Agricultural Price Policy - A Survey With Reference to Indian Food Grain Economy

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Agricultural Price Policy: A Survey with Reference to Indian Foodgrain EconomyAuthor(s): N. KrishnajiSource: Economic and Political Weekly, Vol. 25, No. 26 (Jun. 30, 1990), pp. A54-A63Published by: Economic and Political WeeklyStable URL: http://www.jstor.org/stable/4396433

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Agricultural P r i c e P o l i c yA Survey with Reference to Indian Foodgrain EconomyN Krishnaji

Agricultural price policy must be seen as an essential part of a larger 'package' of policies' designed to promoterapid growth in a few regions endowed with irrigation acilities and to encourageprivate investment in the necessarymeans for the cultivation of the new varieties. Given the highly skewed distribution of land and assets and themarked regional concentration of irrigatedareas, the policy package was bound to promote both inter- and intra-regional inequalities. One can thus perceive a built-in regressive element in the price policy and locate it withinthe overall policy of promoting growth through various production incentives, a policy not based on sufficientconsideration of its distributional consequences.

IIntroductioiTHiECONTEXT

BEFOREthe mid-nineteensixties the acti-vities of the government in the foodgraineconomywere imited n scopeto the importof grainandits distribution-mainly in theurban areas under various forms ofrationing-during periods of food scarcityfollowing poor harvests. ' Thereafter,however,with the adoption and promotionof the 'newagriculturalstrategy',based onthe cultivationof high yielding varietiesofseeds with the use of 'modern' inputs-fertilisers, esticides, tc-in areasof assuredwatersupply,the governmentbeganto playa major role in the transformationof theagricultural ector. This led to the involve-ment of the state in diverseactivities suchas the development of infrastructuralfacilities,provisionof subsidiesof differentkinds, supply of inputs and credit, and thepromotion of agronomic researchfor theadaptationof exoticcrop varieties o Indianconditions.2The agricultural price policy whichevolved subsequentlymust thus be seen asan essential part of a larger 'package' ofpolicies designed to promote rapidgrowthin a fewregionsendowedwell with irrigationfacilities, and to encourage private invest-ment in the necessary means (moderhinputs, tubewells, farm machinery,etc) forthe cultivation of the new varieties. It canbe argued that, given the highly skeweddistribution f land andassetsanda markedregionalconcentration-ofrrigated reas, hepolicy packagewasbound to promotebothinter-andintra-regionalnequalities.Forthisreason,one can perceivea built-inregressivecharacter n the price policy and locate itwithin the overall policy of promotinggrowth through various production incen-tives, a policy not based on sufficient con-sideration of its likely distributionalconsequences.AGRICULTURAL RICES

COMMISSION APC)Both before and after independencethegovernmentof India had been constituting

'committees'and 'commissions'with a fair

regularity o investigate he 'food problem'and suggest ways to solve it. But all thesewerebodies formed ad hoc in responsetoperiodic carcities.Theworkandrecommen-dationsof these variousbodiesprobablyhadno lasting impact on the Indian agrarianeconomy.3Itwas onlyin 1965 hata permanentbody,viz, theAgriculturalPricesCommission,wasset up with presumablylong-run goals inview.The APC, like the PlanningCommis-sion(a nationalbodyconcernedwithgrowthand development in general), is only anadvisorybody,withall thedecision-makingpowers resting unquestionably with thegovernment.The APC was chargedwiththeresponsibility of evolving a balanced andintegratedpricestructure"inthe perspectiveof the overallneedsof the economyandwithdue regard o the interestsof the producerand the consumer".The termsof referenceof thecommissionrefernot only to theneedforprovidingpriceincentives orpromotingagriculturalgrowth but also to the need to"ensure ationalutilisationof landandotherproduction resources" and to the "likelyeffect of the price policy on the restof theeconomy, particularlyon the cost of living,level of wages, industrial cost structure,etc"Wide-rangingas thesetermsof referencewere, they have since been modified andexpanded n 1980 n response o the changesin the agrarian economy that have takenplace duringthe late sixties and the seven-ties. An importantaddition is the directivethatpricefixationshould"take ntoaccountthe changes in the terms of trade betweenagriculturaland non-agricultural ectors":the originaltermsof referencedid not coverany principleof pricingin relationto costsor paritybetween ectors,barringa referenceto marketingcosts and margins. We shalldiscuss the specific politicalcontext of thisdirective aterbut note herethat the under-lying concern with agricultural nput costsin relation to output prices, and, moregenerally with parities of different kinds,havebeengivenfurtherandexplicitrecogni-tion in 1985 with the commission beingrenamed stheCommission orAgriculturalCosts and Prices (CACP).5The composition of the commission hasundergone ome change n character ver he

years. It was headed in succession by severaldistinguished economists and originallycomposed of economists and civil servantswith experience in matters relating to theworking of the food economy in the coun-try. However, after 1974, one or morerepresentatives of the farmers have beenfunctioning as full-time members in thecommission, with obvious implications forthe evolution of policy.6

OBJECTIVESThe objectives as laid down in the terms

of reference of the APC are to some extentmutually conflicting, and difficult to realisefor other reasons as well. One may thus saythat the APC was given an impossible task.Let us elaborate.(a) If the sole objective is to promoteagricultural growth-whether or not broad-based with respect to crops and regions-

through subsidies and price incentives, thereis a clear possibility that the implied policywould hurt the interests of the buyers offood and agricultural raw materials. Aresolution of the conflict of interests betweenproducers and consumers-or between netsellers and net buyers, and between 'surplus'and 'deficit' areas, as some have describedit in the case of foodgrains-thus becomesa necessary element of overall policy-making. It is a recognition of this necessitythat ts reflected in the expressed concernabout the imipactof policy on cost of living,etc, and has led to Ce onversion of pricepolicy into an appi Ai which seeks to in-tegrate in some mn-- production objec-tives with those o: C sztiibution. In the caseof foodgrains this meant that price policyhad to be combined with the operations ofa public distributioni system (PDS) to ensuresupply of foodgrains at subsidised prices toat least some of the poorer sections of thepopulation. However, to the extent that sub-sidising both the producer and consumer isseverely limited by financial constraints, itcannot be sustained on either a short- orlong-term basis without being supplementedby compensating measures of taxation. Allthis makes the design of price policydifficult, especially by a body with nodecision-makingpowers;more importantly,the difficulty leads to politically expedient

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measures which exacerabaterather thanresolve conflicts.(b) The difficulty is compoundedby twoother obviousfactors.First if relativepricesare to play an efficient al(ocative role andnot lead to undesirablecropping patternshifts, policiesmustbe designedto coverallthe majorcropson acountry-widebasis,animpossible task to accomplish.7 Second,sincepublicdistributionof subsidisedgraincannot hope to meet the entire marketdemand(of both the ruraland urbancon-sumers),the impact of policies on marketprices assumesimportance.Thus, with thegovernmenthandlingonly a fractionof themarketedurplus, he pricingobjectivesmayin theend be defeatedby market orces.Thedesignof price policies with only a limitedcontrol over the market thus not onlyinvolvesanappropriate ombinationof pro-curement, tockaccumulationand depletionpoliciesbut must necessarilybe basedon asound knowledgeof the impliedworkingofdual markets.The biggest hindrance n thisrespect s not lack of knowledgeabout pro-duction trendsand demand elasticities butour virtual gnoranceabout the operationsof private radersat thedifferent iers of thegrain markets and their impact on prices:(c) Finally, it must be noted that theobjectivesare not only conflicting-the factthat there s no indication n policyformula-tioAiswhether t is only in the short-runbutalso in the long-runthese conflicts could beleft unresolved s also important-they arealso incomplete and imprecise in somerespects. For example, income and pricestabilisation recommon-objectives f pricepolicy;maintenanceof some form of paritybetween the agricultural and industrialsectorsandprevention f the prosionof pur-chasing powerof agricultural ncomes is arelated oncern,and all theseareadequatelydiscussed n the literature.Indeed they canbe stated with some precision: unlike thevague 'protection' of producer and con-sumer 'interests'; butJit is doubtful ifmultiple objectives are realisable.

INSTRUMENTSGiventhe all-embracingbut vaguely set-out natureof the objectivesof pricepolicy,the APC had to recommend not one butseveral ets of prices; its.repommendationshadalso to coverissues relatingto the pro-

curementand distributionof foodgrainsbygovernmentalagencies. It had to developnotions about: 'support' prices to preventfarmerdistress,8 'incentive' prices to pro-mote investmentandgrowth n agriculture,'procurement' rices-possibly involvinganelementof tax- at whichgraincouldbepro-cured by the government under varyingdegreesof compulsion(or none) and 'issue'prices-involving an element of subsidy-at whichgraincould be distributed underthe public distribution system whateverbeits coverage.The followingdiscussionattempts o coverthe different nstrumentsof policy adopted

by the APC, more factuallyby the govern-ment, their rationale, as well as how theyhaveworked n termsof thestatedobjectives.II

PrinciplesSUPPORT AND INCENTIVE PRICES

Given large output fluctuations arisingout of the vagaries of the monsoon (seebelow) andgiven the low price elasticityofdemand or foodgrainsn the country,pricestend to fluctuate a lot from year to year:changes in the supply induce dispropor-tionately large changes in the marketprices.'A notion of a support price can be seento acquiremeaning in this context.'?Sucha pricemay be regardedas an offer price atwhichthegovernment s willing to buy anyamount of grain from the farmers n yearsof good harvest when, in the absenceof asupportoperation, he marketpricemayfallbelowthecost of production;t has thereforeto be abovethat hypotheticalmarketprice,and, f or h-'trao b a built-in elementof subsidy o theproducer. omeeconomistshave argued, however,that support pricesconceptualised n this mannerneed bearnorelation to costs, at least in the short-run:as long as it is above the low marketpricethat will be realised n the absence of inter-vention, thereis an elementof subsidy,andthe governmentabsorbs a part of the lossand neutralises n some measurethe effects,pf output fluctuations.A logical corollaryto the concept of the'minimum' support price is that of amaximumor ceiling pricethe rationale forwhich lies in two factors.1'First, protectingfarm ncomes n yearsof abundancehroughpurchasesby the governmentat minimumprices mpliesbuilding up of stocks;and forviability-at least over the long-run-sucha policy requires stoAk depletion as well.Second-this is a related factor-a maxi-mum pricewould imply protectionof con-sumer interests in years of crop, failure,without t a supportprogrammeunilaterallyfavours he farmerandis clearlyundesirablebecause the effects of agriculturaloutputfluctuations n India arenot restricted o thefarm sector alone but arequickly transmit-ted to the other sectors of the economy,especially in periods of scarcity, throughhigh food price. In a sense the food priceacts as a base pricein the determinationofboth agriculturaland industrial costs.We thus see that the two notions, one ofpricestabilisation-or, rathet, pricecontrolwithin a certain range-and the other ofsupport of farm incomes along with somedegreeof protection of non-farm interestsare interrelated This, however,still leavessome asymmetry, or the question remainswhether in 'poor crop yearscorrespondingto a disproportionate ricerise,farmersandtraders should be left free to sell all thesurpluson the market o earn super-normalprofits. Of course the policy of stock deple-

tion by the government ends to depress hemarketprices o some extentand holds theseprofits n checkbutit canbe obviouslymoreefficacious in combination with a policyofcompulsory procurement at lower'than-market prices in lean years.Thus the logic of a support price leads tothe notion of a pricerange, specially n rela-tion to theobjectiveof dampeningpriceandincomefluctuationsarisingout of unpredic-table monsoons. Supporting agriculture nthis context is clearly different in nature nIndia from, for example, that in the US,where t has more to do with thepreservationof the purchasingpowerof farmers n rela-tion to manufactured oods underconditionsof abundantandgrowing armsupplies hanwith weather-induced luxtuations in farmoutput. The US hasbeen able to successfullypursue his policy becauseof herdominancein the international grain markets.)In contrast to the support price, it is noteasy to settle what constitutes an incentiveprice.TIherationaleof a price incentive iesin the promotion of growth. In the case ofa single crop such as wheat-hindsightenables us to cite this as anexample-a sup-port price covering costs and some profitduring a period of rapid growthin produc-tion is in effect an incentiveprice,with thegovernment tandingbyto lift surplusesandensureprofit margins rrespective f outputgrowth. Clearly4such a policy cannot beadopted without undesirable onsequences(includingpolitical tensions)bound to arisebecause of the regional concentration ofsurpluses except in the short-run; on theother hand, a price incentive policy is notviable f the objective s to promotea balanc-ed growth with respect to all regions andcropsbecause hereare obvious imitsto theprovision of incentives.It mustalso be noted thatincentivesneednot coveroutputpricesalone butmaybe ex-tended to include subsidies n the supplyofinputs and credit. It is possible to analysethe growth and welfare effects of the dif-ferentunderlyingchoices, but it is generallyagreed hatinputpricesubsidisationmaybecheaper only in the veryshort run-an im-mediate incre"asen food and rawmaterialprices being avoided;in the long run, withprice adjustments taking place across theboard, the effects may be similarto thoseof producerprice subsidies."2 Moreimpor-tantly,as it has been repeatedlystressed ntheliterature,hepromotionof technologicalimprovement through, for example, thedevelopmentof irrigation, may at all timesbe a better alternative hanthe provisionofprice incentives to secure agriculturaldevelopment.This belief is firmly ground-ed intheempirical indingthatgenerallyheelasticities of supply (in terms of output)with respect to such technological changevariablesas the irrigationratio exceedpriceelasticities: greater gains can be securedthrough upward shifts in the productionfunction than from maovementslong thes-upply urvea n otherwosrds,f pricepolicyis to be the only instrument or agricultural

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development,he low supplyresponsewouldrequirea tilting of the terms of trade infavour of agriculture to a degree theeconomy cannot bear except over a veryshort period.'3 Finally, given the unevenspatialdistributionof irrigationand otherresources,the scope for achievingdesiredlevels of overall growth through evenmarginal ncreases n per-hectareyields intheunirrigated ractsof the country(cover-ingabouttwo-thirds t cultivated rea)mustindeedbe enormous;the means for such araising of the yields are without doubttechnological in nature.PROCUREMENT RICES,COSTSOFPRODUCTIONAND PARITY

Given he structure f the Indianeconomyand the decisive role of drought-inducedagriculturalutputfluctuationswithin t, theoperation of a support programme s in-extricably linked with that of a publicdistributionsystem for the supply of grainat subsidisedprices.It is clearthat a systemof subsidiesat both ends (production andconsumption)can be financiallyviableonlyif therearecompensatorymeasuresof tax-ation withinthe agricultural ectoritself orelsewhere: ubsidiesbeyonda certainquan-tumwithouttaxeswill cripplethe economyin the long run.This leadsto theconceptof procurementas a tax on surplus producersespecially inyears of poor harvest when marketpricesand hence profit margins tend to be veryhigh."4And it is obvious that a degreeofcompulsion s inevitable f producersaretobe madeto surrendera partof the surplusat priceslower than those prevailing n themarket. While both the support and pro-curement perations nvolve hegovernmentin the acquisition of stocks, they can thusbe seen to be analytically quite distinct incharacter-one, a moreof subsidisation ndthe other, a form of taxation.

This importantanalyticaldistinctionwas,however, lost sight of in the academicdebatesas well as in policyimplementation,after some initial consideration.'5 Thereasons are many. Soon after the procure-mentanddistributionprogrammes egantogather momentum by the late sixties, theprocurementprice emergedas a guaranteeprice,announcedwell aheadof harvest ime,at whichthe governmentwas committedtomake purchases.More decisive, of course,was the concern of the government o pro-mote growth in the production of wheatthroughthe new technology. All in all thepriceguarantee chemewasa hastyresponseto a combinationof several actors: heneedto recover romanenvironment f shortagesresulting from two consecutive years ofseveredrought (1965-67), the possibility ofsuch a recoveryat a rapidrate throughthecultivation of the newly emerging high-yielding varieties and finally the purelylocalised and limitednatureof the supportoperationwhichmade it eminentlyfeasible.However,neitherthe subsequentemergence

of surpluseson a widerscale northe greaterinvolvement of the government in themarkets t entailedled to any basic revisionof the policywith regard o the rationaleofprocurementand its pricing.The policyhad predictable onsequences.While the support operation was satisfac-torily served by the levels of procurementprices wheneverand wherever upportwas

needed n response o bumperharvests,pro-curementof grain becameincreasinglydif-ficult under conditions of scarcity, ocal orglobal. This meant that procurementpriceshad to remainclose to, even f slightlybelow,marketpricesat all times.Since procurementpriceswere being announcedin advanceofthe harvest and could be based at best oninsufficientknowledgeof the cropprospectsand market conditions expectedto prevailin the coming season, this in turn requiredthe upwardrevision of prices6 -secured inpractice hroughdiversemeans-for meetingprocurementargetswith varyingdegreesofsuccess.(SectionIVdiscusses urtherdetailsabout price movements.)Returningbriefly to the questionof com-pulsion whichcould havebeen the basis ofprocurementunder conditions of relativescarcity,we may note that the governmentdidemploya numberof instruments ncor-porating a coercive element. These rangefrom directcompulsory evies on producers,tradersand millersto the zoning or cordon-ing off supplies to facilitate procurement.Butthe measuresproved o beephemeral ncharacter and ineffective in execution,whether it is the lack of 'political will' orsome otherfactorthatcouldbe heldrespon-sible for the failure of policy. Take, forexample, he constitutionof zones compris-ing one or more regions. The usefulnessofzoning has been much discussed in theliterature.Let us note however that move-ment restrictions generally amplify thechanges n prices n anyregionas theyoccurin response to variationsin domestic pro-duction. Hence,to theextent hata normallysurplusregioncan be kept mmuneto short-falls occurringelsewhere n orderto createconditions favourableto the procurementagency,zoning maybe seen to be consistentwith the principle of procurement belowmarketprices n leanyears.However, henetimpact of zoning on prices, both in termsof the aIl-India averageand the range ofregionaf variation would crucially dependnot only on the coverageof zoning but alsoon how much, where and at what pricesgrain is procured and subsequently dis-tributed. Inpractice,movementrestrictionshave been imposed and relaxed in anarbitrarymanner,sometimesin dissonancewith stated objectives.'7

Let us nowconsider he relevance f costsof production o the fixation of prices.Thegeneralconsensusis that minimumsupportprices-now indistinguishableromprocure-ment prices-must fully cover the averagecost of production, but the,question whatelements of cost should be included in the

calculation of the average total cost con-tinues to be debated.8 Specifically thedebate refers to the appropriatenessof theinclusion of not only the so-called paid-outcosts but also the imputed values of theservicesof family land and labour nputs inthe calculation of the 'complete' averagecost. A price coveringsuch a complete costhas been described as a 'forward-looking'floor because it ensures cash incomes tofarmersover and above the actual moneyexpenditure ncurred.Moreover, t is seen toincorporateat least one principle of parity,viz, input return parity, since the familyinputs are given the same remuneration hattheycould notionallyearn outside he family,farmingactivity.'9(Even if one accepts this complete costprincipleof pricing, it is beset with manyoperationaldifficultiesarisingfrom the factthat evenfor a single crop the cost of pro-duction varies a lot not only fromregiontoregion but also within regions across dif-ferentfarms.20A solution suggested n thisrespect recommends he use of a bulk linecost,the minimumcost that covers he costs3f farmersproducinga major part of theoutput, weeding out the very 'inefficent'farmers.But then the derivedprice wouldcease to have the same meaning as thatbased on the average cost in standardeconomic theory. It is equally difficult tograpplewith the questionof regionalvaria-tion in costs. The actual practiceof fixinga uniformprice for all regionsis obviouslydefective. For example, the adoption of aprice that covers the costs in a high costregion, where, say, traditional methods ofcultivation reused,results n abnormalpro-fits to farmersof other regions using thecost-reducing new technologies. Thus theprinciplemaybe consistentwith the objec-tiveof growthbutnotwiththat of the reduc-tion of interregionaldisparities.)TWomportantpoints have been madeinrelation to the imputation of values atmarketpricesto the use of familyland andlabour resources.Sincethepriceof produceis raisedby the inclusion of these elementsin the total cost, agricultural abourers-andothernet buyers f food for whom wagesconstitutea majorelementof income-losebecausewages actually paid generallytendto be below the statutorilyfixed minimumlevels (which in principle could be in linewith output prices fixed by the completecosting principle)whileemployersof hiredlabourearnan abnormalprofitforthe samereason. In simpler erms,money incomes ofnet buyers (especially of wage earners inruralareas)generally agbehind,foodprices,and the total cost principle reinforcesthetendency. Regarding the imputation ofmarket rental values to the use of ownedland, it has beenargued hat therehasbeena continuous ncrease nthese valuesarisingfrom increasing productivity as well asdemographic pressure. Regions well-endowed with, say, public irrigationresourcesare also in generalregionsof high



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productivity and it is debatable whether suchregions should be allowed to enjoy higheconomic rents through the enhancement ofproduct prices resulting from the inclusionof rental values in the total cost.

Similarly, it is arguable whether increasesin rental values arising froam xogenous fac-tors such as demographic pressure or insuf-ficient expansion of non-agriculturalemployment should be automaticallytransmitted ;s'additional costs to the pro-duct price. Thus the debates in the literaturedemonstrate that even a well-defined cost-based principle for price fixation canbecome meaningful and reasonably opera-tional only in relation to. a clearly specifiedpolicy goal (such as the reduction of spatialdisparities in incomes earned from thecultivation of the same crop).The parity with input costs is only oneamong different kinds of parity one canthink of in the context of product pricing.For example, there is the parity between farmincomes and incomes earned in other sectorsof the economy. A little reflection shows thatin India, with large output fluctuations therule rather than the exception, it is difficultto maintain such a parity through a productpricing policy alone: here again a system ofsubsidies and taxes is needed to limit therange of fluctuations in farm incomes andensure their parity with icomes in othersectors. Also, because of the stickiness ofnominal wage incomes over the short period,product price adjustment can at best protectincomes from cultivation only. Thus, upwardadjustments in agricultural prices made inresponse, for example, to increases in theprices of some manufactured consumerarticles may fail to maintain the purchasingpower of all rural classes uniformly; wageearners may in fact suffer a loss in real in-come following the rise in the price of foodbecause food absorbs most of their expen-diture. A uniform output price consistentwith the income parity criterion cannot becalculated simply because the commoditybaskets of consumption vary as between thedifferent rural classes.

IIIPolitics

Political factors behind the making ofeconomic policy are -generally ignored inwhat may be described as 'mainstream'economics but constitute an importantelement of discussions of economic pro-blems in the growing literature on Indianpolitical economy. The general concern inthe alternative stream is with pro.ductionrelations (such as those between landownersand labourers) and how they influence pro-cesses of change in the spheres of produc-tion and accumulation. However, the politicsof price-fixing in the Indian context hasreceived a lot of attention from both thecampS.21In the agrarianeconomy,the importanceof politics with respect to policy-makingarises from two basic factors. First,policies

are formulated by governments at the stateand the central levels, the constitution andworking of the government depend verymuch on the configuration of class forces.(For example, the failure of land reforms forimposing ceilings on landholdings and forredistribution of land, despite much legisla-tion and endless rhetoric in day-to-daypolitics and plan documents, cannot beexplained without a consideration of thebalance of class forces and the manner inwhich it has influenced the implementationprocess.) Second, and more readily seen, isthe very large disparity in landholdings inall regions of India, with big landownersconstituting a small proportion of ruralhouseholds but controlling the major sharenot only of land and assets in general butalso, consequently, marketed surpluses.Rural disparities have grown further withthe introduction of the new agriculturaltechnology which has strengthened theeconomic and political power of the classof surplus producers. Described as the ruraloligarchy this class had appropriated adisproportionately large share of the benefitsgenerated by the policy of incentives andsubsidies to the agricultural sector since thelate nineteen-sixties. The political strengthof the class is seen to lie, moreover, in its con-trol over the rural vote in the electoral pro-cess, which enables it to further its own in-terest through bargaining with the othermajor ruling group, the industrial (urban)bourgeoisie. As a result there is in existencea- politically powerful 'farm lobby' whichinfluences policy-making in agriculture witha fair degree of success.22The success is derived from two factors:First, given the nature of the electoral pro-cess and the decisive role of the rural votein its outcome, there is a heayy representa-tion of the 'farmer interest' in the statelegislatures and governments. We shouldnote that in reality the farmer interest relatesto the amassing of incomes and wealth bythe surplus-producing big farmers, althoughthe political rhetoric refers always to the'peasant cause' in general, as if the peasantryconstitute an undifferentiated mass; small,poor farmers and agricultural labourers havehardly any representation in any tier of thedecision-making process. Second, practicallyall political parties accord support to the'peasant cause' and to rural agitations on avariety of issues such as demands for'remunerative' prices for the products ofagriculture; for provision of inputs like waterand electricity, and credit, at cheap rates; forcancellation of rural debt in hard times; andin general for all-round support at-all times.For most political parties, slogans aboutthe rural poor are a necessary means tosecure political power through the electoralprocess. The basis Of leftist support for thefarmer interest has another dimensionhowever. The communist parties, for exam-ple, recognise landlords and capitalistfarmers as constituting an exploiting classbut seek to mobilise not only poor peasantsatid l'abourersut also themiddleandricher

sections of the peasAntryn orderlo securepeasantunityconsiderednecessaryto carryforward the struggle against exploitingclasses ngeneral.Thesepartiesrecognise hefact, forexample, hat thebenefits from in-creases in agricultural prices flow in adisproportionately large manner, if notwholly, o thesurplus-producing ig farmers(andtherefore, uggestmeasuresof taxationon the rich and for relief for the poor tocounteract hegrowth n inequality hatp-iceincreases ntail)butsupport he struggles or'remunerative rices'perhapsbecauseof thepriorityaccordedto the necessity for secur-ing peasant unity from a long-termperspective.23Thecourseof eventsrelevant o foodgrainpricepolicysincethemid-sixtiescannow bedescribedn brief. Theheralding f the greenrevolutionwiththeintroductionof newseedvarietiesof wheatand the unequivocal om-mitment of the central government to thenewagricultural trategy ed to the supportof wheat prices at levels prevailingduring1966 and 1967-a period of extremescarcity-without any referenceo principlesof cost orparityor to the demandandsupp-ly conditions in a period of abundanceresulting from the wheat surpluses. n thenorth-west. The sole aim was to promotegrowth at any cost. During this periodpolicy-makingwaswhollytheprerogative fthechiefministers f thesurplus tates.Suchattempts as weremade by the APC to in-troduce some principles nto the settingofrelativeprices and procurement argetspro-ved to be futile.The most importantconcernof the farmlobby till about 1973 appears to be theprevention of a fall in the price of wheatwhich thebumperharvestsof 1968-72wouldhavenormallyentailed. It must be noted inthis context that during this period ricesurpluses and quantities procured weremarginal; further some cost comparisonsshow that the marginsof the procurementpricesover the costs of productionwere farhigher in the case of wheat than in that ofrice(seebelow).Theparitybetweenriceandwheat seems to havebeen establishedonlyfrom about the mid-seventies,24 ollowingboth the greaterquantumof ricebeing pro-cured and the conditions of relativescarci-ty prevailing n 1973 and 1974.At any rate, the terms of trade movedgenerally in favour of agriculture during1965-73.The trend has reversed ince then,withthepricesof manufactured rticlesandagricultural nputs risingat rapidrates andstocks of foodgrains piling up with thegovernment as a consequence of a succes-sion of good harvests. This adverse move-mentin the termsof trade s the backgroundto numerous farmers' agitations forremunerativeprices. An incidental factorbehind hestruggles s theemergencen 1977of peasantleaderslike CharanSinghat thecentre. The eighties saw not only areconstitSutionf the APC (to allow for ex-plicit representationof the farmer nterest)but also to its renamingas the Commission



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of AgriculturalCosts and Prices, enshrin-ing the cost principle in price-fixing. Thefarmlobby has in recent years been grow-ing furtherwith the mushroomingotfself-styled 'non-party' 'peasant' organisationssuch as the one led by Sharad Joshi. Therhetoricof Joshi's movementrefers to theexploitation of agriculture Bharat) by in-dustry (India) and the goals may thereforelook broad-basedbut the programmehasbeen aptly described as a one-point pro-grammneor securing higher agriculturalprices in all seasons.5IV

Price Movenients and RelationsGROATTHND FLUCTUATIONSN OUTPUT

In per capita terms the oUtput offoodgrains n Indiaas a wholehas stagnatedsince the beginniinigf the sixties, implyingtherebythat the growth rate in foodgrainproduction just about equalled that ofpopulation.26However,different crops ex-hibitdifferent rends: or example, herehasbeenan impressivencrease n the outputofwheatbut a distinctdecline n thatof coursecerealsandpulses(bothin percapitaterms).The impact of th"se differential trend onrelative pri&emr,-no4mentss well as con-sumptionlevels, especiallyof the poor, hasstill to be studied in detail.But more important perhaps is the factthatboth at the specificcropleveland in theaggregate herehave been considerable ear-to-yearfluctuations n yieldperacreas wellas producfioi. Since the production offoodgrainsas a whole has stagnated n percapitaterms,output fluctuationsare clearlyrelevant to price movements in a periodcharacterised y a growth-albeit modest-in real incomes per capita. Some earlystudies show that the price flexibilitycoefficient tendsto be very high (morethantwoin absolutevalue) or cereals uch as riceand wheat.27Of course, availability s notdetermined ylevelsof production lone: heoperationsof the government through m-ports and distribution) and of surplus-holding farmersandtradersat thedifferenttiers n themarketeconomyareequallyrele-vant.A good partof the priceflexibilitymaybe due to the speculative activities of thetraders singularlyabsent n studiesof pricetrends),but output fluctuations contributealso to the quantumof grainthat could beprocuredbythe governmentat givenprices,to amounts that have to be distributedthroughthe publicdistributionsystem,etc,and thus are of central importance to theinteractionof privateand publicagencies nthe foodgrain economy, i e, to the dualmarket economy.From this perspective, he recentlywell-documentedincrease n fluctuations-withmuch inter-regional and inter-cropvariation-in productivityand productionof foodgrains in the post-greenrevolutionperiod assumes importance28but is notEdequatelyreflectedin policy-makingwith

reference o pricing, building-upof stocksand distribution.The studieswhichdemon-stratethis increase n instabilityargue thatthe improvedtechnologies are not respon-sible per se for this tre.nd n variancesandpoint to a number of concomitant factorssuch as the sub-optimaluse of irrigation ndfertilisers, imultaneous ncreases n year-to-yearvariability n areas sown as well as anincrease in the covariance between yieldsobtainedandareassown and so on; all thisrequiresmoredetailed tudy at a greaterevelof.disaggregationwith respect o bothcropsand regionsthan has been attempted n theliterature o far. A recentstudy on outputfluctuations comes to the conclusion that"aggregate production instability is aninevitable onsequenceot rapidagriculturalgrowthand there is little that can be effec-tively done about it" and suggests thatpoliciesaddressed o the stabilisation f con-sumption hroughstorageandtradepoliciesmay be more promising.29This conclusionis, however,contestable because a broad-basedstrategy orthe improvement f yieldsand stability in output in the dry and rain-fed tractsof the couintrys a clearalternative,admittedlynot yet spelt out in detail on thebasis of existing knowledge.The supply of grain is more relevant oprice movementsthan is domestic produc-tion. If one takesnet productionaugmenitedby changes in stocks with the governmentas a first approximationto supply (desig-nated usually as availability), his variableexhibits characteristics imilar to those ofproduction: since the early sixties netavailability f foodgrains n per capitatermshas virtually tagnatedbutyear-to-yearluc-tuations have been fairly wide-althoughdistinctly esswider thanin output,with thegovernmentdistributing somewhat higheramounts in years of crop failure.30 Thegood harvestsof thg late seventiesandearlyeighties have been utilised more for stock-building than for improving levels ofavailability.Indeed, levels of stocks whichwere about 3 million tonnes in the earlyseventiesgrewclose to 30 milliontonnes by1985(moreon this later). The fluctuationsin actual availability in the market mighthavebeenwiderthanthesefirstapproxima-tions indicate, because of the possiblespeculativehoarding by the private trade.MARKETPRICES, PROCUREMENT RICESAND COSTS

In this and the followingsub-sectionsweshalldiscuss heworkingof thedualmarketsin the foodgrainsector,especially n relationto the period after the mid-sixties mrrkedby a significant nterventionby governtnen-tal agenciesin the market.Apartfrompro-curementand distributionof certainquan-tities of grainat set prices, the governmentwas involved also in stock-buildingopera-tions. This -is the basis for dual marketmodelswhich seekto capture heinteractionbetween heoperationsof thegoverment ndthe functioning of the open market.3' It

must be noted, however, hat a realisticfor-mulation of such models in their fullestcomplexity s not an easy task, for it wouldrequireapartfromthe specificationtf sup-ply and demand functions under ihe di;hapricestructure,an explicitconsiderationofthe role of exogenous output fluctuationsand of the complexity introduced by dif-ferentpolicy nstruments uchas zoning andstock-piling. Perhaps, it is for this reasonthat most available analytical models areaddressedto narrowly focused issues suchas theimpactof priceandotherinstrumentson levels of procurement.

Letus begin with a descriptive ccountofthe trends n pricesand costs. Althoughpro-curement prices have generallybeen lowerthan market prices, both series exhibit astrong upward rend since 1960-61,charac-terised, n the case of foodgrainsas a wholein India, by a clearly visible staircasetypeof movement,withpricesrisingsignificantlyin poor cropyears but remainingsteadyorincreasing moderately in years in goodharvest.The only exceptionsto this typeofmovement-withpricesdeclining n responseto good crops-were in 1968-69, followingthe initial spurt in wheat production, andin 1975-76, he periodof Emergency ndall-round 'discipline'.32

Twofactors appearto underliethis typeof price behaviour: first, weather-inducedoutput fluctuations especially n per capitaterms)of a wide order,combinedwith highpriceflexibility oefficients;and second,thebounty of good harvestsbeing used moreforstock-building hanforpricereductions.(The asymmetrybetweenthe protectionofproducer ntereststhrough pricesupport-inherent in withholding supplies in goodyears-and the protectionof consumersisperhapsmost clearly seen in this aspect ofgovernment operations. The question ofoptimal level of stocks is discussedbelow.)It mustbe addedhowever hat the natureof both the trends in prices and the orderrelationsbetweenprocurementand marketprices, portrayed above in the case offoodgrainsas a whole forall-India,maynothold uniformly across regions and crops.

lbrning now to a comparison betweenprocurement ricesandcoststo see whetherprocurementhas operatedas a disincentiveto production, let us recall that the com-parison s besetwithdifficultiesarising romtheconceptualisation f cost. Studies n thisregardrelyon the averagecost at the statelevel (estimated on the basis of samplesurveys)with cost C as the relevant oncept.This cost includes the imputed value offamilylabour as wellas the imputedrentalvalue of owned land. The conclusions arethat in the case of wheat, since the earlyyearsof greenrevolution, rocurement riceshave been higher than-well above, in theinitialpartof this period-costs of produc-tion and in some years close to the openmarket prices. For rice, until the mid-seventiessupport prices did not covercostsin West Bengal and the southernstatesbut



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they did in the case of northern states.Thereafter,however,procurementprices ofrice have been raisedsubstantially so as tocover costs uniformly in all the producingregions.33It is possible to arguethat uniform pur-chase prices (generally fixed in relation tocosts prevailing n a high cost region) arelikely to have promoted inter-regionalinequalitiesbecauseof the wide variation ncosts (howsoever defined). For example in1978-79,while the cost per hectare or paddywas higher in Punjab than in AndhraPradesh by about 11per cent), the cost perquintalof paddy was lower(by about 22 percent) because of the higher yields per unitareaandmore favourable onditions for thecultivation of high yielding paddy varietiesin Punjab.34 t mustbe noted in this contextthat in the Punjabregionpaddy is producedalmostexclusively s a commercialcrop andthe region contributes significantly to therice procured by the government.

To the extent that farmersare freeto sellon the open market, prices received byfarmers a weightedaverageof procurementand marketprices,with the relevantquanti-ties as weights)aremore relevant han pro-curementpricesalone to a judgment aboutdisincentives. At a hypothetical but moresophisticated evel one might comparecostswith the prices that wouldhaveruledin theopenmarket n the absenceof purchlasesnddistributionby the government.The deter-minationof suchpriceswouldrequire pro-perly specified supply-demand-prices odelbut crude calculations can be done on thebasis of available demand elasticities andprice flexibility coefficients under theassumption hatoutput evelsareexogenous-ly given.At any rate,the fewstudies involv-ingsuchprice-costcomparisonsshow onceagain that procurement prices have ingeneral been 'remunerative' n relation tocost.35As noted before, the parity in relation tocost is only one among the differentkindsof paritywhich can form the basis forpricefixation. Although the APC has from timeto timetaken nto account, apartfrom costsof production,pricesof specific inputssuchas fertilisersor the general price levelin theprice fixation process, presumablyin con-formitywith some principle of parity, it isdifficult to discern from data the workingof any particular parity principle (such asthat between crops,. between input andoutput prices, or betweenprices paid andreceived)possibly because of the arbitrarymannerin which elements relevantto dif-ferent ypesof parityhave n practice nteredprice fixing in differentcombinations overthe years.36The arbitrarinesshas made it easy forthosewho argueforprice ncreases o invokethis or that principleof parity as the occa-sion demands.Forexample, f the pricesoffertilisers reraisedbythegovernment, hatalone is sufficient to ensure politicalmobilisation in favour of the demand for

remunerativeprices regardlessof the totalcost of productionor marketconditions. Ifin the following season the prices of fer-tilisersare reducedbut thegeneralprice evelrises (for whatever eason),the basis for thedemandforpriceincreasesmaychange;forexample, t mayshift to thecost of livingorthe real income of poor farmers.The pointis important because of the differentialtrends n pricesof commoditiescoveringdif-ferentcrops, agricultural nputsand articlesof consumption; it is easily illustrated: hedemands for high support (procurement)prices of wheat were based on an appeal tothe level and changes in market prices tillabout the mid-seventiesbut later, with theprices of some inputs and manufacturedarticles increasing n general at rates fasterthan those of agricultural commodities(including wheat), slogans for politicalmobilisation began to be centredmore andmore aroundinput prices and costs. It willbe interesting o analyse n this light the shif-ting ground of the farm lobby in responseto the changing economic environment.At a different evel,among theacademics,questions relating to the terms of trade(TOT)betweenagriculture ndindustryhavereceived much attention.37 They includequestions about the relevance of TOT toprice policy and mobilisation of ruralsurpluses in the specific Indian context aswell as those relating to the actualmovementsof relativeprices. In contrast tothe first set of these questions, the secondhas generated much controversy in theliterature.This is probablya fall-out of thepolitical processin whichslogans based onrelative prices have, as remarked before,

assumed muchsignificance.In any case,theshift in the focus is unfortunate becausewhat is relevant o policy-making oncernedwithwelfare s not so much the actual move-ment in the net barterTOTas its impactonaggregate farm output, farm incomes andtheirdistribution. It mustbe pointedout inthis context that generally the supplyresponse s low and, therefore, he questionto what extent agriculturalgrowth can bestimulated hroughchanges n TO broughtabout by policies with a limitedcoverageofcrops and regions becomes crucial to ourunderstanding of such policies.The picture of actual movements in theTOT whether n net barteror in net incometerms) dependson how theTelevant ndicesare constructed, the commodity composi-tions taken,the weights assigned, the pricedataemployed,the baseyear chosenand soon. Indeed, the studies in this areademon-strate, if anything at all, that constructedseries are extremely sensitive to methods ofconstruction,yieldingas theydo sometimesopposingconclusions about the direction nthe movements. A continuation of thisdebate can be fruitfulonly if this sensitivityis examinedmore closely and in relationtothe impact of the TOT on the differentaspects of the farm sector.

IMPORTSAND STOCKSOne of the objectivesunderlying he pro-motion of high yieldingvarieties nd the newtechnology was the attainment of self-sufficiency in foodgrain production, i e, adrastic reduction in the dependence onimports.Indeed, herole of imports nmain-taining supplies has become insignificantfrom about the mid-seventies.Both imports and internal procurementenable the government to build up stocksneeded to maintain supplies at given levelsand stabilise the prices, i e, to curb pricemovementsarising out of the output fluc-tuations characterisingIndian agriculture.Twoquestions arisein thiscontext, the firstabout the optimal level of stocks to be heldby the governmentand the second relatingto the possibility of choice between mportsand domestic procurement or the purposeandtheconditions governingsuch a choice.It is obvious hat formeaningfulanalysis hequestionshaveto be set within a frameworkthat includes not only the dual domestic

marketsbutalso theinterniational arket orfoodgrains.But let us begin with a brief reviewof thefacts.Therewerebroadly wo phases, cover-ing 1968-72 and 1975-85, during whichstocks held by the government have beenallowed to increase, from 2 to 8 milliontonnesduring he firstand from8 to roughly30 million tonnes duringthe second phaserespectively.Both thesephases coverstringsof good harvest,withpeakand record evelsof per capita production during the early'eighties. While both imports and procure-ment contributed o this stock-pilingduringthe first phase, it was almost wholly theinternaleffort that enabled the governmentto accumulate stocks during the secondphase.(Thedroughtsof 1986and 1987haveled to a depletion of stocks.) As notedbefore, the governmenthas generallybeenreleasing somewhat largeramounts, in percapita terms, for distribution through thePDS under distress conditions, but theseamounts have only marginally augmentedthe fluctuatingproduction evels.Generally,the levels n percapitaavailabilityhave fluc-tuated along with those in production,although the year-to-yearvariations weresmaller in the former. It is clear that thegovernment's stock management has notbeen successful n bringingabout a stabilityin supplies,a fact readilyseen from the lowlevels of per capita net availability n yearssuchas 1975and 1980correspondingo poorharvests(406 and 410gms per day respec-tively,in contrastto an averageof 447 gmsoverthe wholeperiod1961-84).More mpor-tantly, heprecedence ccorded o the policyof accumulation f stocksoverthatof deple-tion in adequateamounts ed to theexpectedpricechanges: arge ncreasesnyearsof cropfailure and moderatechanges duringtimesof good harvest following the use ofprocuredgrain for accumulatingstocks topreventprices alling. It can be seenthusthatthe stockmanagementpolicyof thegovern-



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ment has contributed n some measure o theinflation in grain prices and to the dis-advantage of consumers.38The question of optimal level of stocksassumes importancein the context.39Thegross output of foodgrains per capita perday has over the period 1961-84stagnatedaroundan averageof 494 gms with a coef-ficientof variationof 8 percent. (Thecom-putation includes the worst ever years, 1966

and 1967.) This means that actual outputlevels n any year areunlikely o deviate rom494 gms by more than 12.8per cent, i e, 63gms per capita per day (1.6 times the stan-darddeviationcorrespondingo a 5 percentchance for larger deviations, under theassumption of a normal distribution).Fora populationof 800 million thiscorrespondsto a predictable hortfall not exceeding18.4million tonnes (with a probabilityof 95 percent) in a single ear.The technicalcommit-tees constituted by the governmentduringthe sixties and seventieshaverecommendedbuffer stocks n the rangeof 10to 15milliontonnes (for lower evelsof total population)on a basis of probability alculations imilarto the one above.40An insurance cover against two con-secutive poor harvests would of course re-quire a much larger buffer stock but thepolicy is likely to be extremely costly andeconomicallycrippling.Inany case,it is dif-ficult to arguein favour of a stock holdingin excess of 20 million tonnes at the currentpopulation evel, especially f thepossibilityof imports duringa secondconsecutive earof poor crops) s kept n mind.Indeed,somestudies show that the government'sstockpolicieshavebeensuboptimal n many ways:they demonstratethat higher level of percapita supplies than in the past could bemaintainedwithappropriately esignedandcoherent policies for fixing prices, ac-cumulatingand depletingstocks, determin-ing import levels and so on.

Above all, if the rangeof pricevariationis to be limited so as'to benefit both pro-ducers and consumers, any sensible policymust include the depletion of stocks inadequate amounts when necessaryas wellas accumulation to the desired extent. Thepoint is important because the increaseininventoriesbeyond optimal levels not onlyimposesa cripplingburdenon theeconomybut is also regressive n character.For ex-ample, the so-called food subsidy-mountingand accountingfor a big propor-tion in the budget deficits of the centralgovernment in recent years, and usuallyinterpretedas a subsidyto the poor coveredby the PDS-includes the costs of holdingstocks;it can be argued hat the poor wouldbe betteroff if pricesare allowedto declinein response o good harvests speciallywhenthe stocks held by the government arealreadyadequate o meetcontingencies uchas drought.Accumulationof stocksbeyondthe level needed to cover contingenciesbenefit the surplusproducers nly at the costof the consumers, especially the rural poorwho have no access to the PDS.

ANALYTICAL ISSUESThe highly correlated movements in costs,procurement prices and market prices, bothcontemporaneously and with lags in thevariables, are not very useful for assessingthe impact of state intervention in foodgrainmarkets. Given the limited coverage ofgovernment operations, with respect to cropsand regions on the one hand and quantities

procured and distributed on the other, itwould appear prima facie that the impact ofthese operations, for example on marketprices, would also be limited with regard toregions and crops. On this understanding,the impact of operations in the wheat marketwould be limited to regions in the north-westwhere the procurement effort is concentratedand the regions-mainly large urbanareas-where subsidised wheat is distributedin large enough quantities to influence theopen market prices. This is questionable,however, because to an unknown extent themarkets for different cereals are integrated,with demand, supply and price conditionsin the market for one cereal influencingthose in the markets for other cereals. Theexplanation for a strong correlation betweenmarket prices and support prices in the caseof foodgrains as a whole may lie in such anintegration, not addressed adequately in theliterature. Our ignorance in this respect isattributable in part to the lack of the rele-vant data: for example, on prices in the ruralareas of both the 'surplus' and 'deficit'regions; but also to the absence of analysesof the required nature: for example, of howprices of inferior cereals are influenced (inthe different regions of the country) by thoseof rice and wheat; of trends in the regionaldispersion in price levels and so on.In contrast, the phenomenon of increasesin market prices leading on, with some lags,to increases in procurement and issue prices,analysed in some detail is perhaps easier tounderstand.4' In general a rise in foodgrainprices can be expected to lead to a rise inwage costs, albeit with time lags in adjust-ment. More importantly, the burden im-posed on the government by its own opera-tions in the foodgrain markets, is relieved inpractice, although only in part, throughincreases in the so-called administeredprices, for example fertiliser prices, and theseincreases have a direct bearing on the move-ment of agricultural costs. Finally, increasesin costs of production lead to pressure onthe government through the political processto raise support prices. Observed correla-tions between procurement prices and laggedmarket prices (and costs) notwithstanding,the chain of causation in this respect requiresfurther study on the support of availabledocumentation on the disposal of subsidiesand the budgetary transactions of the centralgovernment.In sum, the elaboration of the means forachieving some form of inter-cropparity andreducing inter-regional disparities in prices,in consistence with a set of well-definedwelfare goals, remains elusive in Indianeconomic literature.

vNet Impact

What is the net impact of foodgrai pricepolicy on the economy in general, on theprocesses of inflation, investment, growthand distribution, and more particularlyongrowthrates n agriculturalproduction, thelevels of prices and consumption of food-grainsof different ypes n the differentpartsof the country?The question cannot be answeredeasily,and not merely because it encompassesmany nterrelatedssues.Threeotherreasonsare pertinent: first, the quantitative signi-ficance of the limited nature of stateintervention n the foodgrainmarkets s stillto be assessed in meaningful analyticalterms. (For example, we know practicallynothing in this context about rural-urbanpricedifferentials.) econd,while there s nodoubt that relativeprices, rrespective f theextent to which they have been influencedby actually mplementedprice policies, haveplayed a significant role in shaping theeconomy, t is necessary o take nto accountthe working of taxes and subsidies of dif-ferentkindsforunderstandinghis role.Andthird, there s a need to incorporate nto theanalysis the experiencewith non-price in-strumentssuch as directpublic investmentsin irrigation development, etc.What follows covers a limited groundonly.

OUTPUTNumerous studies deal with supplyresponse-grist to the agriculturaleconomics mill.42 Barring a few exceptions,

they are concerned with the response intermsof the allocationof areas of differentcompeting crops correspondingto relativeprices and profitability. These seek todemonstrate, in general, that the Indianfarmer s a rational economic animal. Theexceptions consider also the response intermsof the increase n input use, especial-ly of modern nputssuch as fertilisers,rele-vant to the generation of higher profitsthrough ncreasesn theproductivity erunitland area. We thus have some plausibleestimates of the overall ouput response(combining both the area and inputresponses).The long-run elasticity of out-put withrespectto the lagged output-inputpriceratio is in the rangeof 0.4 to 0.6 forthe major cereals:rice and wheat, and thesupplyresponse, eckonedhus,is lower hanthe responseof output to increasesin thelevels of irrigation.43These estimates bas-ed on past data summarise the Indianexperience ki some fashion and showtherefore hat agriculturalgrowthhas beenpromoted more by the development ofirrigation than by the price factor.Thisis not to denytheverysignificant olesupport pricesandsubsidies(andhence theterms of trade) have played in the promo-tion of agriculturalgrowth n certainareasof the country. In generalonly some cropsand some regions have benefited from the



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mix of policies pricing, iscal andother)andthis has promotedbothinter-crop ifferencesin growth and inter-regional nequalitiesinagricuIturalperformance. The impressivegrowth n the productionof superiorcerealshas been brought about to some extentthrough shifts in the croppingpatternawayfrom nferior erealsand pulses,and in someareas at the expense of commercial cropstoo. These shifts have been made possibleby the policy-mixreferred o earlier. In theoverall,a substantialpart of the incrementin production associated with the newtechnology has originated in five or sixadvanced tates with the eastern regionandsemi-aridparts of the country performingpoorly. Both price policies and the easyavailabilityof subsidised funds have pro-mbited hese developments."

INCOME DISTRIBUTION AND POVERTYThe exacerbation of inter-regional in-equalities in foodgrain production and thedeclinein per capita productionof inferior

cerealsand pulsesare stronglysuggestiveofa generalwideningof disparities in incomeand consumption. Let us consider in briefsome relevantanalytical factors. Procure-ment prices, farm harvest prices andwholesalemarket prices are all relevant othe determination of the price producersreceive for their surplus crop output. Ingeneral and in the simplest case priceincreases reregressiven their mpacton theincome distribution among the producersbecause hebiggerproducers ccountfor thelion'sshare n the marketedpartof the out-put and thereforeappropriatethe gains, ifany, accruing from a price rise in a largerproportionthan do the small farmers.Offurtherrelevance n this context is the factthat smallfarmersandagriculturalabourersare ngeneralnetbuyersof foodgrain ncon-trast to the big farmerswho are netsellers,so thatbyvirtue of theircapacity for reten-tion in full measureof grain for home con-sumptionthe latter are not hurt by the risein market prices. Likewise, the seasonalmovements n prices, especially in yearsofpoor harvest,havea regressive mpactsincethe poor as net buyersmay depend whollyon marketpurchasesn theleanseasonwhenprices tend to be higher.However, or a morecompleteassessmentof the impact of priceincreaseson incomedistribution t will be necessaryto takeintoaccountincomesearnedthroughnon-farmactivitiesby wageearnersandsmallfarmers.In the absence of detailed researchof thistype, some analysts havesought to directlyrelateestimatedpoverty levels to changingrelativeprices to sees for example,whetherrising food prices hurt the interestsof thepoor.This effort has also led to some con-troversy ecausethesamedata setsanalysedin different ways produce contradictoryresults.The underlyingmethodologicaldif-ficultieshavereceivedmuchattentionin therecentiterature.45But t is difficulto contest some relevant

empirical findings. It has been demonstratedconvincingly that at the all-India levelpoverty ratios -(the proportion of peoplebelow the so-called poverty line) exhibit fluc-tuations with no discernible trend-positiveor negative.46 The variations in the ratioare, however, correlated-enough to attractmuch academic attention-to both realincome (inversely) and food prices (directly),suggesting thereby that while agriculturalgrowth contributes to a reduction in povertyrising food prices may act independentlyof levels of output and lead to decreases inthe consumption of food and hence tohigher levels of poverty.Regional disparities assume importance inthis context. Inter-state differences in the percapita production of foodgrains havewidened. But through its operations of pro-curing grain from the pockets of surplus anddistributing it through the PDS the govern-ment has ensured that regional disparitiesin terms of availability have not increasedsince the mid-sixties. However, except inKerala and Gujarat (and more recently TamilNadu and Andhra Pradesh) the PDS hardlycovers the rural areas. An early study dealingwith inter-state differences in food intake,covering both the rural and urban parts, isrelevant in this context.47 It suggested thatgiven the magnitudes of regional disparitiesin incomes and prices, the markets work insuch a way that a part of the surplus tendsto remain in the surplus-producing regionsand deficits left uncovered in other regions.A reason could be that the rural areas in thedeficit regions do not attract marketsupplies, given the range of price differencesand the organisation of markets. Therefore,the implied lack of adequate price-quantityadjustments through market forces hasgenerally a greater impact on rural than onurban consumption levels. Of course, thepublic distribution system reinforces thistendency so that generally while the urbanpoor are ensured of supplies at given levels,the rural poor eat better only if the localharvest is good.

CONCLUDINGREMARKSPrice policy refers to the doings of thegovernment, but prices are not determinedby policies alone: the markets play a partand so do some non-market factors un-related to policy. It is not easy then tounscramble observed price trends in relationto the different aspects of the economy toarrive at unambiguous judgments about thecorrectness or otherwise of this or that

poJicy.Relatively high and rising agriculturalprices favour surplus-producing big farmersand may indeed be necessary to promoteagricultural growth at a satisfactory rate. Butthey have adverse effects on the costs andstandards of living of the rural and theurban poor, and on a wider stretch, as somehave argued convincingly, may also lead toindustrial stagnation.The subjectremains ontroversial ndthedebate on each specific underlyingquestion

is unresolveddespite the participaticonn thedebate of severaleminent economists andpolitical leaders.To some extent there is inall this a loss of perspectiveresultingfromscholarlyaffinity to hair-splitting.But it hasled to a polarisation of sorts.One school denounces 'cheap food'policies and argues for price-supportpro-grammes that give adequate incentives tostimulate supply. On the other hand, it canbe argued hat aggregatesupply response slow, and that more importantly, price-supportprogrammes mply highprivateandsocial costs, price incentivesfundamentallyresult in income transfers to the largefarmers. Consequently, a well-balancedpackage of government instruments in-cludingpromotionof technology, nfrastruc-ture investmentsand production subsidiesis preferableo a relianceon the price nstru-ment alone. The literature suggests thatpublic investment, say, in irrigation is bet-ter than the provisionof priceincentives ornot only promoting growth but also for'cost-efficiency' nd distributinggains fromgrowthuniformlyacross the differentsocialand economic classes in India.49These conclusions emerge in part fromsome wellknown facts:agriculturalgrowthhas remained fairly stable since indepen-dence at about 3 per cent per annum; theratesof growth n foodgrainproductionhavebeen somewhat lower and there is noevidence of an improvement n the levels ofconsumption; the green revolution hasexacerbatednter-regionalnequalities n theproduction of foodgrains, productivityincreases having been largely confined towheat in the north-west; he publicdistribu-tion system (PDS), restrictedrnainly o theurbanareas,has failed to protectthe ruralpoor; and thesocial costs of public nterven-tion in this sector, ncludingdirectsubsidiesto agriculture and those involved in theoperationof the PDS have been heavyandrising. The point is that these subsidiescutinto the resourcesmeant for developmentexpenditure,apart from increasing rural-urban inequity since the vast mass of theruralpoor are denied access to the PDS.But the conclusions have been, and con-tinue to be disputed. In some measurethecontroversiesarise fromthe fact that whilethe issues canbe stated n fairlysimple erms(suchaswhetherpricepolicyhas contributedto agricultural growth), they cannot besatisfactorily esolved through, orexample,a regressionof production on some pricevariable to measure the supply response)because of the complexity of the structureof economic and social relations withinwhich the questionshave o be addressed ora meaningful analysis.50

Notes1 Internal procurement of foodgrains wasgenerally not high till the mid-sixties;thereafter t gradually ncreased n quantumfrom about 4 million tonnes to the currentlevel of about .15million tonnes a year.For



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a discussion of the evolution of food policyand data relatingto the government opera-tions during the earlier period see Chopra(1981). Comprehensive data on the food-grain economy are also to be found in theannual publication: Bulletin on FoodStatistics.2 The general economic setting for the adop-tion of the new technology as a part ofoverall growth strategy is explained inChaudhuri (1978).3 Apart from these bodies, the Americanshavealso contributed to our wisdom aboutthe food problem. The Ford Foundationcompiled a report in 1959 entitled India'sFood Crisis and the Steps to Meet It. Fordetails see Chopra (1981).4 The terms of referenceare reprintedin theAppendix to the Report of APC on thePrice Policy for Kharif Cereals, 1965-66,p 47. For some discussion of these terms seeKahlon and Tyagi (1983).5 The revised erms of referenceare containedin a notification of the Government ofIndia, No 14011/2/78, Ministry ofAgriculture, dated Mftrch5, 1980.6 de Janvryand Subbarao (1986) p 17. Theyadd that there is no representationfor con-sumers on the commission.7 Raj Krishna, who was closely associatedwith the APC, had written: "A price sup-port programme is unavoidably a dis-equilibrium programme. The case for it isonly that, if effective, it may convert a dis-equilibrium of shortages into a dis-equilibrium of supplies in the markets forselectedcommodities'' Krishna 1967) p 525.Emphasis added.8 It must be noted that there are two kindsof distress. Small farmerssell a partof theiroutput, sonmetimes t a price disadvantage,although they may in generalbe net buyers

of grain. This form of distress is clearlydistinct from farmers-big and small-having to sell at low prices arising frombumper harvests. An appreciation of thisdistinction is absent in discussions on sup-port prices.9 The price flexibility'coefficient has beenestimated at - 2.38 for foodgrains as awhole and - 2.24 for cereals.See Ray (1972)for details. Earlier contributions in thisrespectare those of Thamarajakshi (1970aand 1970b). These also demonstrate highprice-flexibility coefficients for rice andwheat.10 The principles for price fixation by thegovernment for its limited intervention infoodgiain markets have been discussedthreadbare n the literaturepublished sincethe mid-sixties. Some relevant referencesare: Dandekar (1965), Dantwala (1967),Krishna (1967 and 1982) and Thamara-jakshi (!977). Attempts to sum up thedebates have been made, for example, inKahlonand Tyagi 1983),Subbarao(nd)andRath(1985).No such attemptis made in thefollowing text. It should be noted, however,that much of the literatures concernedwiththe efficacy of stimulating growth throughprice incentives. Issues relatingto distribu-tion are addressed omewhat angentially.11 Dandekar 1965).12 Krishna 1967), pp 526-27.

13 Assuming a realistic estimate of 0.4 for thelong-run elasticity of output with respectto the terms of trade, Raj Krishna says:.16 per cent growth over five years [inoutput] would require a one-shot 40 percent increase in the real terms of trade ofagriculture.This is equivalent to 7 per centannual increase over this period, which willalso, of course, spread out the resultinggrowth. This order of terms-of-trade in-crease s hardlya practicalproposition,evenassuming that a government can fix termsof trade" In the sequel, he concludes ".. .aunit percentage change in the importantshifter variable (technology)will yieldmuchgreater growth than a unit percentage priceshift", Krishna (1982) pp 235-36.14 Procurement as a tax on farm produce hasa long history in the development phase ofmany countries. This has a bearing on thelarger issue (not treated in this survey)ofusing surpluses from the farm sector topromote industrialisation. See in this con-text Krishna (1982) and Mitra (1979).However, n India this has a narrower,moreimmediate context as recognised, forexample, by the APC itself. An early APCreport says:"Itshould be a social obligationon the part of cultivators to surrender aportion of the produce to the state in thewider national interest ... While directtaxation involves no quid pro quo, in thecase of procurement he transactionswouldstill be in the nature of buying and sellingand the producers would receive a price,even though this price may be lower thanthe prevailing market price. The case forsuch an impost becomes particularlystrongin view of the extremely light incidence ofagricultural axation in the country:'Reportof the APC on Price Policy for KharifCereals (Procurement Prices) for 1967-68Season, September 1967, p 5.15 See Krishnaji (1973) and Nadkarni (1987),p 203.16 The prices fixed by the state governmentswere generally higher than those recom-mendedby the APC and the centralgovern-ment. A study making a detailed demon-strationof this fact says:"Thephenomenonof states fixing prices higher than therecommendedprices is explained by the in-fluence exercised by farmer interests onpolicy at the state level. But it is also dueto the realistic economic reasoningthat theprocurement targets recommended by thecentre could not be realised with un-attractivepurchase prices, especially in badcrop years:" Krishna and Raychaudhuri(1980) p 4.17 Subbarao(1978) summing up the literatureon zoning says: "That food zones actuallyaccentuated regional price differencesis anempiricallywell establishedfact" However,there is some evidence which indicates thatthe relaxation of zoning in the north-westduringthe initial spurtof wheat productionis a response to the fear that prices wouldfall and impede growth in that region.Krishnaji (1973).18 Subbarao (nd). See also Kahlon and ryagi(1983).19 Krishna (1987), pp 517-21.20 What ollows s largelybasedon Subbarao(nd).

21 The debateson price policy are not restrictedto professional academic journals: they areconducted also, fairly regularly, innewspapers, at public meetings and withinthe state and central legislatures.22 For a cogent exposition of this view, whichattracted a good deal of controversy, seeMitra (1979).-23 Representativeviews of the differentpartiesareexplained,for example, n CPI(M) (1973and 1981),Nathan (1982)and Sinha (1980).24 See Krishnaji (1975) and Krishna andRaychaudhuri (1980).25 The growth of farmers' lobbies audmovements has been traced in Nadkarni(1987).26 The growth rate calculated separately foraggregate output shows a highervalue thanthat of population but the growth in percapita output is found to be statisticallyinsignificant. This is a statistical artefact.The data are given by Roy (1984) andKrishnaji (1988). See in particular thegraphical representationof the data in Roy.27 Ray (1972).28 Mehra(1981),Hazell (1982) and Ray(1970,1971 and 1983).29 Hazell (1982), p 10.30 Roy (1984).31 For example, Krishna and Chibber (1983)and Gulati (1987).32 For the data see Roy (1984) and Krishnaji(1988).33 Forcost-price comparisons see KrishnaAndRaychaudhuri (1980).34 de Janvry and Subbarao (1986) pp 20-27.35 See in this context the discussion in Roy(1984); also for a case study of rice,Subbarao (1978a).36 A review of the actual process of pricefixationby the APC is contained in Kahlon-nd Tyagi (1983).37 For a reviewof the debate see Vittal (1986).See in particular Mitra (1979) and Tlyagi(1979).38 See Roy (1984) for the data and Krishnaji(1988) for further discussion.39 Questions relating to stock policies havebeen addressed in Ray (1970), Wall (1978),Krishna and Chibber (1983). Krishnaji(1984) and-Reutlinger (1978).40 For details of these recommendations seeAcharya (1983).41 Krishna and Raychaudhuri (1980) diftussthe empiricaldeterminantsof procurementprices.42 Askari and Cummings (1976).43 Krishna and Raychaudhuri (1980).44 Subbarao (1985). See also Mahendradev(1987).45 Fora debate on the poverty-pricerelation-ship see Mellor and Desai (1986) and fora comment on the statisical methodologysee Krishnaji (198T).46 See Bhattacharya et al (1985).47 See Chapter I in United Nations (1975).48 Mitra (1979). This important aspect ofrelativepricesis not dealtwith in thissrvey.49 This section drawsheavily from de Janvryand Subbarao (1986).50 de Janvry and Subbarao (1986) attempt tograpple with this complexity through aComputableGeneralEquilibriumCGE)model, which enables them to carryoutseveral imulation xercises. hey indthatA-62 Economic and Political Weekly June 30, 1990


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technological change in agriculture andirrigation development withflexible pricesare essential for alleviating poverty. Priceflexibility benefits both rural and urbanworkers through a combination of employ-ment and deflationary effects. In general itbenefits the net buyers of food throughrelatively low prices. Generally, they findprice-incentivepolicy an inferior alternativeto technological development, especially inrelation to welfare goals.References

Acharya, K C S, 1983, Food Security Systemin India, Concept, New Delhi.Askari, H and Cummings, J *T, 1976,Agricultural Supply Response: A Survey ofthe Econometric Evidence, Praeger,New York.Bhattacharya, Nikhilesh et al, 1985, RelativePriceof Food and the Rural P'or- TheC>awsof India, Indian Statistical Institute(mimeo).Chaudhuri, Pramit, 1978, The IndianEconomy: Poverty and Development,Vikas, New Delhi.Chopra, R N, 1981,Evolution of Food Policyin India, Macmillan India.Communist party of India (Marxist), 1973,Central Committee Resolution on CertainAgrarian Issues and An Explanatory Noteby P Sundaryya (party document).-1981, New Peasant Upsurge: Reasons andRemedies, Documents and Resolutions atthe AIKC meeting at Trichur.Dandekar, V M, 1965, 'Minimum SupportPrices for Foodgrains: Guidelines for aPolicy and a Programme, Artha Vijnana,Vol 7, No 4, pp 273-83.Dantwala,M L, 1967, 'Incentives and Disincen-tives in Indian Agriculture',Indian Journalof Agricultural Economics, Vol 22, No 2,pp 1-25.-1976, 'AgriculturalPrice Policy in India sinceIndependence', Indian Journal ofAgricultural Economics, Vol 31, No 4,October-December, 9, 31.de Janvry, Alain and Subbarao, K, 1986,Agricultural Price Policy and IncomeDistribution in India, Oxford, Delhi.Government of India, Reports of theAgricultural Prices Commission, variousissues.-Bulletin on Food Statistics, various issues.Gulati, Ashok, 1987, Agricultural PricePolicy in India An EconometricApproach,Concept, New Delhi.Hazell, Peter B R, 1982, Instability in IndianFoodgrain Production, International FoodPolicy Research Institute, Report No 30,Washington.Kahlon, A S, and Tyagi, D S, 1980, 'Intersec-toral Terms of Trade', Economic andPolitical Weekly, Vol 15, Review ofAgriculture, pp A173-84.-1983, Agricultural Price Policy in India,Allied Publishers, New Delhi.IAi'hna, Raj, 1967, 'Agricultural Price Policyand Economic Development' in Herman MSouthworth and Bruce F Johnston (eds),Agricultural Development a:id EconomicGrowth, Cornell, New York.KIWshna,aj and Raychaudhuri,C; S, 1980,Some Aspects of Wheat and Rice Price

Policy in India, World Bank, Staff Work-ing Paper, No 381.Krishna, Raj, 1982, 'Some Aspects ofAgricultural Growth, Price Policy, andEquity in Developing Countries', FoodResearch Institute Studies, Vol 18, No 3,pp 219-60.Krishna, Raj and Chibber, Ajay, 1983, PolicyModelling of a Dual Grain Market, TheCase of Wheat in India, Report No 38,International Food Policy ResearchInstitute.Krishnaji, N, 1973, 'Wheat Price Movements:An Analysis', Economic and PoliticalWeekly,Vol8, Reviewof Agriculture, June.-1975, 'State Intervention and FoodgrainPrices', Social Scientist, Vol 3, Nos 6/7.-1987, 'Agricultural Growth, Prices andPoverty', Economic and Political Weekly,Vol 22, No 6, June.,-1988, 'FoodgrainStocksand Prices'in AmiyaKumarBagchi (ed), Economy, Society andPolity: Essays in the Political Economy ofIndian Planning, Oxford, Calcutta.MahendraDev, S, 1987, 'Growthand Instabilityin Foodgrains Production: An Inter-StateAnalvsis' Economic and Political Weekly,Review of Agriculture, September,pp A82-92.Mehra,Shakuntala, 1981,Instability in IndianAgriculture in the Context of the NewTechnology, International Food PolicyResearch Institute, Report No 25.Mellor, John W and Desai, Gunvant M (eds),1986, Agricultural Change and RuralPoverty, Oxford, Delhi.Mitra, Ashok, 1979, Termsof Tradeand ClassRelations, Rupa and Co, Calcutta, alsopublished by Frank Cass, London, 1977.Nadkarni, M V, 1987, Farmers'Movements inIndia, Allied Publishers.Nathan, Dev, 1982, 'On Agricultural Prices',Economic and Political Weekly,Vol 17, No36, pp 2101-04.Rath, Nilakantha, 1985, 'Prices, Costs of Pro-duction and Terms of Trade of IndianAgriculture', ndianJournalof AgriculfturalEconomics, Vol 40, October-December,pp 451-81.

Ray, S K, 1970, 'Imbalances, Instability andGovernment Operations in Foodgrains',Economic and Political Weekly, Vol 5,Review of Agriculture, September,pp Al15-24.-1971, 'Weather and Reserve Stocks ofFoodgrains", Economic and PoliticalWeekly, Vol 6, Review of Agriculture,September, pp A131-42.-1972, 'Effects of Consumption, Availability,Fluctuations on Foodgrain Prices',Economic and Political Weekly, Vol 7,Review of Agriculture, June, pp A86-92.-1983, Growth and Instability in Indian,Agriculture, Instituteof Economic Growth(mimeo), Delhi.Reutlinger,Shlomo, 1978, 'The Levelof Stabi-lity of India's Foodgrain Consumption',Indiw Occasional Papers, World Bank,Staff Working Paper No 279.Roy,Shyamal, 1984,'GovernmentManagementof Foodgrains Supplies: A CriticalAppraisal' TowardsContinuingEducation,Vol 5, pp 1-19.Sinha, Indradeep, 1980, The Changing

Agrarian Scene, Problems, and Tasks,Peoples Publishing House, New Delhi.Subbarao, K, 1978, 'Rice Price Behaviour andPublic Procurement: An Analysis of theExperience of Andhra Pradesh', IndianJournal of AgriculturalEconomics, Vol 33,No 3, pp 1-20.-1978a, Rice Marketing Systems and Com-pulsory Levies in Andhra Pradesh, AlliedPublishers, New Delhi.-1979, 'Producer Levy Evasion and IncomeLoss', Economic and Political Weekly,Vol 14, Review of Agriculture, March,pp A2-7.-1985, 'State Policies and Regional Disparityin Indian Agriculture" Development andChange, October.-(nd), Farm Prices: A Survey of the Debate,Institute of Economic Growth (mimeo).Thamarajakshi, R, 1970a, 'Determinants ofRice Prices'Agricultural Situation in India,March, pp 1075-1079.-1970b, 'Determinants of Rice Prices'Agricultural Situation in India, May,pp 129-36.-1977, 'Role of Price Incentives in Stimulating

Agricultural Production in a DevelopingEconomy' in D E Ensminger (ed), FoodEnough or Starvation for Millions, TataMcGraw Hill, pp 376-90.Tyagi, D S, 1979, 'FarmPrices and Class Biasin lndia', Economic and Political Weekly,Vol 14, Review of Agriculture, September,pp A1l1-24.United Nations, 1975, Poverty,Unemploymentand Development Policy.Vittal, Nalini, 1986, 'Intersectoral Terms ofTrade in India: A Study of Concept andMethod', Economic and Political Weekly,Vol 21, Review of Agriculture, December,pp 147-66.

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