Farmers in Punjab, Uttar Pradesh and West Bengal, hurt by crashing prices, have taken to dumping their potatoes on the roads. This dramatic but little-watched series of events should be a warning: what hurts growers in the short run winds up hurting consumers in the longer run, as the iron laws of supply and demand act to discourage production. The price crash the farmers were protesting is not limited to potatoes; it cuts across commodities, affecting almost all those crops whose prices are not supported through government procurement. The exceptions, therefore, are wheat and rice. Vegetables like onions, tomato, ginger, and garlic have become significantly cheaper, as have plantation products — notably pepper — and fibres like cotton and silk. Costs, too have gone up, driven by higher labour and input costs.
This is, of course, the flip side of the much-heralded fall in food inflation, which has come down to nearly zero — driven, for example, by onion prices falling by as much as 75 per cent year-on-year. Potatoes have fallen 35 per cent year-on-year; other crops, by between 15 and 50 per cent. Basic economic logic implies that disincentivising farmers in this manner will cause supply to dry up, and food inflation will likely once again go through the roof. The urban bias of India’s agricultural policy is revealed by the fact that, when prices rise the government steps in immediately with interventions like export bans, stock limits and other old-style curbs and controls; but when prices slide, nothing is done to minimise distress sales.
Is this price slump just a seasonal variation? Or is it the result of some structural or policy deficiencies? The high food inflation phase, which lasted nearly a year and half before ending sharply last month, was attributed to a supply crunch, caused largely by the paucity of post-harvest produce management infrastructure and inefficient marketing. These factors have hardly been rendered irrelevant. Yes, production has probably gone up, following increased investment by farmers in yield-boosting inputs, in anticipation of better returns and favourable weather. However, the output increase in most cases has not been substantial to warrant a price crash of this order. In onions, for example, the output is estimated to have risen just by four per cent or so; yet prices have plummeted by nearly 75 per cent. Clearly, structural factors and policy issues are more to blame for the instability caused by wild price swings. The policy prescription is clear: more rural roads; increased transportation and storage, particularly refrigerated; and no knee-jerk, ill-conceived policy reactions in the form of relaxations in export curbs and stock limits. Reform is essential to enhance marketing efficiency, and direct deals between farmers and retailers must be allowed. Above all, farmers need to have access to mechanisms that will allow them to hedge their production and price risks. Only properly stabilised production will curb price volatility, and the political and economic instability that comes with it.