Problem of plenty 

Problem of plenty 

Context

Agricultural policy should look to address the problem of severe price fluctuations

Cycle of boom and bust

There appears to be no end in sight to the cycle of boom and bust in the prices of agricultural goods

Example: Potato prices as low as under a rupee, farmers in distress

Last year: Red Chilli, tur dal and tomato

Cobweb phenomenon

The sharp swing in prices has been explained by the Cobweb phenomenon

  • Farmers tend to increase the production of certain crops in response to their high prices during the previous season, which in turn leads to a supply glut (excess) that causes prices to crash
  • The cycle repeats each passing year, with the lag between price and production causing a huge mismatch between supply and demand

Slowdown in economy

The present fall in potato prices comes against the backdrop of a slowdown in the rural economy.

Effects:

The Politics of populism

Given the humanitarian and political costs of agricultural distress, particularly in a year when many big States go to the polls, local governments could turn towards populism to satisfy their rural voter base

MSPs, loan waivers etc.

This could come in the form of fiscal measures such as farm loan waivers, a higher minimum support price for farm produce, or some combination of the two

Rural economy focused budget

  • The next Union budget may well be focussed on the rural economy through fiscal measures

But permanent solution needed

  • Such relief measures that temporarily ease the pain on farmers, however, will fail to make a significant difference to their lives in the long run
  • Any permanent solution to the problem of agricultural distress will have to deal with the challenge of price fluctuations

The Reason for boom and bust cycles

The boom-and-bust cycle is the result of a broken supply chain that is over-regulated

No safeguard against price fluctuations

In the absence of a robust market for buying and selling forward-looking contracts, farmers are left to fend for themselves against severe fluctuations

Cartels dominate

In addition, the domination of the wholesale market by cartels prevents farmers from receiving a fair price even when their produce is sold at much higher rates to consumers

Structural changes needed not adhoc

The government must resolve to address these structural issues, and not limit itself to ad hoc policy measures in fire fighting mode. There is a need to give farmers not just a better, but also more stable, return on their crops.

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