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India’s pulse economy and the problem of plenty

India’s pulse economy and the problem of plenty

By Prashansa Srivastava

A Crisil study report says that the income of farmers growing pulses fell by 16% in 2016-17. According to the report, if gram is excluded, margins have fallen by 30%. While the selling price of pulses fell, the cost of cultivation continued to rise.

Sowing seeds of stagnancy

The fall in farmers’ income is due to a record production of 22.95 million tonnes of pulses in 2016-17, up by 40% over the previous year. This may seem counterintuitive at first. However, this can be explained by the cobweb phenomenon. When there is a scarcity of a commodity, its prices increase dramatically. Farmers resort to boosting the production on the premise of the pre-existing demand and prices. This leads to a problem of plenty. An abundance of produce then leads to a crash in prices, dashing the hopes of farmers. 

The cobweb phenomenon is highly prevalent in agriculture in general and pulses in particular. Seen widely in the plummeting production of tur dal (pigeon pea) in Maharashtra last year, the cobweb model explains how a small economic shock can shift the market into a long-term disequilibrium position.

Impact on consumption and production decision

The consumption of pulses has also grown with falling prices, as the commodity is largely price elastic. India’s average import of pulses used to be 4 million tonnes and domestic production around 18 million tonnes. However, in 2016-17, with nearly 23 million tonnes and over 6 million tonnes of imports, India has built a huge surplus in the system. Despite the creation of around 2 million tonnes of buffer stock, the surplus is still high.

During the past few months, the government fixed an import quota for tur, arhar/moong for the agricultural year 2017-18. However, the measure has come too late and has not helped domestic farmers. Government data as on September 1 shows that the area sown with pulses has decreased from 14.30 million hectares to 13.76 million hectares with farmers shifting plantation to cotton and sugarcane.

Macroeconomic implications

If such trends persist as planting picks up the pace with the progress of monsoon, India could witness a lower production of pulses and a spike in imports. In FY 2015-16, the country spent nearly $10 billion importing vegetable oils from Malaysia, Indonesia, Brazil and Argentina, and $2-$5 billion buying pulses from Austria, Canada and Myanmar.

The entire cycle of shortages, price rises and higher imports has extreme macro economic implications such as a higher deficit, increased dependence on imports, and rising inflation. The looming plunge to a shortage of pulses and oilseeds will deal a major blow to the government’s push to become self-sufficient in these crops by the end of the decade.

Exports: A viable option

To ensure that pulses remain remunerative for the farmer and the country, exporting these goods is a viable option. Being the largest producer of pulses in the world, the government must diversify its exports instead of relying on imports.

According to Crisil, the price of gram has remained above the minimum support price (MSP). It has also been a profitable crop in general within the pulses basket. Gram (chana) has a high share of 40-45% in production and over 60% in the export of pulses. The report notes, “Since there is no restriction on the export of gram, profitability remained higher for gram farmers as the international market was ready to absorb the supply in excess of the domestic demand”.

Role of the government

Nearly half of the cultivated land in India under small and marginal holdings of less than two hectares. It has become increasingly difficult for farmers to manage the longer duration and more demanding crops like cereals, pulses and oilseeds. Lack of safeguards against the cyclical nature of pulses hurts both consumers and producers. Lower income during periods of economic downturn and contraction adds to the woes of farmers. 

The government must initiate steps to smoothen prices through a mix of effective Minimum Support Price (MSP) dispensation, open trade policy, export promotion and well-functioning markets. The MSP must be set keeping the cost of production in mind. Otherwise, it will not benefit the needy farmers.

Ultimately, the whole country survives on the food grains produced by farmers. Farm income can go up only when productivity rises due to an increase in output, without costs skyrocketing. The government can achieve this only through consistent steps to provide technological and infrastructural aid.  

Featured Image Source: VisualHunt

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