From helping farmers to hurting them

Who gets hurt when grain exports are banned?

Swaminathan Iyer took the words out of this bloggers mouth. The UPA government, he writes “has suddenly shifted from protecting Indian farmers against cheap imports to protecting the consumer by cheapening imports”. He is referring to the ban on rice exports (which follow the export of wheat late last year, followed by the ban on export of maize and pulses).

The April 2008 issue of Pragati called for the government to free the farmers. The UPA government did just the opposite—far from allowing Indian farmers to benefit from selling their produce at record prices, the government is forcing them to sell at artificially low prices. So who is hurting the farmer? And why is silence replacing Sainath? And next year, when farmers find themselves unable to repay their loans, the UPA government—if it is in power at that time—will simply increase payouts and write-offs.

In the end the consumers pay the farmers: only the government gets itself into the equation causing unnecessary leakage and wastage.

Unnecessary? Why, isn’t it at least helping curb inflation? Not quite. As Mr Iyer explains:

The lesson is clear. Curbing exports is a form of national hoarding. If every country tries to hoard food, food prices will naturally rise. Governments would like to believe that hoarding by traders is terrible, whereas hoarding by governments promotes the public interest. But the impact on prices is exactly the same in both cases. Indeed, when governments start to hoard food out of panic, the panic itself stokes further inflationary fears.

That is why I am not optimistic about the Indian government’s anti-inflation package. The government thinks it is improving domestic supplies and hence bringing down prices. In fact the government is adding to the global hoarding problem, and stoking panic too. So, expect food inflation to keep rising in coming months. [TOI]

It’s all very well, you say, but what should the government do when poor people can’t afford food? Well, it should buy food grain at market prices and distribute it to those who need it. That way it will least distort the price signals that farmers receive and allow them to benefit from the good times. And by spending taxpayers’ money in a targeted manner—only the poor will enjoy cheap food—it will spend less. That is, if the government actually wanted to address the policy challenge, and not flail about paranoid of losing votes.

10 thoughts on “From helping farmers to hurting them”

  1. I don’t understand how “national hoarding” results in higher prices within the nation, unless the claim is that the nation is not producing enough.
    Your suggested solution of Govt. buying and distributing to the poor – isn’t it somewhat similar to what the Govt. does through the Public distribution system.

  2. Jujung,

    Mr Iyer’s explanation is plain enough.

    Yes, the PDS is similar to the solution I offer 🙂 In fact, I’d argue that it would be better to use the imperfect PDS for this. For there is little sense in a person earning Rs 40,000 per month (and enjoying wealth appreciation through the stock market) being protected by the government from increasing prices in the food market.

  3. Well, it should buy food grain at market prices and distribute it to those who need it

    i agree with the mkt prices bit , even with oil cos
    but with the kind of leakages will the taxpayer subsidised food ever reach intended poor people?

  4. Nitin,

    Some observations …

    “If every country tries to hoard food, food prices will naturally rise.”

    Every country need not hoard food. India by banning food exports, will have lower prices at the expense of other countries.

    If inflation is high, it only means that prices in the market are above-par, so not being able to export will not greatly hurt the farmers/exporters’s profit.

    Food crisis is not just economics, it is political too. Donor/export countries can easily arm-twist india to gain better bargains.(devils alternative, pakistan’s recent crisis) Instead of buying the same food grains in the international market for high prices, it makes economic sense to buy them at home by banning the exports(short-term)

    I read pragati april edition, while the article explains why loan waiver is wrong, it does not provide any solution on how to free the farmer. It certainly does not discuss the current issue.

  5. Jujung,

    Iyer’s underlying logic is as follows(i hope so).

    The marginal utility(MU) of any product falls as the quantity increases. That is, you would be willing to pay more for the first unit as compared to the second unit and more for the second unit than for the third unit and so on. Supposing a country A hoards Rice and Country B hoards wheat, it might turn out that MU of rice is lower that wheat in country A and reverse would be the case for country B. So if country A and B trade, the cumulative MU of citizens of both countries would be higher than when they were isolated. Hence citizens of both countries are better off(in this case, better fed).

    But in this case, we are talking of an essential commodity which might not follow the logic stated above. For example, country A might produces rice and country B produces say computer chips/oil/diamonds/steel etc. Citizens of country A might gain by trade and gain at the risk that some more of them will go hungry. It might not necessarily be becauseof what country B is producing, it could also be the result of inefficiency. but given same inefficiency in both scenario 1 and 2, more poeple in scenario 2 would go hungry.

  6. Dear Commenters,
    What Nitin has posted is an excerpt of what Mr. Aiyar has written. It is not a precis. You are requested to please read the article in full before asking questions that have already been answered.

  7. Dark Lord,

    Mr. Aiyar does not seem to be thinking of efficiency when he talks about price rise due to Govt. control on exports. He talks about the resultant “panic” which apparently raises prices even if the supply is in excess.
    From his article:
    “So too has Thailand, traditionally the world’s biggest rice exporter. This has created panic in Thai markets. Far from falling, the price of rice jumped up by $ 75/tonne in Thailand last week, since its export curbs sent world prices up further, and had a knock-on effect on local prices.”

    This may be akin to what happens in the stock markets where investor sentiment has a significant impact on prices in the short run. I am not sure how valid this is in this case.

  8. Nitin,
    I’m glad you are in favour of using the PDS (perhaps you might even consider expanding it and reconsidering the “targeted” aspect of it).

    But I don’t understand the mention of Sainath? He mentions rather clearly (when commenting on the waiver)that
    Nothing in this budget will raise farm incomes. Which means farmers will be back in debt within two years.

    To attack him as “silent” on this is just to distort his position.

    As regards Iyer’s comment on this “increasing inflation” he provides no evidence that it’s a significant factor. As Sainath points out in his article the waiver is chicken feed compared to much bigger write-offs.

    As a matter of fact, it’s quite generally recognized that the inflation in global food prices is partly due to
    (according to the World Food Program)

    Rising food prices, which are affecting millions of people, are rooted in what Sheeran has described as a “perfect storm” of increasing demand for food from emerging economies, competition between biofuels and food production, high fuel prices and increasing climatic shocks such as droughts and floods.

    A report in Financial Times estimates that the increase in fuel prices has wiped out all aid to Africa, for example.

    If you want to blame someone, there are plenty of more deserving targets.

    What Iyer is saying is just a gross distortion of the facts. The food prices have nothing to do with such “market distortions” like small ones by India. If you want to attack market distortions, attack biofuels. It’s just using the crisis to further his own agenda.

    Note, again, I’m not taking a position on the narrow question of banning exports (which might be right or not).

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