Production glut behind farm distress?
In an article published in The Indian Express on 18 April, Harish Damodaran has argued that “production glut, not dearth of cold storage and processing infrastructure, is the real cause of farm distress (in India) today”. The argument, if true, has serious ramifications for Indian agriculture. This is because it suggests that the only way to deal with farm distress is to reduce agricultural production in the country.
This is an interesting argument, but does it have a macroeconomic justification? The article cites problems of potato and sugar cane farmers in some districts of Uttar Pradesh, but such anecdotal evidence may not warrant the radical inference. Indeed, such an argument focuses almost entirely on supply side factors without looking at demand side issues. And two, it does not recognise the fundamental asymmetry which characterizes global agricultural markets.
Whether or not a particular commodity is in excess supply in a market also depends on the level of demand for it, which is a function of many things including purchasing power and preferences. For example, if all billionaires were to vanish from the world tomorrow, we would suddenly have a glut of private jets. Similarly, if the number of billionaires suddenly doubled in six months, there would be a severe scarcity for these jets. Both of these situations can arise without any change in the supply of private jets in the world.
What many commentators do not realise is that demand for food also varies drastically among countries. This becomes clear by a comparison using the data published by the Food and Agricultural Organisation (FAO). The relevant category to look at in the FAO database is per capita supply of food items.
FAO calculates supply by deducting net exports, addition to stock and other wastages from the total production for a commodity. In other words, this is a good proxy for effective demand for food in a country. FAO also gives out information on per capita supply of food (in kilo calories per day) and protein and fat (in grams per day).
The latest available data (for 2013) shows that among 177 countries in the FAO’s list, India is ranked 137th in food supply per capita, 145th in protein supply per capita and 146th in fat supply per capita. To put these numbers in context, China is ranked 54th in per capita food supply, 38th in per capita protein supply and 60th on per capita fat supply. The countries which are ranked at the top in each of these lists are developed economies.
What is interesting is that India’s per capita supply of calories, protein and fat used to be more than China’s until the 1970s. China adopted large scale economic reforms after this period and since then its per capita supply figures (a proxy for demand) has surpassed that of India. This is also the period when China’s per capita incomes have increased at a faster pace than India’s. One can argue on the basis of these numbers that lack of mass income growth has acted as a roadblock to any increase in effective demand for food in India.
There is nothing to suggest that the current supply-demand situation in Indian agricultural is very different from what it has been until 2013, the latest period for which the FAO data is available. The compound annual growth rate (CAGR) or Gross Value Added (GVA) in agriculture at constant prices under the present government (2014-15 to 2018-19) is lower than what it was under the second United Progressive Alliance (UPA) government and marginally higher than the value for UPA-I. This does not suggest any radical overproduction problem in Indian agriculture in the recent period. However, the current price growth, which is the function of prices, has fallen drastically under the present government, taking the ratio of current price to constant price growth in agriculture at the lowest level under the past three governments for which data is available under the 2011-12 GDP series.
If prices did not collapse when agricultural production was growing at a much faster pace, why should they crash when production growth has actually decelerated?
India is nowhere close to reaching peak food consumption levels in the world. This (price crash for food items) could have happened if mass purchasing powers have come under squeeze in the recent period. Unfortunately, there is no consumption expenditure data to accept or reject this claim. The recently leaked findings of the National Sample Survey Office (NSSO) employment survey did suggest that the Indian economy has fared badly on the employment front. If these findings are true, there is bound to have been a negative impact on mass purchasing powers. To be sure, farm incomes have also suffered in India due to the adverse turn in international food prices, which have brought down export opportunities and earnings and also created problems for crops such as sugar cane.
Also, agrarian distress is not something which has suddenly appeared in India in the past couple of years. Viability of the average Indian farmer has been in crisis for a long time now. What many people do not realise is that this is not a problem which is unique to India. Even in a country like the US, where farming is extremely mechanised and practiced on very large farms, prices cannot cover the cost of production for important crops such as wheat and cotton. Statistics from the United States Department of Agriculture show that the difference between value of output and total costs has been continuously negative in the US.
It is the extremely high level of farm subsidies which sustains commercially unviable farming in countries such as the US. The US gave almost $120 billion in Green Box category farm support to its farmers in 2015. This is nearly one-third of the nominal agricultural output in India in 2015-16. Although Green Box subsidies are permitted under the World Trade Organisation (WTO) rules, they do play an important role in sustaining what would otherwise be commercially unviable cultivation and creating a glut in the global market. The US is among the top exporters of both wheat and cotton in the world. If the global agricultural markets did not suffer from such distortions, third world countries like India would actually have a better chance at exporting their products.
These factors are probably more important for the current predicament of Indian agriculture than overproduction is.