Domestic futures contracts, too, are quoting at higher rates.

The hardening seen in the prices in synthetic fibres, the main competitor to cotton, due to the higher prices of petrochemicals-based inputs, and growth in domestic cotton demand are all pointers to a further firming up of cotton prices.

Against this backdrop, the government would do well to withdraw its agencies from procurement operations and let market forces decide price and production trends.

In fact, the commitment of the present government to create a common agricultural market in the country is in the best interests of farmers, traders, consumers, and other end-users of agro-products.

The sooner market manipulation instruments like open-ended procurement are scrapped, the better it would be for agriculture and other sectors.