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November 6, 1998


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Business Commentary / Bibek Debroy

Why India should learn to accept higher prices for Bharat products

Economist Bibek Debroy flags off a new business column.

Sharad Joshi, farmer and peasant leader, often talks about a dichotomy between Bharat and India. This assumes significance in view of what has happened to prices of agricultural products. Onions, potatoes, tomatoes and perhaps even rice.

Today, what the Indian farmers get for output is lower than market-determined prices. This is in two senses, depending on how one defines market-determined prices. First, procurement prices are lower than market-determined prices within the country; in several products, there is a form of compulsory procurement. Second, even internal market-determined prices are lower than what farmers can obtain on world markets, since global agricultural prices are generally higher than Indian prices.

So why should farmers not be allowed to export and obtain prices that are rightfully theirs? Not allowing them to do so, is tantamount to indirectly taxing agriculture. Will anyone argue that garment exporters should not be allowed to export shirts for four dollars and instead must sell the shirts domestically for two dollars? If something is illogical for manufactured products, it also should be illogical for agricultural products.

Let me state this differently and draw a distinction between manufactured products and agricultural products again. As a sweeping generalisation, prices of Indian manufactured products are higher than global prices and prices of agricultural products are lower than global prices. If one completely freed trade, the price differential will come down. Consequently, prices of manufactured products in India will come down and prices of agricultural products will go up.

This is a trade-off that follows reforms. As consumers, we are happy that prices of manufactured products have come down, think of prices of several consumer durables. But we resent it the moment prices of agricultural products begin to go up. I don't understand the logic at all.

I am not suggesting that prices of onions went up because of this, I am making a general point. As consumers, we have to be prepared to pay higher prices for agricultural products.

One encounters the typical reaction, ''but farmers are subsidised. They don't pay taxes on agricultural income, they get subsidised inputs like water, electricity, fertilisers, seeds.'' True. But when one is reforming, one plans to reform both input and output prices. Farmers will get higher prices for output and pay higher prices for inputs.

This is the spirit of the Uruguay Round agreement, although the liberalisation proposed in that agreement is at best an incomplete one. The farmers benefit from higher output prices, but lose out on higher input prices. What happens on balance?

This is a question that can only be answered by looking at empirical facts. Studies done, such as by Ashok Gulati and others, show that on balance, farmers gain. Thus, in net terms, in spite of the subsidisation of inputs, the Indian farmer is taxed, a tax being interpreted as a negative subsidy. This mindset is of course a hallowed tradition in planned economies. Tax agriculture and release a surplus for industrial development. But a policy is silly, regardless of whether it has a hallowed tradition or not.

The biggest competitor to India's agricultural exports is not some other country. Tea exports don't primarily face competition from Kenya or Sri Lanka. The largest competitor is the domestic market. Prices go up, clamp down on exports. One encounters the phenomenon for tea, coffee, raw cotton and onions.

But this allowed-today-banned-tomorrow policy earns India the label of an unreliable and erratic supplier. Other countries don't come back for repeat orders. As consumers, we must therefore be prepared to pay higher prices. Once we liberalise, it is not only exports that are liberalised, imports also have to be liberalised.

So if we are not prepared to pay more for Darjeeling tea, we are free to drink cheap Kenyan tea instead. If we are not prepared to pay more for basmati rice, we are free to eat cheap Thai rice instead. Edible oils is one instance where prices domestically are likely to come down as a result of trade liberalisation.

Fair enough. But what about the consumer? Garments are not quite the same thing as food. Food is necessary for survival. What about the poor? This is a valid point. But surely, everyone in the country is not poor. By all means let us have a public distribution system that is properly targeted towards the poor, instead of the present one that has a pronounced pro-urban bias and does not exist in the areas where the poor really need them.

Providing food cheaply to the poor is not quite the same thing as providing food cheaply to everyone, which is what we are doing right now. The poor are really in villages, urban poverty is essentially a spillover of rural poverty. Through what we are doing, we are taxing the poor to pander to pampered urban consumers, who of course are a very vocal lobby.

Will liberalisation really help the poor farmer who has no marketable surpluses? Sixty per cent of farmers have nothing to sell to the market. We don't really know the answer to that, do we? The agricultural sector has been so messed about through State intervention in the last 50 years, that we haven't provided farmers a chance.

There are all kinds of restrictions on inter-state movements. The rural credit and insurance sectors are in a shambles; clearly, the public sector can't deliver. Rural infrastructure has collapsed, and in infrastructure, maintenance of existing ones is just as important as new construction.

In some of these problem areas, we haven't given the private sector a chance. In other areas, like infrastructure, the government has a major role to play. But the government cannot be a distant and anonymous one, sitting there in district headquarters.

We thought State intervention was necessary because agriculture and farmers are backward. I am not sure this is a valid proposition. I suspect farmers have far more of entrepreneurial spirit than some of our large-scale industrialists. Let's get the government off their backs. Bharat can transform what India looks like.

Bibek Debroy

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