Price Policy. Rabi Crops THE MARKETING SEASON for. Price Policy for Rabi Crops

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1 Price Policy for Rabi Crops Price Policy for Rabi Crops THE MARKETING SEASON THE MARKETING SEASON Vol. I COMMISSION FOR AGRICULTURAL COSTS AND PRICES Department of Agriculture & Cooperation Ministry of Agriculture Government of India New Delhi August 2012 COMMISSION FOR AGRICULTURAL COSTS AND PRICES Department of Agriculture & Cooperation Ministry of Agriculture Government of India New Delhi August 2012 Vol. I

2 Price Policy for Rabi Crops THE MARKETING SEASON COMMISSION FOR AGRICULTURAL COSTS AND PRICES Department of Agriculture & Cooperation Ministry of Agriculture Government of India New Delhi August 2012

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4 CONTENTS S. No. Description Page Acronyms I List of Tables iii List of Charts iv Summary of Recommendations v-x 1. Overview Demand-Supply, Procurement and Efficacy of Price Policy Competitiveness of Indian Agriculture Costs, Returns and Inter-Crop Price Parity Productivity and Costs of Major Rabi Crops Considerations & Recommendations for Price Policy 69-78

5 A2+FL APMC C2 CACP CAGR/CARG CAP CBOT CCEs CCI CIF C&F CF CoP CPI-AL CS CSO CV CWC DAC DCP DES DFPD DGCIS DGFT DIPP DOC EDI FAO FCI FFPI FOB List of Acronyms Actual paid out cost plus imputed value of family labour Agricultural Produce Market Committee Comprehensive cost including imputed rent and interest on owned land and capital respectively Commission for Agricultural Costs and Prices Compound Annual Growth Rate/Compound Annual Rate of Growth Cover and Plinth Chicago Board of Trade Crop Cutting Experiments Competition Commission of India Cost, Insurance & Freight Cost & Freight Correction Factor Cost of Production Consumer Price Index for Agricultural Labour Comprehensive Scheme Central Statistics Office Coefficient of Variation Central Warehousing Corporation Department of Agriculture & Cooperation Decentralized Procurement Directorate of Economics & Statistics Department of Food & Public Distribution Directorate General of Commercial Intelligence and Statistics Directorate General of Foreign Trade Department of Industrial Policy & Promotion Department of Commerce Electronic Data Interchange Food and Agriculture Organization Food Corporation of India FAO Food Price Index Free on Board i

6 GCF GDP GVO HA HRW HSDO IMF LDO MMTC Mn MSP NAFED NCCF NCDEX NFSB NSSO OECD OGL PDS PEG PPP PSS Qtl R & M RMS SEA SOPA SRR SRW STC TE TFP TPDS USDA VAT WPI WTO Gross Capital Formation Gross Domestic Product Gross Value of Output Hectare Hard Red Winter High Speed Diesel Oil International Monetary Fund Light Diesel Oil Minerals and Metals Trading Corporation Million Minimum Support Price National Agricultural Cooperative Marketing Federation of India Limited National Cooperative Consumers' Federation of India Limited National Commodity and Derivatives Exchange National Food Security Bill National Sample Survey Organization Organization for Economic Co-operation and Development Open General License Public Distribution System Private Entrepreneurs Guarantee Public-Private-Partnership Price Support Scheme Quintal Rapeseed and Mustard Rabi Marketing Season Solvent Extractors' Association of India Soybean Processors Association of India Seed Replacement Rate Soft Red Winter State Trading Corporation Triennium Ending Total Factor Productivity Targeted Public Distribution System United States Department of Agriculture Value added Tax Wholesale Price Index World Trade Organization ii

7 List of Tables Table No. Topic Page No. Table S.1 Actual and Recommended MSPs of Rabi crops vii Table 2.1 Availability and Use of Rabi Crops ( to ) 13 Table 2.2 Comparative position of wheat procurement & stocks in CAP & % in Kutcha CAP in major States as on 1st June 2011 and 1st June Table 2.3 Major States imposing Levies (as % of MSP) (RMS ) 26 Table 2.4 Prices of wheat during Oct 2011 to Mar 2012 in major States 26 Table 3.1 Forecasts for International Prices 43 Table-4.1 Gross & Net Returns on actual estimates of cost for the years from to Table 4.2 Compound annual growth rate of agriculture labour wage rate (Rs/day) for states and at all-india level in nominal and real terms (Dec.2008-May 2009 to Dec.2011-May 2012) 50 Table 4.3 Variations in projected C2 and A2+FL costs across states for rabi crops, Table 4.4 Relative returns (%) of Rabi crops over A2+FL and C2 in Table 4.5 Estimated cost of production for Rabi Crops for , inclusive of Table-5.1 Marketing/Transportation and crop Insurance Premium (All India) 58 Growth (CARG) in Area, Production and Yield of Rabi Crops at All-India during Decades of 1990s and 2000s 62 Table 5.2 Impact of Variation in Yield on CoP (%) 64 Table-5.3 Gaps in India's Yield Levels of Various Rabi Crops 65 Table-5.4 Elasticity of Yield w.r.t. Various Causal Factors (Drivers of Yield) 66 Table-5.5 Average Divergence between CS and CCE Yield Rates during to Table 6.1 Average Margins of MSP over C2 and Net Returns for Major Rabi Crops 75 Table 6.2 Projected C2 costs for crop season for major rabi crops 76 Table 6.3 Recommended MSPs of Rabi Crops iii ( ) and their Justification 78

8 List of Charts Figure No. Topic Page No. Chart 1.1 Production of major crops during last three years 3 Chart 1.2 Central Pool Stocks with FCI 4 Chart 1.3 Procurement, Allocation & Offtake during last five years 5 Chart 1.4 Contribution of various items to Inflation in Primary Food Articles 6 Chart 1.5 Change in monthly per capita consumption of cereals in Urban & Rural areas: & Chart 1.6 Comparative growth in GDP(overall) and GDP(agri) during Plan periods 8 Chart 1.7 GCF in agriculture and share of public & private investments 9 Chart 1.8 Composition of Public Resources for Agricultural Sector 9 Chart 2.1 Wholesale (mandi) prices of select commodities over two years 14 Chart 2.2 Composition of Coarse Cereals, TE Chart 2.3 Barley and Maize Prices (Apr 2001-June 2012) 16 Chart 2.4 Pulses Production -Share of Major Pulses, TE Chart 2.5 Wholesale Prices - Gram (Chana) and Kabuli Chana (Jan 2007-Jun 2012) 19 Chart 2.6 Average Monthly Prices of Chana and Yellow Peas (Jan 2010-Jul 2012) 19 Chart 2.7 Chart 2.8 Wheat Procurement as % of Production & Market Surplus ( ) 21 Procurement as a percentage of Arrivals in select States ( to ) 21 Chart 2.9 (a) Share of major States in wheat procurement (RMS ) 22 Chart 2.9 (b) Share of major States in wheat procurement (RMS ) 22 Chart 2.10 Procurement as a share of production in MP ( ) 23 Chart 2.11 Composition of Economic Cost of Wheat for FCI ( ) 25 Chart 2.12 Economic Cost of Wheat to FCI Vs Procurement ( to ) 25 Chart 3.1 India's Trade in Agricultural Products vs. India's Total Trade 32 Chart 3.2 Composition of Agri-Exports & Imports, TE Chart 3.3 India's Exports & Imports of Wheat during to Chart 3.4 International prices Vs Domestic Prices of Wheat 35 Chart 3.5 International prices vs. Domestic Prices of Barley 36 Chart 3.6 Value and Volume of India's Imports of Pulses 37 Chart 3.7 International vs Domestic prices for Gram & Lentil 37 Chart 3.8 Value and Volume of India's Imports of Edible Oils & Exports of Oilmeals 39 Chart 3.9 International Prices Vs Domestic Prices of R&M Seed & R&M Oil 40 Chart 4.1 Compound annual growth rate of agriculture labour wagerate (Rs/day) for states and at all-india level (Dec.2008-May 2009 to Dec.2011-May 2012) 51 Chart 4.2 Percentage Increase in input Prices in WPI (May 2012 over May 2011) 51 Chart 4.3 (a to f) Projected Cost and Supply of Rabi Crops by States for Chart-5.1 (a to f) Relationship between Real Cost of Production and Yield Rates 63 Chart 6.1 Bulging Stocks of Foodgrains with State Agencies ( ) 72 Chart-6.2 Rising Imports of Edible Oils & Pulses 73 Chart 6.3 CBOT Wheat quotes during April-July Chart 6.4 India's Agri Exports & Agri-Imports 75 iv

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10 Price Policy for Rabi Crops Summary of Recommendations Price Policy Recommendations S.1 In the reports of the Commission for the marketing season , namely the Price Policy Report for Rabi Crops (as well as that for Kharif Crops), a major realignment in MSPs was recommended keeping in mind the sharply rising costs of production, domestic and international prices, and overall demand and supply situation of various commodities in the country. The Government accepted those recommendations and made a major move towards getting prices right to incentivize farmers to raise productivity and produce more. Farmers have responded to these price signals, and aided by good weather and other production and marketing policies, the country has reaped the biggest ever harvest of foodgrains at 257 million tonnes (wheat 94 million tonnes, and rice 104 million tonnes) in This achievement is unprecedented and commendable as this is the likely demand of foodgrains estimated by the th Planning Commission for the year , the end of the 12 Five Year Plan. As a result of this spectacular performance on production front, st and concomitant procurement, as on July 1, 2012, the public agencies had 80 million tonnes of grains (wheat and rice) stocks. The challenge is now of managing surplus grains prudently. v

11 Price Policy for Rabi Crops S.2 The major focus of this report now is getting the markets right for six rabi crops, besides recommending their MSPs. The MSPs are recommended keeping in view the likely demand and supply scenario of these commodities in marketing season , their projected costs of production, domestic and international prices, terms of trade, inter-crop price parity and the likely impact of prices on cost of living, and industrial cost structures. The Commission expects that in RMS there will be a large excess supply of cereals, especially wheat, which cannot be fully consumed at home and the Government will find it challenging to store safely or export. Given this situation, the Commission recommends freezing the MSP of wheat and barley at the levels, i.e., Rs 1285/quintal for wheat and Rs 980/quintal for barley, while keeping their exports open. It is anticipated that with exports of wheat picking momentum, the domestic wheat prices will take a lift and farmers will stand to benefit from that. In case the Government imposes export bans on wheat and barley, the Commission recommends that the government should simultaneously then announce a bonus of 10 percent on their MSPs to compensate farmers for this implicit taxation through export controls. S.3 However, in case of oilseeds and pulses, although the government had substantially raised their MSPs last year, the Commission recommends some increases this year as the imports of edible oils and pulses have crossed Rs 55,000 crores in This indicates the need to bridge the widening gap between demand and supply so long as India can produce oilseeds and pulses at a globally competitive cost. Accordingly, the Commission recommends that the MSP of rapeseed/mustard be increased from Rs 2500/quintal to Rs 3000/quintal, and safflower from Rs. 2500/quintal to Rs. 2800/quintal. Similarly, MSP of gram is recommended to be increased from Rs 2800/quintal to Rs 3000/quintal and of lentil from Rs. 2800/quintal to Rs 2900/quintal. Justification for each one of these increases is given in chapter-6 in detail and briefly in Table S.1. vi

12 Price Policy Rabi Crops for Table S.1: Actual and Recommended MSPs of Rabi crops (Rs/quintal) Note: Figures in parentheses are percentage increases over the previous year. Non-price Policy Recommendations S.4 The main challenge is to prudently use surplus wheat stocks and find a solution to the high edible oil import bill of Rs 46,242 crores and pulses of Rs 8767 crores in Large build of wheat stocks (of about 50 million tonnes) has been a result of unprecedented increase in wheat vii

13 Price Policy for Rabi Crops production in (94 million tonnes), four years of export controls ( ), bonus given by states like Madhya Pradesh and Rajasthan on top of MSP, and high taxes/commissions imposed by states like Punjab and Haryana, which have almost driven the private sector out of grain trading. As a result, in a year of bumper harvest, much of wheat procurement has fallen on state agencies. While it is commendable what state agencies did in Punjab, Haryana and Madhya Pradesh, to procure large quantities of wheat, it has led to an almost State monopoly in wheat trade, which is not good for the country in the long run. Every effort should be made to bring back the private sector in wheat trade. For this, the Commission recommends: I. Keep exports of wheat (and rice, and coarse cereals) open for private trade. In case of any restriction on their exports, give a bonus of 10 percent on their MSPs till the export bans continue. II. Advise States, most notably Punjab and Haryana, to lower taxation/commission etc on basic staples like wheat (and rice) to less than 5 percent. The Central Government could compensate these states for their loss of revenue through some other route. This will go a long way to bring back private sector. Failing this, the Centre would need to review its policy of open ended procurement and limit its purchases especially from States that levy higher taxes. III. Advise state governments, most notably Madhya Pradesh and Rajasthan, not to announce any commodity-specific bonus as it distorts the all India market and drives out the private sector. Instead, encourage them to help peasantry through cropneutral investments in irrigation and water management. Failing this, the Centre would need to review its policy of open ended procurement from states that give extra bonus. IV. Excessive grain storage is also caused by uncertainty about the quantum that may be required to implement National Food Security Bill (NFSB). There are estimates which indicate the need to distribute million tonnes at Rs 2/kg (wheat) and Rs 3/kg (rice). In such a situation, holding of 80 million tonnes is not very much out of line with the requirements, given that any year could be a drought year. It is worth keeping in mind that the drought of led to a drop in foodgrains production by 38 million tonnes. India cannot afford to go to international market with a demand of 38 million tonnes as the global prices will simply erupt to abnormally high levels. Given the weak PDS system, wherein it is reported that at least 40 percent of grains do not reach the designated beneficiaries, the Commission is of viii

14 the considered view that a better strategy to help the poor would be to use an income policy, i.e., direct cash transfers/food vouchers to the poor (works out to about Rs 5000/year for a family of five as per provisions in the proposed NFSB). This will be in line with the emerging diversification of food basket, reduce leakages from PDS, and also insure against any drastic fall in grain production. The beginning can be made with say 100 prototype experiments in urban areas, which can then be scaled up after gaining experience in a year or so. This will avoid taking-over grain markets, or the need to keep 80 million tonnes of stocks, help cut down the costs of storage, of taxes on procurement, and therefore be much more efficient and quick in reaching the poor. This would also be in line with the international best practices being followed in many countries to help the poor. Price Policy for Rabi Crops S.5 Steeply rising imports of edible oils (Rs 46,242 crores in ), need an urgent and bold policy decision. Developing oil palm on a million hectares that is identified as suitable for its cultivation is the main answer to bridging the gap between demand and supply of edible oils. The Commission has already submitted a separate report on that in January 2012, wherein it is analyzed and recommended that investing Rs 10,080 crores over the next six years can save the government an import bill of more than Rs 600,000 crores over the next 27 years. In view of this, the allocation of Rs 100 crores for current year for developing oil palm is woefully low looking at the need and savings it can yield. The Commission therefore recommends that at least Rs 2000 crores per year be allocated to develop oil palm in the country, and it should be taken up on a high priority, as it will benefit large numbers of farmers and consumers alike, and also save on the import bill. S.6 Indian rapeseed/mustard is reasonably import competitive at the farm/mandi level. But owing to the reservation of mustard oilseed processing (expeller) units in the micro and small-scale sectors, the average size of processing units for mustard oil has remained small besides having outdated technology. This makes the costs of processing high and mustard oil less import competitive (and many a times even protected). Therefore, the Commission recommends de-reservation of the mustard/rapeseed expeller units (and also for groundnut processing units) from the small scale sector, along with emphasis on technology upgradation and modernization of the edible oil processing units to ensure their enhanced efficiency and capacity utilization leading to reduction in real costs of processing. ix

15 Price Policy for Rabi Crops S.7 Imports of oilseeds continue to be restricted with 30 percent import duty even when import duty on edible oils has been reduced to zero. Logically, the import duty is graduated from low on raw material to the highest on refined product. The Commission, therefore, feels that the duty structure of nil duty on crude oils and 7.5 percent duty on refined oils and high duty of 30 percent on import of oilseeds defies economic sense. As such, there is a need to impose an import tariff of 10 percent on oilseeds and also review the extant duty structure on oilseeds, raw and refined oils and levy it as per economic rationality, say at 10, 12.5 and 15 percent respectively on oil seeds, crude edible oils and refined edible oils. S.8 Pulses imports are open at zero import duty, but exports of many pulses are banned. This is typically a pro-consumer policy, which is not in the best interest of the producer. The Commission recommends that the export of pulses be opened thus creating a neutral trade policy. The Commission also recommends that imports of pulses should have a 10 percent import duty for the next three years to promote their production at home, given their import bill of Rs 8767 crores in S.9 Efficiency gaps in India's yield levels compared to those of the world average are quite significant. These gaps increase substantially when our yield levels are compared with the countries having the highest world yields for the respective crops. It needs to be appreciated that the prudent solution to increasing costs of production lies in enhancing productivity. Therefore, the Commission recommends that an Expert Committee be set up by the Government to study the international best farming practices, including seeds being used by benchmark countries, so that India can adapt these to its specific conditions and leapfrog into a higher plane of productivity levels. S.10 It is commendable to see that the public expenditure on agriculture as a percentage of agri-gdp has almost doubled between and But almost 80 percent of this is going as input subsidies and only 20 percent as investments in agriculture. The input subsidies have much lower marginal rates of return than investments in agriculture. This calls for a paradigm shift in public expenditure strategy for agriculture geared towards rationalizing and containing input subsidies and channelizing those savings towards agri-investments. The Commission recommends that an expert committee be set up to look into this aspect in greater details and come out with a feasible strategy on this. x

16 Chapter 1

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18 Chapter 1 An Overview Price Policy for Rabi Crops 1.1 Indian farmers have clocked a record food grain production of million tonnes (an increase of 5.2 percent over last year) and scaled new peaks in rice and wheat production in Rice production has touched a new record at million tonnes in (an increase of 8.7 percent over last year). A fifth record wheat crop in a row at 93.9 million tonnes is also reported(an increase of 8.1 percent over last year). However, for coarse cereals as a whole, the total output of 42.0 million tonnes in is 3.8 percent less than that of last year and total pulses production in is also estimated to be 5.6 percent less than last year at million tonnes. The production of total nine oilseeds in is also lower than last year by 7.3 percent at million tonnes (Chart 1.1). Reaping bumper crops for two successive years may be the result of normal and well-distributed monsoons in For the year , however, there is a likelihood of India receiving subnormal rains. This demands close surveillance with contingency plans in place. Record production of foodgrains (257.4 million tonnes) in , but lower production of coarse cereals, pulses and oilseeds Likely subnormal monsoon in Source: DES, Ministry of Agriculture th Note: Figures for & are Final Estimates; figures for are 4 Advance Estimates 03

19 Price Policy for Rabi Crops Acute storage crisis for FCIincreasing risks of wastage of foodgrains 1.2 A more than four year ban on wheat and common rice exports till September 2011, despite bumper harvests, and the lack of a clear road map on the implementation of the proposed National Food Security Bill (NFSB) have led to a 'problem of plenty' in Central Pool stocks. As against the buffer stock norm of 31.9 million tonnes of rice st & wheat (as on 1 July of each year), total Central Pool stocks were st more than double at 80.5 million tonnes on 1 July, 2012 (Chart 1.2). This has been a repeat of the peak of Central pool stocks achieved in (63 million tonnes), which was also a result of a ban on exports of rice & wheat during Periodic overstocking by public sector agencies has huge implications on the fiscal side, apart from distorting the food grain market. Overstocking leads to the associated storage crisis. Currently, FCI is facing an acute storage crisis with covered capacity estimated at around 45.9 million tonnes and Covered & Plinth (CAP) storage of 17.4 million tonnes against the stocks crossing 80 million tonnes. This indicates that a large stock of foodgrains face high risk of damage. Problem of plenty in Central Pool stocks stoked by restrictive trade policy 1.3 The current peak of 80.5 million tonnes comprises 49.8 million tonnes of wheat (against a buffer norm of million tonnes) and 30.7 million tonnes of rice (against a buffer norm of million tonnes). The procurement of wheat has exceeded 38.0 million tonnes, almost 10 million tonnes higher than last year's record procurement of 28.3 million tonnes. Rice & wheat exports have been opened since September As per USDA, India is likely to be the world's leading exporter of rice in with record exports of 04

20 8.0 million tonnes and is set to export another 7.0 million tonnes in Indian wheat proved uncompetitive in due to fall in international wheat prices in the latter half of the year. With a recent strengthening of the global prices of wheat, it is expected that India may export 1.8 million tonnes in (USDA). 1.4 The enhanced procurement of wheat and rice in recent years has not been accompanied by a commensurate increase in allocation for Targeted Public Distribution System (TPDS) and other schemes, with offtake even lower than the quantity allocated with consequent buildup of stocks (Chart 1.3). This low offtake is indicative of a weak distribution network and changing patterns of demand of people in India. Thus, the foodgrain economy is trapped in a situation of increasing production and procurement with no corresponding outlet for consumption/processing, leading to storage crisis and associated wastages. This situation has been aggravated by the uncertainty caused by the NFSB and the grains requirement therein. Price Policy for Rabi Crops Record rice exports in , wheat expected to catch up in Note: Allocation and Offtake are for TPDS Source: Food Bulletin, March 2012, DFPD st 1.5 The bloating excess stocks, beyond the buffer stock norms, as on 1 1 July, 2012 amount to around Rs 73,000 crore locked in FCI godowns. Accounting for the fact that the economic cost of FCI for acquiring, storing and distributing foodgrains is about 40 percent more than the procurement price, the locked in stocks value more than Rs 1 lakh crore. The macroeconomic implication of this Enhanced procurement not matched by increasing offtake leading to bloated stocks per tonne for 29.7 million tonnes of wheat and Rs per tonne, levy price for st procurement of rice, for 18.9 million tonnes of rice held in excess of the norm, as on 1 July,

21 Price Policy for Rabi Crops Stocks with FCI lock up Rs 1 lakh crore worth goods-fuelling inflation Food inflation largely due to F&V, milk and protein items and not due to cereals infusion of excess money into the economy without corresponding flow of goods is causing inflationary pressures. The burgeoning fiscal deficit, comprising mainly of expanding subsidies on food, fertilizer and fuel, is one of the main causes of high inflation in India. Food inflation is also being caused by weak and fragmented value chains, especially for perishable commodities like fruits and vegetables, milk and milk products, and eggs, meat and fish. 1.6 India has been experiencing persistent and elevated food inflation over the last few years in the face of bumper crops of food grains and overflowing food stocks. During the first half of , food inflation remained in the range of 8-10 percent but eased out towards the latter half of when it fell to 0.8 percent in December, 2011 and (-) 0.7 percent in January, This was mainly due to base effect aided by good production of seasonal crops and a tight monetary policy. Food inflation has again gone to double digits since March, A distinct feature of food price inflation in recent years has been the increased contribution of fruits & vegetables, milk and fish, meat & eggs to food inflation visà-vis the share of cereals and pulses. (Chart 1.4). This clearly shows that MSP increases in cereals, pulses and oilseeds announced recently (last two years), are not inflicting significant inflationary pressures on food prices. In fact it is the non-msp segment of food, which is the main cause for worry. Price Policy for Kharif Crops 06 xi

22 1.7 Both supply and demand factors are contributing to food inflation. Demand for cereals has been static and abundant supplies of cereals and robust buffer stocks have dampened their price volatility. Demand for high value commodities is increasing but erratic supplies lead to wide fluctuations in their prices. With the Indian economy growing steadily and the middle class expanding, Indian households across all income classes are diversifying their consumption pattern with the inclusion of high-value and higherprotein items, like fruits, dairy products, meat, and processed foods in the consumption basket. The monthly per capita consumption of cereals has declined between and in urban and rural areas across all expenditure groups (Chart 1.5). The share of expenditure on cereals in total food expenditure has declined from 41.1 percent in to 37.4 percent in to 29.1 percent in in rural areas and from 26.6 percent in to 25.8 percent in to 22.4 percent in in urban areas. Price Policy for Rabi Crops Shift in the Indian food basket towards high value commodities Decile Expenditure Class 1.8 Despite the shift in the consumption pattern, rice and wheat still dominate and remain the focus of food security concerns among policy makers. It needs to be appreciated that cereals constitute only about one fifths of the total value of output from agriculture and allied sector which is less than the contribution from the livestock sector and almost equal to that of fruits & vegetables. Given the rising share of high value commodities in the total value of agricultural output and their higher expenditure elasticity, this segment is likely to drive future agricultural growth. Being highly perishable in nature, this segment requires faster and better linkages between farms and firms in the logistics, processing and organized retailing. This would entail the development of market institutions such as modern food retailing that strengthens and Institutionalized Linkages between from farm to fork required for growth of highvalue agriculture 07

23 Price Policy for Rabi Crops Growth in agriculture sector in XIth Plan lower than targeted 4% compresses the value chain and offers low prices to consumers and higher realizations for farmers. 1.9 The Agriculture & allied sector is poised to grow at 2.8 per cent during on top of previous year's growth rate of 7.0 per cent. The sector has grown at an estimated rate of 3.4 percent during the Eleventh Plan ( ) compared to the growth rates of 2.5 percent ( ) and 2.4 percent ( ) during Ninth and Tenth Plans respectively (Chart 1.6). But it is still below the targeted growth rate of 4 percent which is imperative for achieving inclusive development. 80 percent investment in agriculture done by private sector 1.10 Growth in agriculture is heavily dependent on investments in agriculture. As a percentage of agri-gdp, the GCF (agri) has increased substantially during the last decade from 11.9 percent in to 20.1 in Public investment in agriculture as a percentage of agri-gdp has increased from 1.8 percent in to 3.6 percent in Though public investment in agriculture is critical and important, in reality it forms only 20 per cent of the total investment in agriculture. The other 80 per cent comes from the private sector, i.e., from farmers who respond better and faster to incentive structures provided by markets and prices (Chart 1.7). A positive price policy with liberal agri-markets, therefore, is essential to propel private investments in agriculture, which ultimately will help accelerate growth in agriculture, and alleviate poverty faster. 08

24 Chart 1.7: GCF in Agriculture and Share of public and private investments Price Policy for Rabi Crops 1.11 Private investments in agriculture also respond positively to public investments in agriculture. But the paradox of Indian agriculture is that it receives public resources more in the form of subsidies (fertilizers, power, irrigation, etc) than public investments. These input subsidies, as a percentage of agri-gdp, have increased at a faster pace than public investment, from 8.9 percent in to 17.4 percent in (Chart 1.8). Given fiscal constraints, there is always a trade-off between allocating money through subsidies and 2 increasing investments. Research shows that marginal returns from investments are much higher (5 to 10 times) than through subsidies. So the focus of public expenditure for agriculture needs to shift towards investments to boost productivity rather than subsidies. This demands rationalization of input subsidies on a priority. The Commission recommends that an expert committee be set up to look into this aspect in greater detail and suggest ways and means how this rationalization and containment of input subsidies can be carried out and the savings thereupon can be channeled towards agri-investments. Investments rather than subsidies required for sustainable growth 2 Investment, subsidies, and pro-poor growth in rural India by Shenggen Fan, Ashok Gulati and Sukhadeo Thorat, Agricultural Economics 39 (2008) Pgs

25 Price Policy for Rabi Crops FAO's outlook for 2012/13- prices remaining firm Global Outlook 1.12 According to FAO Food Outlook, June 2012, international prices of most commodities weakened in recent weeks on generally favourable supply prospects amid growing economic uncertainties and a strengthening US dollar. The FAO Food Price Index (FFPI), with the base of , averaged 201 points in June 2012, down 1.8 percent from May and the lowest since September Grain prices were very volatile in June, with weather as the main driver. After a generally subdued situation during the first half of the month, markets moved up sharply in the second half amid deteriorating crop prospects, most notably for maize in the United States. The increase in maize prices underpinned wheat values, which were already experiencing some increase on downward adjustments to production forecasts in the Russian Federation Wheat prices are already under pressure as global wheat production is anticipated to fall by 4.0 percent from levels to 665 million tonnes in (IGC) due to unfavourable weather conditions in some countries. World wheat trade in is forecast to contract by around 3.5 percent, after an almost 8.7 percent surge in , reflecting a weakening of import demand, especially for feed wheat. International prices for oil crops and derived products have appreciated strongly since January and should remain firm given the increasingly tight supply and demand situation. Adequate incentive structures through open and free markets is required for increasing investment in agriculture 1.14 Farming needs to be made a lucrative and sustainable source of income so that it encourages adoption of modern technologies to raise productivity levels in agriculture. As private investment accounts for 80 percent of the total investment in agriculture, adequate incentive structures through free and open markets are required to undertake investment to enhance productivity. Inadequate availability of quality inputs, low farm productivity, insufficient market access for agricultural produce and an inefficient supply chain are some of the critical aspects that need urgent attention. In the following chapters of the Report, some critical aspects of major rabi crops are analyzed viz, domestic demand and supply, procurement systems, efficacy of price policy, international competitiveness of major rabi crops, costs and returns in crop production, and relationship between productivity and real costs. Based on these analyses, the Commission gives its price and non-price policy recommendations in the final chapter of the Report. 10

26 Chapter 2

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28 Chapter 2 Demand-Supply, Procurement and Efficacy of Price Policy Domestic Market Scenario 2.1. In a market economy, prices are determined by the basic forces of demand and supply. While demand (consumption/usage) of agricommodities is generally spread out over the whole year, its supply (domestic production) comes during a particular period (crop season). Therefore, to match the year round demand of a particular commodity, traders/governments carry stocks of that commodity. The ratio of year end stocks to year round expected demand (usage) of that commodity, thus, becomes an important parameter to gauge the degree of tightness or abundance of that commodity vis-à-vis demand. But estimating demand is a challenge given that it is influenced by not only rising population but also incomes of the people, prices of the commodity under consideration and its close substitutes as well as tastes and preferences of people. Since these factors are quite dynamic, only an approximation of the likely demand is possible. This report uses estimates of demand and year end stocks from trade estimates or Government sources, depending upon their availability and reliability. These stocks-touse ratios for major rabi crops are reported in table 2.1, while their detailed working is given in Annex table Price Policy for Rabi Crops Rape seed and Mustard Rape seed and Mustard # 2.2. An examination of the wholesale prices of the major rabi crops, wheat, gram, lentils and rapeseed/mustard seed reveals that while the price of wheat has been largely steady, the prices of gram, 13

29 Price Policy for Rabi Crops High prices of rabi crops, except wheat, largely due to supply constraints. lentils and mustard seed show a rising trend from around the first quarter of This is depicted in Chart 2.1, which shows the wholesale mandi prices of select crops as on and over different time periods during the last two years. Prices of all crops, except wheat have been ruling above their respective MSPs. Prima facie, it is apparent that while the stock-to-use ratio seems comfortable in the case of wheat, there exists a problem with respect to the other rabi crops. th 2.3 The NSS Report, (66 Round) on consumer expenditure shows that consumption patterns are diversifying, and consequently, the per capita demand for cereals is declining. Supply of oilseeds and pulses falls short of their total demand and therefore the demand-supply gap is met by imports. The pressure on prices is due to lower domestic availability of these commodities, and thus, the focus should be on managing their supplies through increased production and/or imports, depending upon India's comparative advantage. Cereals- Wheat 2.4 With respect to wheat, owing to high production and procurement levels, there are no supply constraints; the stock position has increased dramatically leading to a high stocks-to-use ratio, up from 18.7 percent in to 23.3 percent in and 33.2 percent in (Table 2.1). Wheat Balance Sheet is given in Annex table As a result of this successively and significantly improving stocks-touse ratio, the inflation rate of wheat was largely in the negative zone

30 1.3 The current peak of 80.5 million tonnes comprises 49.8 million tonnes of wheat (against a buffer norm of million tonnes) and 30.7 million tonnes of rice (against a buffer norm of million tonnes). The procurement of wheat has exceeded 38.0 million tonnes, almost 10 in million 14 of the tonnes 17 months higher from than November last year's 2010 record up to procurement March of This 28.3 unprecedented million tonnes. high Rice stock-to-use & wheat exports ratio and have consequent been opened low rate since of inflation September in wheat prices As per was USDA, largely India due is likely to (i) record to be the production world's leading and procurement exporter of rice of wheat; in (ii) the with controlled record exports trade policy of 8.0 regime, million tonnes that was and initially is set to adopted export another during the 7.0 million period tonnes of scarcity in in 2007, Indian but continued wheat proved during uncompetitive the 'surplus' in period up due to 2011; to fall (iii) in international leakage of wheat from prices the ipn Public the Distribution latter half System of the (PDS) year. into With the a open recent market. strengthening of the global prices of wheat, it is expected that India may export 1.8 million tonnes in (USDA). 2.6 But things are now gradually changing. The increased procurement 1.4 The by government enhanced procurement in 2012 has of somewhat wheat and reduced rice in recent availability years in has the not been open accompanied market. And now, by a as commensurate exports of wheat increase have been in allocation permitted, for Targeted Public Distribution System (TPDS) and other schemes, with and given the rising global wheat prices of wheat since June 15, offtake 2012, domestic even lower prices than of the wheat quantity may rise, allocated albeit only with marginally. consequent buildup Inflation of rate stocks of wheat (Chart is 1.3). currently This increasing, low offtake from is indicative per of cent a weak in distribution March 2012 network to 5.97 per and cent changing April patterns 2012 and of demand to 6.82 per of people cent in in India. June 2012, Thus, which the foodgrain is marginally economy higher than is trapped the corresponding a situation rate of increasing production and procurement with no corresponding outlet for consumption/processing, leading to storage crisis and associated Coarse wastages. Cereals - Barley This situation has been aggravated by the uncertainty caused by the NFSB and the grains requirement therein. 2.7 As per the Fourth Advance Estimates, the estimated total production of coarse cereals is 42 million tonnes, which is lower than last year's production of million tonnes. A marginal decline in the production of barley is also estimated, from 1.66 million tonnes to 1.61 million tonnes. Although the stocks-to-use ratio for barley had increased from 15.2 percent in to 19.5 percent in ; it declined sharply to 11.2 percent in , indicating a somewhat tight supply situation as compared to last year (Table 2.1). Barley Balance Sheet is given in Annex table Price Policy for Rabi Crops Wheat prices are generally depressed owing to high stocks-to-use ratio and food management related issues. 1 15

31 2.8 Barley ranks the lowest among coarse cereals as seen from Chart 2.2. Due to increasing demand for barley by brewers, the crop prices have generally shown an increasing trend since But coarse grains are also used as feed grains, and feed grains are highly substitutable. As a result, prices of any feed grain are influenced by the supply and demand for the entire feed grain complex. Rising demand for maize as a feed material, and for exports, is also impacting the price of barley. A scatter diagram of barley and maize prices (Chart 2.3) with each point reflecting figures for a particular month during the period, April 2001 to June 2012, shows positive correlation between the two. Oilseeds Rapeseed/mustard & safflower 2.9 Rapeseed/mustard is India's biggest domestic oil bearing oilseed. Wholesale prices of rapeseed/mustard have been showing an increasing trend, as seen from Chart 2.1, largely due to the expectation of lower production of oilseeds in As per the Fourth Advance Estimates, the output for the nine oilseeds as a whole, is estimated to decline from 32.5 million tonnes in to 30 million tonnes in (a drop of 7.6 percent); for rapeseed/mustard, from 8.2 million tonnes to 6.8 million tonnes, which is a 17 percent drop; and safflower from 0.15 to 0.12 million tonnes, a drop of 20 percent. 16

32 2.10 While the trade also estimates production of rapeseed/mustard to decline by about 14 per cent over last year, from 7 million tonnes last year to 6.15 million tonnes in , it is seen that their absolute figures for both the years are at variance with the DAC figures. With the traders' estimates, the stocks-to-use ratio for rapeseed/mustard shows a sharp decline, from 19.2 in to 4.5 per cent in , indicating a tight supply situation as compared to the comfortable situation last year; this is also reflected in the rising prices. The rapeseed/mustard Balance Sheet is given in Annex table Price Policy for Rabi Crops Pulses-Gram/Lentil 2.11 India's pulses production peaked last year to million tonnes. As per the Fourth Advance Estimates, production of pulses is estimated to decline by 5.6 per cent to million tonnes. Of the total pulses production during the triennium ending , 46.5 per cent was contributed by gram (Chart 2.4); gram production in is estimated at 7.58 million tonnes, a drop of 7.8 percent over the previous year. Lentil production is estimated to be steady at 0.94 million tonnes (as per the third advance estimates of ). It was 1.03 million tonnes in Chart 2.4: Pulses Production -Share of Major Pulses, TE Source: DES 2.12 With the decline in production, it is expected that the stocks of gram would also have declined. This is corroborated by the pressure on wholesale prices of gram (desi chana) observed for more than a year. Currently, the futures prices of chana are also trading around Rs 4800 a quintal and serve as an indication of supply tightness in the coming months. This scenario is however not confirmed by the stock-to-use 17

33 Price Policy for Rabi Crops Selective export policy for kabuli chana leading to skewed market behavior leaving desi chana behind ratio of gram, as shown in Table 2.1, as the production figures as estimated by the DAC do not support the increasing price trend observed in the case of gram. On the other hand, trade estimates of production show a sharp decline in production and also indicate an extremely tight supply position ahead as measured by stock-to-use ratio, which has turned negative in (Table 2.1). The variance between the DAC figures and trade figures is too large (also presented in Annex table 2.27), indicating the need to examine the robustness of DAC estimates of production vis-à-vis trade estimates of production. It may be pointed out here that the trade estimates of production generally explain the movement of domestic prices better than the DAC production estimates Prices of gram are rising sharply for the last six months (Chart 2.1), largely due to the decline in production. But a shift to kabuli chana by farmers may have also contributed to the same. While exports of all pulses are banned since June 27, 2006, export of kabuli chana is permitted since February 20, This skewed policy has led to a shift in cultivation from one variety of gram, desi chana, to kabuli chana, in Madhya Pradesh and Andhra Pradesh. Consequently, production of kabuli chana is forecast to jump by about 50 percent in (from about 0.4 million tonnes to 0.6 million tonnes; Source: NCDEX). Growing export demand and lucrative returns are attributed to the increase in Kabuli chana sown area and output (Source: VISIONAGRICO Research). Export of kabuli chana has increased by more than 230 per cent from 61,300 tonnes in to 2,04,600 tonnes in In , up to September 1,15,000 tonnes have been exported. The trade estimates the total exports of kabuli chana in at 1,98,000 tonnes (Source: VISIONAGRICO Research). The decline in total gram production would therefore imply a greater reduction in the production and supplies of desi chana, thus impacting on its domestic price. The spurt in kabuli chana prices and the consequent growing divergence as compared to gram prices since middle of 2008 are indicative of the increasingly dominant position of kabuli chana in the domestic market (Chart 2.5). 18

34 Price Policy for Rabi Crops 2.14 In addition, after March 2012, the limited import of yellow peas, viewed as a cheaper (though imperfect) substitute of chana, also influenced the price of gram (Source: NCDEX). Prices of gram, though at a premium, have generally moved in tandem with the prices of yellow peas. However, since last year a growing divergence in price of chana vis-à-vis that of yellow peas is observed. Gram prices, led by kabuli chana prices as shown in chart 2.6, seem to be increasing at a faster rate than yellow peas. Chart 2.6: Average Monthly Wholesale Prices of Chana and Yellow Peas (Jan 2010 to 17 Jul 2012) Source: DES, VISIONAGRICO Research 2.15 Therefore, to keep neutrality in incentives for different types of pulses, the Commission recommends that pulses as a group be opened up for exports so that relative prices of various pulses reposition themselves, and don't get skewed in favor of kabuli chana. 19

35 Price Policy for Rabi Crops Procurement Policy and Operations 2.16 Among the rabi crops, the role of procurement operations to give support to MSP is largely limited to wheat. In addition, as indicated earlier, prices of all other rabi crops were higher than their respective MSPs. National Agricultural Cooperative Marketing Federation of India Limited (NAFED), National Cooperative Consumers' Federation of India Limited (NCCF) and Central Warehousing Corporation (CWC) are the Central Nodal Agencies of the Government of India for undertaking procurement of oilseeds and pulses under Price Support Scheme (PSS), when the market rates of a particular commodity fall below MSP. As the market prices of rabi oilseeds, namely, mustard/rapeseed and safflower seed and pulses, namely gram and masur covered under PSS ruled above MSP, market intervention under the Scheme has not been necessitated (Source: NAFED). Rising share of state agencies in total procurement has led to record procurement 2.17 Hence procurement related issues are discussed only for wheat. Due to excess stocks, the challenge, therefore, is more on the marketing of wheat, domestic as well as exports. In the absence of free and fair markets, it is only incumbent on the government to ensure that farmers get at least the MSP that is announced. In order to do this, Government has designated Food Corporation of India (FCI) for providing effective price support to cereals, especially wheat and rice During the current year, a quantity of 31.8 million tonnes was targeted to be procured. Starting with an opening balance of stocks of Central Pool as of of million tonnes (20 percent higher than that of last year), comprising million tonnes of wheat and million tonnes of rice, as of the total stock of foodgrains was million tonnes of foodgrains (an increase of million tonnes over last year), comprising million tonnes of wheat and million tonnes of rice; while the buffer norm (including strategic reserves) was only 31.9 million tonnes, as on The procurement of wheat as a percentage of production and marketed surplus from to is graphically depicted in Chart 2.7. Procurement as a percentage of production has crossed 40 per cent in (as of ). It is also observed that over the years, more than 45 percent of the marketed surplus is procured by the government. 20

36 Chart 2.7: Wheat Procurement as % of Production & Market Surplus ( to ) Price Policy for Rabi Crops Source: DES, DFPD, Agricultural Statistics At A Glance, This situation becomes more glaring when procurement is taken as a percentage of market arrivals. As is evident from Chart 2.8, at the all- India level nearly 95 per cent of wheat arrivals in regulated markets (where arrivals are recorded) are procured by the government; this is contributed by major states like Haryana, Punjab and Uttar Pradesh who account for more than 70 per cent of wheat procurement. Chart 2.8: Procurement as a percentage of Arrivals in select states ( to ) Top 5 states account for around 98 per cent of the total wheat procurement (%) Haryana Madhya Pradesh Punjab Rajasthan Uttar Pradesh All-India Source: DFPD th Note: The status is shown as on 30 June of each year 2.21 In recent years, states like Madhya Pradesh and Rajasthan are also catching up on this trend. During the last three years, the declining share in wheat procurement of Haryana, Punjab and Uttar Pradesh has been more than compensated by Madhya Pradesh and Rajasthan. Charts 2.9 (a) and 2.9 (b) reveal the changes in the relative share of procurement among major states in RMS and RMS

37 Price Policy for Rabi Crops Chapter 1. An Overview 2.22 Thus the government, as the single largest buyer of wheat, is virtually a monopsonist in the domestic wheat market. This is not a healthy trend, if markets are to function as a barometer of price discovery. Absence of competition is also not healthy for long term efficiency in procurement operations as well as for farmers. MP: A case of state policy leading to state take-over of wheat market MP has been providing Rs 100/qtl bonus to its farmers since which has created a spurt in wheat production and procurement. In a span of five years, from to , area under wheat has increased from 3.7 million ha to 4.9 million ha and production of wheat from 6.0 million tonnes to 10.5 million tonnes MP has emerged as a major wheat procuring state almost matching the traditional grain procuring states of Punjab, Haryana and UP in terms of production and procurement. Nearly 80 per cent of wheat stocks in CAP are stored in kutcha CAP this year, as compared to 42 per cent last year. From procuring 0.8 percent of wheat produce in , the Government has now cornered 85 per cent of its total wheat produce in (RMS )This has nearly wiped away the private trade in MP. (See chart below) Mn tonnes Chart 2.10: Procurement as a share of production in MP ( to ) Bonus of Rs 100 on MSP for wheat since (%) Production Procurement Procurement As a % of Production Source: DES, FCI 22

38 2.23 It is interesting that although, even after 14 years, Decentralised Procurement (DCP) has not been widely accepted, the share of DCP states, Madhya Pradesh, Gujarat and Uttarakhand, has increased from 18 per cent in RMS to 23 per cent in RMS , largely due to the 71 per cent increase in contribution from MP. However, storage facilities have not been ramped up synchronously. Storage capacity 2.24 The total storage capacity of FCI and state agencies, as on , was million lakh tonnes, of which covered capacity was million tonnes and the rest were under Cover and Plinth (CAP). Including capacity taken over under PEG as on , the total storage capacity in the country adds up to million tonnes. st The stock position as on 1 June 2012 was million tonnes, comprising million tonnes of wheat. It needs to be highlighted that more than 54 per cent of these stocks of wheat were stored in CAP (as compared to less than 50 per cent last year); of which 13 per cent were in kutcha CAP. Price Policy for Rabi Crops Almost total government takeover of the market has led to crowding out the private sector 2.25 An examination of the comparative position of wheat stocks in CAP st st in major procuring states as on 1 June 2011 and 1 June 2012 reveals that wheat stocks are increasingly being kept in kutcha CAP (Table 2.2). Given the 35 per cent increase in procurement of wheat in RMS as compared to last year as on , the Table gives a picture of the dearth of efficient storage capacities currently available with the state agencies in the context of their rising procurement levels. Thus a substantial portion of the grains are exposed to the vagaries of weather and resultant damage. The lack of preparedness of MP is quite apparent; the 73 per cent increase in procurement has led to a concomitant increase in the share of stocks in kutcha CAP. 23

39 Price Policy for Rabi Crops Table 2.2 Comparative position of wheat procurement & stocks in CAP & % in Kutcha CAP in major states as on 1st June 2011 and 1st June 2012 (Million Tonnes) State Procurement RMS RMS Stocks in CAP Share of CAP stocks in Kutcha CAP (%) Procurement in RMS Stocks in CAP Share of CAP stocks in Kutcha CAP (%) Punjab Haryana U.P Rajasthan M.P Grand Total Source: FCI Stocks of wheat exposed to damage in the absence of sufficient storage capacities meeting scientific standards 2.26 As share of FCI in procurement of wheat, vis-à-vis state agencies has been progressively declining; from 23 per cent of total procurement in to 13 per cent in the current year, the onus is on the state governments to set up adequate storage facilities, before embarking on a high procurement mission. In this context the Commission recommends that in these years of bumper production and stocks, the government revisit the policy of following an open-ended procurement by FCI. Instead, rational procurement targets for states may be fixed keeping in view the PDS requirements of each state. This would also help in addressing the high economic cost incurred by FCI in its procurement and distribution operations The economic costs of FCI pertaining to wheat are shown in Chart Over the last 5 years, while MSP of wheat has increased by 51 per cent, the economic cost of procuring the same by FCI has increased by about 39 per cent. The average handling cost per metric tonne for for contractual labour was Rs while for departmental labour, it was Rs and for workers under the Direct Payment System it was Rs This indicates contractual labour of FCI were the least 3 expensive. However, the Ministry of Labour and Employment, has prohibited employment of Contract Labour in the depots of FCI. Here, the private sector needs to be involved to impart efficiency to the procurement and handling operations Under the provisions subsection (1) of section 10 of Contract Labour (Regulation & Abolition) Act, 1970.

40 Price Policy for Rabi Crops High economic costs of FCI owing to dis- economies of scale 2.28 The economic cost of procurement to FCI (worked on constant price basis-base ) has been rising from to (BE) with increasing scale of procurement (Chart 2.12). This indicates that FCI suffers from 'diseconomies of scale', i.e., increasing inefficiencies with increasing levels of procurement. This may be attributed to higher procurement incidentals and increasing carrying costs of the buffer stock, but it certainly points out that FCI is on the rising part of the cost curve and its operations need to be contained, not expanded, if any efficiency in procurement is to be attained. Chart 2.12: Economic Cost of Wheat to FCI Vs Procurement ( to ) 25

41 Price Policy for Rabi Crops 2.29 A major contribution of increasing procurement incidentals are the high rates of statutory levies imposed on the market by different states, which vary from 1.5 per cent in Karnataka to 14.5 per cent in Punjab. The statutory levies imposed by state governments are given in Table 2.3. While states like M.P, Gujarat, Rajasthan and Delhi have not levied any VAT on wheat, the states listed in the Table 2.3 have imposed 4-5 per cent VAT. In addition cesses are also levied for Infrastructure Development (ID) and Rural Development (RD), all of which will have a cascading effect on prices. These add to the costs of procurement for FCI which ultimately accrue to the food subsidy bill. Around Rs 7000 crore (10 percent of the food subsidy in ) have been collected in from FCI through levies in states like Punjab, Haryana, AP & MP. The Commission therefore recommends exempting State VAT and other levies on procurement of food grains. Region Market/ Mandi Fee/ APMC Cess Commission VAT CESS Total Price after tax at Mandi (Rs. /Qtl 5 Punjab (RD+ID) Haryana (RD) U.P Uttarakhand Madhya Pradesh (NS) Gujarat Jharkhand Bihar Efficacy of Price Policy 2.30 Despite the intent, farmers across the country do not get the MSP, due to which they are forced to sell in distress. The prices of wheat that prevailed in some states during the period October, 2011 to March, 2012, are indicated in table

42 2.31 Together Haryana, Punjab, Uttar Pradesh, Madhya Pradesh and Rajasthan, account for around 98 per cent of the total wheat procurement. The market prices have been ruling below MSP in these states. However, as discussed earlier, nearly 85 percent to 100 per cent of arrivals in the above states are procured by government; these prices may therefore be depressed due to either the leakages in the PDS or of poor quality, and may not therefore reflect the true market price. Research has also shown that between per cent of the grain meant for the poor in PDS 4 is diverted. Price Policy for Rabi Crops Recommendations 2.32 The fundamental function of the market is price discovery. However, the disparate policies adopted at the Centre (trade policy) and some states (bonuses and taxes) have cumulatively led to market distortions. Government interventions have resulted in its becoming the single largest procurer and hoarder of foodgrains. They have also led to inter-crop distortions with farmers opting for the crop which gets them a bonus over MSP. The resultant high costs of procurement owing to arbitrary imposition of taxes/levies by state governments, have also led to crowding out of private players. Since there has been no streamlining of taxes/levied by various states, it is only a matter of time before other states also start raising taxes/levies as Punjab and Haryana have done. Also there is no limit to how high the taxes could be raised. On top of this, there are high costs of operations of state agencies, including leakages. Consequently, FCI would only have to shell out large amounts under the burden of such arbitrary levies and high costs, all in the name of food subsidy for the poor. The impact of these interventions has become more evident this year with the overflowing stocks in the Central Pool. The Commission recommends that Competition Commission of India (CCI) look into these aspects of anti-competitive market behavior, which are not sustainable in the long run and could lead to a complete collapse of the competition in wheat markets The Commission also recommends the following to enable markets to function efficiently: (i) The Centre review its policy of open ended procurement and limit its purchases especially from States which levy bonus/high taxes. (ii) Government may separately review detaching foodgrains as a group from the purview of taxation. 4 Box 2.5, Economic Survey ( ) 27

43 Price Policy for Rabi Crops (iii) Farmers be empowered through direct investment subsidies/cash transfers, which are crop neutral On the distribution side, government policy on distributing food through the PDS is based on equity principle of providing food (read cereals) at cheap rates for the poor households. However, the results of the NSS survey on consumer expenditure ( ) reveals that households across all income groups have diversified their basket of consumption by including protein rich items as well as dairy products, meat, processed foods and fruits and vegetables. Consequently, apart from usual leakages, the chances of more diversions happening cannot be ruled out. For instance, a household will get 35 kilograms of cereals per month at low rates (at Rs 3 for rice, Rs 2 for wheat and Rs 1 for coarse cereals); but as its demand for these cereals is declining, it becomes profitable for the household to trade the balance. Again, with farmers withholding a portion of their own produce for household use, they would also trade their share of the PDS food to obtain other food items. The NFSB, however, does not provide for such diversification of the food basket The National Food Security Bill (NFSB), once enacted, will enshrine people's right to food as a legal right. The foodgrains requirement is estimated at more than 60 million tonnes. In the current scenario this requirement is eminently manageable as we are straddled with bulging stocks. However, one has to envision the scenario if there is a drought situation like in when foodgrains production declined by 16 million tonnes, or worse like in when it declined by 38 million tonnes. It is impossible to source such huge quantities from the international market to fill such a wide gap between requirement and production In view of the above, it becomes imperative that the foodgrains distribution policy be crafted differently. The Commission, therefore, recommends that food subsidy be given directly to poor households through smart cards/food coupons, initially in the urban sector, where markets are more streamlined. Such a policy, while upholding the equity principle, will lead to: (i) Empowering the consumer (which includes the farmer) to choose his basket of food (ii) Avoidance of leakages/diversions in the PDS (iii) Reduce the burden on the government (and FCI), with respect to procurement, storage and food subsidy. 28 These recommendations will go a long way in getting markets right without sacrificing equity.

44 Chapter 3

45

46 Chapter 3 Competitiveness of Indian Agriculture Price Policy for Rabi Crops 3.1. In an economy that is gradually integrating with the world economy, merchandise trade to GDP ratio increased from 15 percent in to 46 percent in , it is important to know how far domestic agriculture has integrated with global agri-markets, how far Indian agri-prices are aligned to global prices, and the level of competitiveness of Indian agriculture in an open economy environment. India is the second largest producer of agricultural produce in the world but has a share of only 1.7 percent in world trade of agricultural products in India is a major producer of foodgrains (wheat, rice, pulses) and cash crops (cotton, sugarcane) and has emerged as a major exporter of rice, cotton, maize and a large importer of edible oils and pulses In the pre-economic reforms era, the overvalued exchange rate itself acted as a barrier to agri-exports and thus inflicted an 'implicit tax' on agri-producers. This was corrected during the 1990s economic reforms, but the hiccups on fully opening up agri-exports remained. The export ban on wheat and common rice ( and again from ) are stark reminders of this policy of restrictive agri-exports. Nevertheless, over a period of two decades, Indian agriculture is today somewhat more integrated to world economy than was the case in 1990, and its domestic prices of most of the agri-commodities are also reasonably aligned to global prices. The agricultural exports and imports as a percent of agricultural GDP has risen from 4.9 percent in to 17.9 percent in (Chart 3.1). Trade in agri-goods has done marginally better than overall trade in terms of increase in share in GDP despite restrictive trade policies for agricultural sector. India is a net exporter of agricultural commodities with agricultural exports constituting 11.9 percent of India's total exports and agricultural imports constituting only 3.4 per cent of India's total imports in , indicating a 'Revealed Comparative Advantage' in agriculture. India is a major exporter of rice, cotton & maize and major importer of edible oils & pulses Domestic prices of most agricommodities aligned with international prices 3.3. Exports of agricultural products have increased around six times from US$ 6.0 billion in to US$ 37.3 billion in Rice is the leading agriculture export product, followed by cotton, marine products and oil meals. India has emerged as the world's leading 31

47 Price Policy for Rabi Crops Exports and imports of agri-products increased by six times in the 2000s exporter of rice worth US$ 4.9 billion in after exports of non-basmati rice were opened in September, Imports of agricultural products have also increased by more than six times from US$ 2.6 billion in to US$ 17.2 billion in Vegetable oils and pulses accounted for 56.1 percent (US$ 9.7 billion) and 10.6 percent (US$ 1.8 billion) of India's total agricultural imports in Agri-export policy mostly a residual policy 3.4. India has an inherent competitive advantage in many of the agricultural commodities due to varied agro climatic conditions, diversified commodity mix etc. The sheer size of Indian agriculture and big population means that even small changes in its production and consumption can have large effects on world prices of those agricultural products for which the overall global markets are small (e.g., rice, pulses, etc.). On the domestic front, the Government has 32

48 adopted a cautious approach permitting exports only after ensuring that it would not have adverse impact on domestic prices. Any actual or perceived shortage of any essential commodity impacting domestic price adversely makes the Government use trade, tariff and administrative means to contain pressure on prices in the market. So, agri-export policy for most of the commodities is like a residual policy, which is clearly proconsumer but may not serve the best interests of the producers. Price Policy for Rabi Crops 3.5. Trade competitiveness is a dynamic phenomenon, which would vary depending upon the changes in international and domestic prices consequent upon demand and supply of commodities, changing technologies impacting costs of production, and market conditions. In its simplest form trade competitiveness, say for exports, can be measured by comparing domestic prices which the farmers receive for that good with its export parity reference price, which in turn is derived by deducting freight, port handling, exporters' margins etc from the fob price of that commodity. On the other hand, trade competitiveness of imports can be measured by comparing domestic prices that farmers' receive with import parity reference prices of those commodities, which are calculated by adding freight, port handling expenses and related costs, importers' margins etc. in the cif price of the commodity. If domestic price of any commodity is lower than the export parity reference price, then the commodity is export competitive. Similarly under importable scenario, if domestic price is lower than the import parity reference price, then domestic produce is import competitive. An in-depth study is required to calculate import and export competitiveness. In the absence of such a study, for purpose of this Report, an attempt has been made to gauge the standing of major Indian rabi crops in this respect by a simple comparison between their domestic and international prices. CEREALS Wheat 3.6 Global wheat production in TE was 677 million tonnes - of which 20 percent is traded at 140 million tonnes (USDA). India is the world's second largest producer accounting for 12.5 percent of global wheat production in TE , coming after China which accounts for 17.1 percent of global wheat output. US, Russia and Canada are the major exporters of wheat. Though India is the second largest producer of wheat, it had a marginal share of 0.3 India second largest producer of wheat but marginal exporter 33

49 Price Policy for Rabi Crops S.5 Paddy: The cost of production has risen sharply (by 53 percent) since , percent and the in paddy global farmers exports are of wheat not duly during compensated TE for India these has been rising costs. an occasional There is exporter a case for as at well least as 16 importer percent of increase wheat, in depending MSP, upon although the full demand-supply compensation of situation cost would at home. mean even During higher the decade jump in of 2000s, MSP. Even India's this wheat 16 percent exports increase were will 2.65 hardly million cover the tonnes full cost in , of an 3.67 important million paddy tonnes growing state like and West were Bengal. as high But given as 4.09 the million excess tonnes in supply situation where Due stocks the are drought bulging in despite , record exports level exports, of wheat from th the Commission Central Pool is of stocks the considered were stopped view that with an effect MSP from of Rs /qtl August, (about As 16 a percent result, increase wheat exports over the declined previous to year) 2.01 million will be tonnes a rational in , decision The million proposed tonnes MSP in by states (weighted and negligible average) thereafter is Rs 1644/qtl (Chart 3.3). and the Exports corresponding of wheat fob price on of private paddy expected account later were in 2012 also works banned since out to be February, in the range of Rs /qtl. S.6 Coarse cereals (Jowar, Bajra, Maize, and Ragi): The cost of production of 3.7 jowar is However, much higher India than has that also of bajra been and maize, importer and of so wheat is its domestic in some years of price already the decade prevailing beginning during October When 2011-Feb the actual wheat Therefore stocks the with the Commission Central is Pool of the went considered below the view minimum that MSP buffer of jowar norm, cannot the Government be tagged imported to the MSP wheat of bajra during and maize The Commission (6.1 tonnes) recommends & (1.8 the tonnes). MSP of The jowar import to be Rs1500/quintal, duty on wheat which was reduced will be a from 53 percent 50 percent jump over to 5 percent th the existing on 28 MSP, June, though 2006 still and lower later than reduced its C2 to cost zero of percent production with (Rs effect from 1646/qtl), th 9 as September, well as the prevailing No market imports price of wheat (Rs 1670/qtl) have during been made Oct for the 2011-Feb Central Pool It will after however these cover two A2+FL years. and Since give , a margin India of 17 has been percent recording over A2+FL. bumper The proposed crops MSP for wheat. by states The (weighted export average) ban, which is was Rs 1889/qtl. imposed The when maize there and was bajra a supply MSP are crisis recommended in 2007, has to been Rs continued Export ban 1175/qtl, which are roughly 20 percent higher than their current MSPs. even when there has been a surplus in recent years (only to be lifted continued for four But given the rising costs, and potential to increase their production, in September 2011). This has contributed to the stockpile of wheat years despite especially maize in line with rising demand, and conserving water, this is stocks in Central Pool. successive bumper the minimum incentive required. The proposed MSPs by states are Rs crops 1292/qtl for bajra and Rs 1485/qtl for maize. Ragi is a special nutri-cereal with very high costs, and the Commission recommends its MSP to be Rs 1500/quintal, while the states proposed MSP is Rs 2006/qtl. 34 S.7 Pulses (Moong, Urad and Tur): The Commission takes a note that India is the largest producer and consumer of pulses, and per capita availability of pulses has been sharply declining. In a country, where pulses have been traditionally the primary source of protein, especially for vegetarians, and with rising imports of pulses, this sector needs special incentives. The costs of production of pulses are very high due to lack of any major technological break-through and very low area under irrigation. Price incentives can help put it on high priority for farmers to adopt whatever best technologies and farm practices are, and allocate larger irrigated area for pulses. Keeping in mind, the costs of production as well as domestic prices prevailing in the country, the commission recommends MSP of Rs 4500/qtl for moong, Rs 4300/qtl for urad, and Rs 4000/qtl for tur. These are substantial increases over the current MSPs, but given that the market prices are hovering around the MSP, the

50 3.8 After a gap of more than 4 years, export of 2 million tonnes of wheat under Open General Licence (OGL) by private parties out of privately held stocks, through Electronic Data Interchange (EDI) enabled Ports, was allowed in September 2011 and later unrestricted exports of wheat were allowed in February, Due to burgeoning stocks of wheat with FCI, it has been permitted to export 2 million tonnes of wheat from the Central Pool. 3.9 India was able to keep its domestic prices of wheat (and rice) somewhat stable by imposing an export ban on wheat (and common rice) despite the global food price crisis in The ban on exports of wheat in 2007, therefore, benefited the consumers but harmed the farmers' interests. As is evident from Chart 3.4, in most of the years before 2007, wheat was not export competitive as international wheat prices were ruling low. But it became export competitive in and again in 2011, when world prices went up. However, wheat has been import competitive in most of the years of 2000s. Indian wheat prices have closely followed the trend line of international wheat prices of Hard Red Winter (HRW) and Soft Red Winter (SRW), fob US Gulf. This pricing of wheat that hovers between fob and cif, ensures that Indian wheat price incentives are largely for self-sufficiency in wheat in most of the years. Price Policy for Rabi Crops Pricing of Indian wheat hovers between fob and cif prices 35

51 Price Policy for Rabi Crops Barley import competing, but not very export competitive COARSE CEREALS Barley 3.10 Global production of barley in TE was million tonnes of which around 12.5 percent (17.1 million tonnes) are traded. Russia, Germany and Canada are the major producers while Ukraine, France and Russia are the major exporters. India accounts for only 1.2 percent of the global production and 0.17 percent of global exports. Exports of barley were banned for a brief period in Currently, export and import of barley are allowed under OGL with nil export or import duty Domestic prices of barley have been closely following the international prices, albeit marginally higher in most of the years. (Chart 3.5). This suggests that barley can be import competing, but not export competitive, unless it exports to some neighbouring countries where it can enjoy freight advantage over Canada. PULSES - Gram India is world's largest producer, consumer & importer of pulses As per FAOSTAT, global production of total pulses in TE 2010 was 64 million tonnes out of which 10 million tonnes (16 percent) are traded. India is the world's largest producer of pulses accounting for 23.4 percent of global production and also the largest importer accounting for around 30 percent of global imports. Import of pulses is mainly from Myanmar, Canada and Australia. Chart 3.6 shows the volume and value of pulses imported from to The major pulse varieties consumed in India are gram, tur (arhar), moong, urad and masoor.

52 Price Policy for Rabi Crops US$ Billion Note: Figure for volume of import of pulses is not available for the full year from the same source 3.13 Global production of gram was estimated at 10 million tonnes in TE 2010 out of which about 10 percent is traded. Australia, Mexico & India are the top three exporters. India is the largest producer with a share of 67 percent in global production. Global production of lentil is 3.8 million tonnes of which 42 percent are traded. India is the largest producer with a share of 24 percent in global production. Domestic prices of gram and lentil have been less than international prices in recent years as shown in Chart 3.7 showing that India is reasonably competitive. India world's largest producer of gram & lentil 37

53 Price Policy for Rabi Crops Export of pulses prohibited except kabuli chana Restrictive exports of pulses along with free imports at zero duty shows a consumer bias in trade policy Pulses exports from India, were initially prohibited for a period of 6 th months vide DGFT Notification dated 27 June, 2006 which was extended from time to time. The prohibition on exports of pulses st has been further extended up to 31 March 2013 vide Notification th dated 27 March This prohibition does not apply to Kabuli th chana whose exports were freed vide DGFT Notification dated 7 March In addition, the prohibition on exports of pulses does rd not apply to exports of 10,000 tonnes of organic pulses (since 23 rd March 2011) and lentils (since 3 June 2011) per annum The gap between demand and supply of pulses in India is met through imports to the tune of 2 to 3.5 million tonnes every year. th Imports are permitted under OGL at zero duty since 8 June, As per a scheme introduced in December 2006 (now terminated st with effect from 31 March 2011), Government of India permitted four designated agencies namely NAFED, MMTC, PEC Ltd and STC to import up to 1.5 million tonnes of pulses subject to maximum reimbursement of losses by the Government to 15 percent of landed cost of pulses. Another scheme approved in November 2008 for the supply of imported pulses to the state governments by the designated agencies for distribution under PDS. Under the scheme, the Central Government reimburses per kg on the quantity of imported pulses supplied to the state governments. The quantum of imports was fixed at 3 lakh tonnes up to and later increased to 5 lakh tonnes in The th scheme was extended up to 30 June Both the schemes were aimed to ensure the availability of pulses at reasonable prices On the other hand, exports of pulses (except kabuli chana and 10,000 tonnes of organic pulses and lentils) have been prohibited. This restrictive export policy along with free imports of pulses at zero import duty clearly shows a pro-consumer bias. Given that India's import bill of pulses is touching Rs 8767 crores in , the Commission recommends that this policy be made proproducer by freeing up exports of pulses and putting a 10 percent import duty on pulses for the next three years. This would help India to enhance domestic production of pulses by attracting more irrigated area under pulses, and saving on fertilizer subsidy (as pulses are nitrogen fixing) and help towards stabilizing production. This also requires streamlining of supply chain for pulses wherein farmers can get a larger share of consumer prices. 38

54 EDIBLE OILS/OILSEEDS-Rapeseed Oil/Rapeseed 3.17 As per USDA, India is a large producer of oilseeds in the world with a share of 7.8 percent of the world oilseeds production in TE However, it is also the third largest importer of vegetable oils with a share of 15.9 percent in world imports. During , imports of more than 9 million tonnes of edible oils valued at US$ 9.7 billion (Rs 46,242 crores) is estimated as compared to 4.18 million tonnes valued at US$ 1.87 billion in , as seen in Chart 3.8. During the late 1970s, imports of edible oils to India as percentage of domestic production hovered around 40 percent, dropped to less than 5 percent during to , and again increased touching a high of more than 90 percent during to , indicating the need for an aggressive oilseeds strategy, including oil palm. India is the fourth largest exporter of oil meals with a share of 6.7 percent in world oil meal exports. Price Policy for Rabi Crops Imports of Edible oils valued at US$ 9.7 billion in US$ Billion 3.18 As per USDA, world production of rapeseed and rapeseed oil was 60 million tonnes and 23 million tonnes in TE India had a share of 11.1 percent of world output of rapeseed and 10.1 percent of global output of rapeseed oil in the same period. Around 18.5 percent and 14 percent of global output of rapeseed and rapeseed oil respectively are traded. India is a small importer with a share of 0.8 percent in TE While the domestic prices of mustard oil have been higher than international prices of rapeseed oil during to ; the domestic prices of mustard seed have been 39

55 Price Policy for Rabi Crops Reservation in the small sector for mustard oil expeller units makes them high cost and therefore globally uncompetitive in line with international prices of rapeseed (Chart 3.9). Given that, mustard seed commands a premium over rapeseed; this may indicate that India has a competitive advantage in production of mustard seeds. However, owing to the reservation of mustard oilseed processing (expeller) units in the small-scale sector, the average size of processing units for mustard oil has remained small, besides having outdated technology, leading to higher costs of processing. This makes the mustard oil (expeller) industry globally uncompetitive. Increasing efficiency and capacity utilization of the existing processing sector through modernization is important to reduce the cost of processing oilseeds. Therefore, the Commission recommends dereservation of the expeller units from the small scale sector, along with emphasis on technology upgradation and modernization of the edible oil processing units to ensure their enhanced efficiency and capacity utilization. 40

56 3.19 Till mid 1990s, imports of edible oils were tightly controlled through canalization. In , India introduced a phased liberalization of edible oil imports; the Government started opening up this sector by eliminating state monopoly on imports and reducing import duties on palm oil, and subsequently other oils too, in a phased manner from a high of 65 per cent in 1994 to 15 per cent in Imports of edible oils, which were very small in 1994, resultantly increased. The Government raised the import duty on oils (for example, palm oil) to 25 per cent in 2000, and to 75 per cent in 2001, although it was subsequently brought down to 65 per cent but again increased to 80 per cent in It was brought down to 45 per cent in Import duties have been reduced to the levels of zero percent and 7.5 percent for crude oils and refined st oils respectively with effect from 1 April, The effective rates of duty are even lower as the tariff value, the base price on which custom duty is determined, has remained fixed since July Only recently, the government has decided to defreeze the tariff value on RBD palm oil and thus align its price with current global price. As in the case of pulses, a scheme approved in March 2008 for supplying imported edible oils to the state governments for distribution under PDS. Under the scheme, the Central Government reimburses per kg on 1 million tonnes of imported edible oils supplied by the designated agencies to the state governments. This scheme, which also has a pro-consumer bias, aims to ensure the availability of edible oils at reasonable prices to consumers and has been successively th extended up to 30 September On the other hand, export of th edible oils has been banned with effect from 17 March 2008, except coconut oil and minor forest based produce, and edible oils in branded consumer packs of upto 5 kg subject to a limit of 10,000 tons per year. The ban on export of edible oils with the above th exemptions has been extended upto 30 September Price Policy for Rabi Crops 3.20 The duty adjustments on edible oils have been basically countercyclical to global prices of palm oil to give some stability to edible oil prices at home. Composition of import depends on price difference between different edible oils. Import prices of rapeseed oil have a premium over palm oil, therefore, imports of rapeseed oil have not increased whereas imports of palm oil have increased over the years. On the other hand, imports of oilseeds continue to be restricted with 30 percent import duty even when import duty on crude edible oils has been reduced to zero. Logically, the import 41

57 Price Policy for Rabi Crops Imports of oilseeds are subject to 30% tariff while imports of crude oils at 0% and refined oils at 7.5% defies economic rationality duty is graduated from low on raw material to highest on refined product. The Commission, therefore, feels that the duty structure of nil duty on crude edible oils and 7.5 percent duty on refined edible oils and high duty of 30 percent on import of oilseeds defies economic sense. As such, as in the case of pulses, there is a need to impose an import tariff of 10 percent on oilseeds and also review the extant duty structure on oilseeds, raw and refined edible oils and levy it as per economic rationality, say at 10, 12.5 and 15 percent respectively on oil seeds, crude edible oils and refined edible oils So far, the Government has adopted a very cautious policy in the matter of agri trade, permitting export of only those commodities which were largely surplus and allowing duty free import of essential commodities to augment domestic supplies. The Commission is of the view that rather than outright ban on agri exports, the Government ought to follow a consistent, stable and predictable tariff policy because the uncertain policy in the matter of agri exports has dented India's image in the international market. A long term trade policy which will lend some kind of predictability to agricultural products trade will allay buyers' apprehension and enable suppliers to plan better. Global Outlook 3.22 According to OECD-FAO Agricultural Outlook , global food commodity prices are expected to remain high over the next decade on account of slowing growth in global food production and rising consumption, both due to food and feed. The OECD-FAO Agricultural Outlook anticipates that agricultural output growth will slow to an average of 1.7 percent annually over the next 10 years, down from a trend rate of over 2 per cent per year in the recent decade. The likely international prices for wheat and barley as estimated by World Bank are indicated in Table

58 Table 3.1: Forecasts for International Prices Crop Price forecast (US$/tonne) Wheat, US, HRW Barley Source: World Bank Pink Sheets Price Policy for Rabi Crops 3.23 While international agricultural commodity markets appear to have entered calmer conditions after record high (in prices) last year, food commodity prices are anticipated to remain on a higher plateau over the next decade. This is underpinned by a slowing growth in global food production. In addition to population growth, higher per capita incomes, urban migration and changing diets in developing countries, as well as rising requirements for bio-fuel feed-stocks are underpinning demand pressures However, the short term forecasts about prices of major agrith commodities for have changed dramatically after June 15, This is primarily due to a severe drought facing US (said to be worst in the last 50 years), weather stress in Soviet Russia, and also in India. Wheat prices have already shot up from about US$ 225 per th th tonne on June 15 to around US$ 300 per tonne by July 20 of Similarly, corn prices have flared and so have soyabean prices. All these will keep the global agri-prices quite firm, and Indian wheat th which was not exportable on June 15 is exportable in mid-july, In the light of the above analysis, three important policy recommendations emerge: (i) Trade policy needs to be kept neutral by keeping exports of wheat open. If exports of wheat are banned, 10 percent bonus on the MSP needs to be provided to the farmers. The same logic applies to barley. (ii) Allow export of all pulses and impose a 10 percent tariff on imports of pulses to promote domestic production. 43

59 Price Policy for Rabi Crops (iii) For edible oils (oilseeds), import tariff on oilseeds needs to be brought down from 30 percent to 10 percent and import tariff on crude edible oils raised from 0 percent to 12.5 percent and for refined edible oils raised from 7.5 percent to 15 percent. 44

60 Chapter 4

61

62 Chapter 4 Costs, Returns and Inter-Crop Price Parity 4.1. Cost of production of a particular commodity represents the supply side. It is an important, but not the sole criterion, on the basis of which the Commission makes its price recommendations. Too much reliance on cost plus pricing can lead to imbalances in demand and supply in the economy. Therefore demand side is as important, if not more, as the supply (cost) side. Keeping this in view, the Commission analyzes actual cost estimates for the years to and projects them for the year rabi crop season to be marketed in the year Price Policy for Rabi Crops Cost estimates are generated by DES under CS 4.2. Before launching the analysis of cost of cultivation/production estimates, it is essential to briefly put across some points, which are often raised in the meetings of the Commission with various stakeholders: (i) cost of cultivation/production estimates have been often criticized for being under-reported in the price policy formulation; (ii) data collecting agencies, i.e., State agricultural universities default on collection of authentic cost data on real factors of production on day to day basis; (iii) farmers' representatives allege that their independent collection of cost data throws up much higher estimates than usually furnished in the Comprehensive Scheme (CS). In this regard, it is clarified that the Commission uses the cost estimates generated under the CS, being implemented by DES. These cost estimates are made available to the Commission by DES at state level, which are then aggregated at national level, by using production shares of the respective state, to calculate the all India weighted average cost of production. By definition, some states may have costs higher or lower than the weighted national average. 4.3 However, there is a deficit of trust between what farmers consider as their real cost of production and what the Government collects under CS. This trust deficit occurs not only at the conceptual level with respect to the treatment of land but also in the way data is collected. This issue has been flagged in earlier reports of the Commission and it is worth noting that Government is constituting a Working Group to look into all the issues related to cost data. 4.4 For preparing price policy report for rabi crops for crop season (marketing season ), the actual cost of production 47

63 Price Policy for Rabi Crops A 'correction factor' has been incorporated in projections data is for the year As per established practice, the Commission updates prices of different inputs like human labour, bullock labour, machine labour, fertilizers, pesticides, irrigation charges, seeds, etc., based on latest data from different sources like Labour Bureau, Shimla, replies from state governments, Office of the Economic Adviser, Ministry of Commerce and Industry; Fertilizers Association of India; National Seeds Corporation, etc. To begin with, the Commission bases its cost projections on the latest three years' actual cost estimates for each crop and each state. In this exercise, there are certain theoretical assumptions: (1) fixed cost components are held constant in the intervening period between the year for which the actual cost estimates are available and the year for which cost projection is made; (2) three cost projections are attempted for each state for a particular crop to even out erratic fluctuations in yield and hence in cost of production. If for example, 5 projected yield for for any crop turns out to be more than the 6 actual yield for , the projected cost estimates may be below the actual cost, and vice versa. As projections are based on certain assumptions, they may turn out to be different from reality. The degree of deviation will be known only when actual costs are available and this is a matter of post facto analysis. 4.5 In recent years, particularly from onwards it has been observed that the assumption of holding constant the fixed cost components in cost projection for two to three years does not hold good. One striking feature that has come out clearly is the rapidity with which the value of output has increased, and alongside the rental value of owned land, due to increasing pressure on it. The Commission has incorporated a 'correction factor'(cf) in its projections, which is the extent of deviation of projected costs from actual costs on a three year rolling basis for which actual cost data are available. Returns on rabi crops during to Table 4.1 presents returns and rates of return over cost A2+FL and C2 for rabi crops of wheat, barley, gram, lentil, rapeseed/mustard and safflower. As is evident from the table 4.1, gross returns (gross value of output A2+FL) for wheat during to , stands the highest at Rs per hectare while gross rate of return (over A2+FL) is 127 per cent. In comparison, rapeseed/ mustard had gross returns of Rs per hectare with gross rate of return being 165 per cent. It is 48 5 It is assumed to be an average of latest three years actual yield levels for which the actual cost data is available For example: for yield, the average yield would be for the years , & This will be available after a gap of three to four years at state level

64 also equally interesting to observe that gross rate of return for gram and lentil differs by a wide margin of 73 per cent higher on the side of lentil. Net rate of return (over C2) for gram is lower than that for lentil due to relatively higher yield of lentil. Barley and gram have their net rates of return at 39 per cent and 23 per cent respectively. In regard to safflower, gross returns are very low at Rs 5850 per hectare. It needs further analysis to understand its dynamics and implications for price policy. Table-4.1: Gross & Net Returns on actual estimates of cost for the years from to CROP Cost A2+FL (Rs./ha.) Source: CS under implementation by DES Cost C2 (Rs./ha.) GVO (Rs./ha.) Gross Returns (GVO- A2+FL) (Rs./ha.) Gross Rate of Return (Gross returns as % of A2+FL) Net Returns (GVO - C2) (Rs./ha.) Notes: 1: Comprehensive Scheme (CS): Actual estimates for the years , and by states have been averaged with weights at all-india level, with weights being their relative shares in total production of states. 2: CACP: projected estimates of C2 exclusive of marketing, transportation and crop insurance charges based on latest available data at the time of price policy formulation. The projection made by revising upward prices of various inputs for studying increase in overall variable cost. Net rate of Return (Net Returns as % of C2) Wheat Barley Gram Lentil Rapeseed/ Mustard Safflower Price Policy for Rabi Crops Gross returns for wheat are highest among rabi crops The details of state-wise returns for rabi crops are given in Annex table 4.1. Behaviour and trends in agricultural wage rates 4.7 There is no denying that rising trends in agricultural wage rate in the last three to four years have contributed to increase in input cost of cultivation. Preliminary observations of agricultural wage rate as given by Labour Bureau, Shimla are that it has gone up by more than 49

65 Price Policy for Rabi Crops Real wages increased by about 9 percent per annum during the last three years 17 per cent in December 2011-May, 2012 over December May, 2011 (Table 4.2). Over the last three years, on an average, nominal wages have increased by about 20 per cent per annum, and real wages (after deflating nominal wages by CPIAL) by about 9 percent per annum. This is a very healthy sign as agriculture labour is generally the poorest of the poor, and his/her real wages having gone up consecutively at this rate will surely help in reducing rural poverty much faster. But for the farmers, this reflects the cost side and unless farmers get either remunerative prices or raise their productivity, this rising costs start shrinking farmers' margins. Table 4.2: Compound annual growth rate of agriculture labour wage rate (Rs/day) for states and at all -India level in nominal and real terms (Dec.2008-May 2009 to Dec May 2012) State Relative share in agri. Labour % increase in the ave. wage rate over Compound annual Compound annual growth rate growth rate (Dec.2008-May (Dec.2008-May 2009 to Dec to Dec May 2012 in nominal May 2012 in real terms) terms) AP Assam Bihar Gujarat Haryana HP Karnataka Kerala MP Maharashtra Odisha Punjab Rajasthan TN UP WB All India Wt. Ave Source: Labour Bureau, Ministry of Labour, Govt. Of India, State -wise relative shares in total agricultural rural labour are derived from Census 2011, Registrar General of India Note: Daily Wage rate - average of five operations i.e. ploughing, sowing, weeding, transplanting and harvesting has been considered. Chart 4.1 gives the details of increase in wage rate during this period by states and at all India level. 50

66 Chart 4.1: Compound annual growth rate of agriculture labour wage rate (Rs/day) for states and at all-india level in Nominal terms (Dec.2008-May 2009 to Dec.2011-May 2012) Price Policy for Rabi Crops Source: Labour Bureau, Ministry of Labour Input Price Movement 4.8 Wholesale price indices (WPI) with base =100 for farm inputs during the period May, 2011 to May, 2012 reveal that prices have increased by per cent for fertilizers, 5.93 per cent for electricity for irrigation purposes, 3.86 per cent for pesticides, 4.79 per cent for non-electrical machinery, 3.93 per cent for tractors, 7.70 per cent for lubricants, 9.24 per cent for diesel oil (HSDO), per cent for diesel oil (LDO), percent for fodder, 7.95 per cent for cattle-feed. Price increase in these farm inputs would no doubt escalate the overall cost of production, with variation within a certain range depending upon crops and the states in which they are grown. Chart 4.2 summarizes percentage increase in farm input in prices in WPI during May, 2012 over May, The details of farm inputs are given in annex table 4.3. Source: DIPP Note: The base year for WPI is

67 Price Policy for Rabi Crops Actual cost estimates of cultivation/production and projections for crop season ( marketing season) 4.9 The latest data of cost of production estimates for rabi crops of wheat, barley, gram, lentil, rapeseed/mustard and safflower have been made available to the Commission under the CS for the year The projections are made as per principles indicated in the earlier paragraphs. The details of cost estimates for compared to those of the previous year are given in the Annex tables 4.4 (A), 4.4(B), 4.4(C), 4.4(D), 4.4(E), 4.4(F). These tables provide information on actual estimates on per hectare cost of cultivation; per quintal cost of production under categories of paid out cost including family labour (A2+FL), overall cost (C2), and implicit price Annex table 4.5 outlines projections for state wise as well as all India level for rabi crops and trends of change in composite variable input price index between and As can be seen from annex table 4.5, the projected costs of rabi crops both in A2+FL and C2 are exclusive of cost of transportation, marketing and crop insurance premium by states and for the country as a whole. Annex table 4.6 gives projected cost of production in A2+FL and C2 inclusive of these additional charges by states and for the country as a whole The projected cost for each crop varies widely across States. The projected All-India C2 & A2+FL costs and their variations across states are given in table 4.3. It is seen that wheat has the maximum spread in cost C2 around the all-india weighted average cost as it has a coefficient of variation (CV) of 39 percent. Rapeseed/mustard is almost parallel to wheat in cost variation. 52

68 Table 4.3: Variations in projected C2 and A2+FL costs across states for rabi crops, Price Policy for Rabi Crops Crop Modified cost* Coefficient of Variation (CV) C2 A2 + FL C2 A2 + FL Wheat Barley Lentil Gram Rapeseed/Mustard Safflower Note: *Modified cost is total projected cost inclusive of transportation, insurance premium and marketing charges Terms of Trade Analysis 4.12 The domestic terms of trade between agriculture and nonagriculture is one of the terms of reference for CACP in recommending its MSP policy. The terms of trade data are being compiled by the DES as prices received over prices paid by the farmers. The prices paid by the farmers are collected for three broad categories of goods for final consumption, intermediate consumption and for capital consumption. Terms of trade data available upto the year (provisional) are given in Annex table 4.9. The index of terms of trade has remained relatively stable, and in fact, marginally favored agriculture in recent years. With base year TE =100 the index has been oscillating between 101 and 107 since and has gone up to in This methodology, which is more precise, is in contrast to the ratio of agricultural prices to non-agricultural prices, which is often taken as an indicator of terms of trade and has improved substantially during the last few years. Government has already set up a new committee, under the aegis of DAC, to come up with fresh estimates of terms of trade. Effective returns over Projected C2 and A2+FL costs of the rabi season (marketing season ) 4.13 Charts 4.3 to 4.8 underscore the likely returns that would accrue to different rabi crops by states as well at all India level with their corresponding MSPs fixed for the year (marketing season ). For wheat, at all India level the likely returns over A2+FL 53

69 Price Policy for Rabi Crops cost in the marketing season of in reference to MSP for would be 87 per cent. Similarly MSP returns for wheat over C2 cost would be about 17 per cent at all India level and it would cover the cost of almost 95 percent of wheat production. In regard to gram, MSP margins over C2 and A2+FL costs at all India level stands at 18 per cent and 65 per cent respectively covering the cost of more than two-thirds of gram production in the country. In gram production, Uttar Pradesh and Maharashtra together constitutes about 24 per cent of total production and they will have marginally negative returns over C2 costs. In case of lentil, at all India level returns over A2+FL work out to 45 per cent and over C2 (-) per cent. With the existing MSP of Rs 2800, major states like Uttar Pradesh and Madhya Pradesh growing lentil and which contribute about 75 per cent of production lose out in recovering their full cost. Barley's margins at all-india level over both A2+FL and C2 costs are 58 per cent and 10 per cent respectively. All India weighted average projected cost for safflower being Rs 3384 per quintal and the existing MSP being Rs 2500 per quintal, returns would turn out negative for these two states. Tables accompanying the charts are given in the Annex table 4.6. Chart 4.3: Projected Cost and Supply of Rabi Crops by States for (a) - Wheat 54

70 Price Policy for Rabi Crops 55

71 Price Policy for Rabi Crops Inter-crop price parity 4.14 Inter crop price parity being a factor for determination of MSPs, the Commission makes an in-depth study of per hectare returns of different crops that are substitutes for each other. The underlying idea is that area allocation amongst different crops be such that their respective per hectare returns are more or less even and balanced. The objective of studying inter crop price parity of crops competing for area allocation is that the farmers need to grow crops in an environment of their respective returns neutrality. The average per hectare returns over C2 cost have been analyzed and shown in table 4.1 and it is found that there is some degree of inequality in returns earned. 56

72 4.15 Table 4.4 details relative returns in percentage terms in reference to that of wheat as numeraire. It is observed that returns over both A2+FL and C2 for remaining crops of barley, gram, lentil, rapeseed/mustard and safflower are less than that of wheat. Barley and rapeseed/ mustard come closer to wheat in their relative returns. On the contrary, gram and lentil fall way below in returns relative to that of wheat. So is the case of safflower. The details of gross returns and net returns by states are given in Annex table 4.1. Net returns over C2 cost for gram and lentil are 37 percent and 74 percent respectively, relative to wheat (=100 percent). The implication of this is that if pulses are to be promoted, especially gram, the relative incentive structure has to be changed, or productivity should be increased, or both. Price Policy for Rabi Crops Table 4.4 Relative returns (%) of Rabi crops over A2+FL and C2 in CROP Relative returns over A2+FL of crops with wheat as numeraire Relative returns over C2 of crops with wheat as numeraire Wheat Barley Gram Lentil R & M Safflower Restructured cost of production 4.16 The projected costs of production, as has been already elucidated in the aforesaid paragraphs, are given in the table 4.5. The table shows modified cost of all rabi crops for the crop season (marketing year ) at all India level. It is pointed out here that pending crop-specific information on marketing, transportation and crop insurance premium from the DES, the Commission compiles these estimates at all India level on ad-hoc basis from whatever information is furnished by different state governments. From table 4.5, it is seen that likely percentage increase in projected cost of production for the year over the actual cost estimates of would be around 53 per cent 57

73 Price Policy for Rabi Crops for safflower, 43 per cent for lentil, 43 per cent for rapeseed and mustard, 31 per cent for wheat and 22 per cent for barley. These increases for different crops are worked out on the basis of increases in costs of different inputs like human labour, fertilizers and other inputs like irrigation charges, diesel oil etc., and then duly weighting them with their relative shares in cost of production. Crop Table 4.5: Estimated cost of production for Rabi Crops for , inclusive of Marketing/Transportation and crop Insurance Premium (All India) (Rs. Per quintal) Projected C 2 Cost of Production % Change over Actual C2 cost of production Cost of Marketing, Transportation and Insurance Premium Modified Cost* Wheat Barley Rapeseed & Mustard Gram Lentil (Masur) Safflower Note: * Modified cost is total of projected cost plus transportation, insurance and marketing charges As indicated earlier in this chapter, cost is an important input in price policy formulation, but not the only one. Demand and supply of a particular commodity are equally influencing factors, if not more. Currently, while India is short of edible oils and pulses, it is hugely surplus in cereals, especially wheat. This indicates the need to restructure the relative price matrix, so long as India remains competitive in crops for which MSPs are raised. 58

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76 Chapter 5 Productivity and Costs of Major Rabi Crops Price Policy for Rabi Crops An Aerial View of Growth in Productivity Levels 5.1 The role of productivity in enhancing competitiveness of agricultural commodities, for that matter all commodities, is critical. Empirical evidence suggests that volume of international trade, ceteris paribus, is greatly influenced by prices. One way to reduce real prices of commodities is to increase their total factor productivity (TFP) much faster than demand. While there is a need to undertake a comprehensive study on TFP for Indian agriculture and for specific crops based on cost of cultivation data, in the absence of such a study, it would be interesting to see how land productivity, a partial component of TFP, impacts cost of production. The focus of analysis is on six major rabi crops namely wheat, barley, gram, lentil, rapeseed/mustard and safflower. Six rabi crops wheat, barley, gram, lentil, R & M and safflower are analyzed for their productivity 5.2 For this, at first the long term compound annual rate of growth (CARG) in area, production and productivity levels of major rabi crops during the decades of 1990s and 2000s is considered. The CARG for the decade of 1990s is worked out by taking period from TE (triennium average of to ) to TE Likewise, the CARG for the decade of 2000s, annual compound growth rate between the periods TE to TE , are worked out and given in Annex tables-5.1 to 5.6. The summary of these growth levels is presented in table Based on Table 5.1, it is noteworthy that growth rates in production as well as areas under R & M and gram have distinctly accelerated during the decade of 2000s. Though wheat shows deceleration in its growth rates of all three parameters viz. area, production and yield during the decade of 2000s compared to the preceding decade, growth in its production is still higher than that of population and is not a cause for concern especially when the country has enough surplus of this crop. Safflower experienced higher magnitude of negative growth rate in production and deceleration in its yield level in 2000s compared to 1990s. Given the fact that safflower ultimately contributes only 0.5 percent in the total domestic availability of edible oils, emphasis need to be laid on oilseeds such as oil palm which has the potential of far higher yield of oil on per hectare basis. 61

77 Price Policy for Rabi Crops Table-5.1: Growth (CARG) in Area, Production and Yield of Rabi Crops at All- India during Decades of 1990s and 2000s (%) Growth rates in area & production of R & M and gram have distinctly accelerated in 2000s compared to 1990s Crops Growth in Decade of 1990s* Growth in Decade of 2000s# Area Production Yield CV (in yield) Source: Collated on the basis of data of DES, New Delhi. * During T.E over T.E # During T.E over T.E Area Produ ction Yield CV (in yield) Wheat Barley Gram Lentil Rapeseed & Mustard Safflower Cost of Production and Yield Rates Notching up yield level can contain real cost (CoP) 5.4 Of late, demand from various stakeholders to increase MSP of various agricultural commodities has been intensifying and the main ground on the basis of which this demand is justified is the monotonously increasing cost of production year after year. As noted earlier, MSP is recommended not solely on the basis of costs, though it is duly factored in while recommending price policy. The answer to contain increasing cost of production lies in enhancing yield levels as, on a priori basis, one would expect an inverse relationship between real cost of production and yield rates. 5.5 To find empirical evidence in support of this, cost and yield data of six rabi crops, drawn from CS Scheme for to across all the major producing states of the relevant crops, are analysed. Based on panel data (across states and over these years), relationships between yield rates and real cost of production for six crops are depicted in charts-5.1a to 5.1f. These scatter diagrams (charts-5.1a to 5.1f) exhibit the existence of an inverse relationship between yield rates and real cost of production. Thus, it is inferred that cost of production can be contained by improving productivity. 62

78 Charts-5.1a to 5.1f: Relationship between Real Cost of Production and Yield Rates (Constant prices =100) Price Policy for Rabi Crops 63

79 Price Policy for Rabi Crops Measure of Impact of Yield Improvements on Costs 5.6 To measure impact of variation in yield on cost of production, linear regression analyses have been undertaken, separately for each of six crops under reference by fitting the following model: CoP i = a+ b i*yi th where CoP i = real Cost of Production of i crop, i=1,2 6 th y i = Yield rate of i crop th b i = regression coefficient (also called beta coefficient ) of i crop; and a = constant 5.7 Based on above regression model, beta coefficient for each of six crops has been determined which have been converted into respective elasticities by the following formula: e i = b i *(Average y i / Average CoP i ) th where e i = elasticity of i crop. The crop-wise elasticities are presented in table-5.2. Table-5.2 : Impact of Variation in Yield on CoP (%) Crop Elasticity No. of Observations R 2 Adjusted Wheat * Barley * Gram * Lentil Rapeseed & Mustard * Safflower * Notes: 1. Coefficients marked with asterisk (*) are statistically significant at 95% level of confidence and an unmarked coefficient is not significantly different from zero. 2. Since elasticities are worked out on the basis of panel data, value of R 2 has rather limited meaning. 5.8 It can be inferred from table-5.2 that cost of production of barley can be brought down by about 10 percent if its yield is improved by 10 percent. The impact of yield enhancement on cost reduction is estimated to be 7 percent in case of safflower, 5 percent in R&M, 4 percent each in wheat and gram, if their respective yield levels increase by 10 percent, while in case of lentil, it is insignificant. 64 Benchmarking Productivity: India vis-à-vis other Leading Producing Countries 5.9 In a globalised scenario, relative performance in yield improvement is as critical as temporal improvement in

80 productivity levels. The role of productivity in enhancing competitiveness is critical as it can reduce cost and thus prices. Therefore, it would be interesting to envision India's standing vis-àvis other major rabi crop producing countries on land productivity scale. This would help in benchmarking productivity standards, and set our targets accordingly with a view to gain greater competitiveness. Keeping this in view, crop specific efficiency gap, an indicator defined as (1-e) *100, where 'e' denotes the ratio of India's yield rate to that of corresponding world average, has been used. Similarly, efficiency gaps are also worked out with reference to benchmark countries (the country which has the highest land productivity of that crop). The crop specific efficiency gaps, thus worked out, are presented in Table-5.3. Table-5.3 : Gaps in India's Yield Levels of Various Rabi Crops Price Policy for Rabi Crops Efficiency gap in India's yield level is highest in R & M. India is still way behind benchmark countries on productivity scale. Crop Share of India as percent of World Production India's Yield T.E (Kg/Ha) World's Yield T.E.2010 (Kg/Ha) Average Benchmark Country* Efficiency Gap in India's Yield Level (%) w.r.t. World Average Benchmark Country* (1) (2) (3) (4) (5) (6) (7) (8) Sources: FAO {col. (2), col. (4) & (5)}, DES for Col. (3). * The country that has the highest yield in the world is taken as 'benchmark'. The figures in parentheses indicate their respective shares in total world production. Note: Countries with low shares of production in total world production have not been considered for benchmarking. Depending upon size and production distribution of crops across countries, threshold for the purpose of 'benchmark' is fixed at 3.5% for wheat, 0.9% for gram and 1% for other four crops. Benchmark Country (with its share in World production)* Wheat Germany (3.7%) Barley France (8.2%) Gram Canada (0.9%) Lentil China (3.5%) R & M Germany (9.6%) Safflower USA (18.4%) 5.10 It may be noted that India is below World average on productivity scale in all six crops. The efficiency gap is the highest in case of R&M (42%), followed by lentil (34%), barley (24%). The efficiency gaps become more glaring when productivities of domestic crops are compared with those of the benchmark countries. India's ranking, both in terms of yield levels and production in respect of aforesaid six crops, and also leading countries which are ahead of India on productivity scale is given in annex table 5.8. It is apparent that to enhance the productivity levels of domestic crops, there is an imperative need to first understand how the benchmark countries 65

81 Price Policy for Rabi Crops 10% increase in gross returns, in t h e p r e c e d i n g year may increase yield levels in the range of 1% to 5% i n s u c c e e d i n g year, depending upon crop. have achieved such heights of productivity. It is, therefore recommended that an Expert Group be set up to study the best international farming practices, deepen the understanding of factors (natural and man-made) that have helped benchmark countries achieve the high levels of productivity and also to explore the possibility of using those practices/factors, with mutatis mutandis, in Indian conditions after taking its agro-climatic conditions in view..drivers of Productivity 5.11 Having established empirically that real cost of production can be reduced by increasing land productivity, the next logical question arises as to what drives land productivity. To find an answer to this, various causal factors are tested. Basically these factors fall in three categories: (a) gross returns over A 2+FL of the crop under question in real terms in period t-1 as a proxy to price incentives; (b) technology factors such as fertilizers consumption per hectare, or percent area irrigated, or seeds, etc.; and (c) Nature represented by actual rainfall or percent deviation from normal rainfall. The impact of each one of this is explored by undertaking simple linear regression analyses. Based on this approach, elasticities for six important rabi crops under reference are estimated and presented in table-5.4. Crop Gross returns in preceding year at constant prices ( =100) Table-5.4: Elasticity of Yield w.r.t. Various Causal Factors (Drivers of Yield) Seed (Kg/ha.) Elasticities % Area Irrigated Winter Rain (% Deviation from normal) Wheat * * Barley * # Gram * * Quality of Labour## Lentil * # *** R & M * * * Safflower # 66 *: Statistically significant at 95% level of confidence ***: Statistically significant at 88% level of confidence #: Not significantly different from zero in statistical sense of the term. Notes 1: Blank cells indicate that the corresponding variable was not found appropriate to explain variability in yield levels 2. Given that regression analysis are based on panel data, not much significance can be 2 attached to value of R and therefore not reported in the above table. ## Quality of labour is defined as ratio of expenditure incurred on machine labour to total expenditure incurred on both human & animal labour.

82 5.12 The results of the regression analysis show that farmers respond strongly to gross returns over A 2+FL compared to any other variable in the equation. It has strong implication in terms of policy which would indicate that price policy has critical role to play in gross returns and therby in overall production and productivity of the crop under consideration. The gross returns is a sort of a 'catch all variables' in influencing productivity. Land Productivity: Divergence in Two Official Series 5.13 Having underscored the need for enhancing productivity, an important tangent to the issue is its measurement in a manner that truly reflects the ground reality. In this context, it is pertinent to bring out that yield rates generated from the CS are at significant variance with the corresponding figures obtained under Crop Cutting Experiments (CCEs). To gauge the degree of divergence between the two series, average divergence during last eleven years, state-wise and crop-wise, have been worked out and given in annex tables. The summary of these divergences is presented in table-5.5. Table-5.5: Average Divergence between CS and CCE Yield Rates during to Crop Average Divergence (%) Wheat Barley Price Policy for Rabi Crops Divergence between yields obtained from CCEs and those from CS Scheme calls for deeper investigation. Gram Lentil Rapeseed/ Mustard Safflower Note: Divergence = (CS/CCE -1)*100 It is noted that CS yield rates in general are higher compared to those obtained under CCEs in most rabi crops, except in case of safflower, in the range of 10 percent to 31 percent. This issue needs to be studied and resolved. The working group that is being constituted by government to look into entire gamut of the CS Scheme is best equipped to revisit this issue To recapitulate, the following key messages emerge from the foregoing analyses: I. A prudent response to ever increasing costs of production lies in productivity enhancement; 67

83 Price Policy for Rabi Crops II. Efficiency gaps in India's yield levels compared to those of world average are quite significant. These gaps increase substantially when our yield levels are compared with those of benchmark countries. To ramp up our productivity levels to be more competitive, there is a need to set up an Expert Group to study the best international farming practices, deepen the understanding of factors that have helped benchmark countries achieve the highest levels of productivity and also to explore the possibility of using those practices/factors, with mutatis mutandis, in Indian conditions after taking its agro-climatic conditions in view. III. Gross return over A +FL is an important factor that drives 2 productivity. This indicates that price policy has critical role to play in promoting overall production and productivity. Therefore, there is an urgent need to getting the prices right. 68

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