More About Dalonomics 101 - Vivek Kaul's Diary
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More About Dalonomics 101

Sep 21, 2016

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One of the issues I have regularly written is the economics of pulses (or dal, as we call it in Hindi). Recently, the Committee for Incentivising Pulses Production Through Minimum Support Price (MSP) and Related Policies, submitted its report to the Government. Arvind Subramanian, the Chief Economic Adviser, Ministry of Finance, was the Chairman of the committee.

Given this Report, it is time to revisit the issue.

Take a look at the following chart. It tells us very clearly why the price of pulses has gone up over the years:

Domestic Production and net availability of pulses

The demand for pulses (as measured by its net availability i.e. domestic production plus net imports) has gone up at a rapid pace. However, the domestic production hasn't been able to keep pace and the difference has had to be made up through imports.

As can be seen from the chart, in 2000-2001 the production of pulses (i.e. the supply) was almost equal to the demand. During the course of the year, the total import of pulses amounted to a meagre 0.06 million tonnes. But by 2015-2016, this had jumped many times over to 5.53 million tonnes. This is a clear indication of the fact that the supply of pulses hasn't been able to keep pace with demand.

Interestingly, in 2010-2011, the gap between demand and supply had been considerably narrowed. In fact, in that year, the imports of pulses had fallen to 2.7 million tonnes, only to jump up again.

The gap between demand and supply has increased considerably over the last two financial years. This has primarily been on account of inadequate amount of rainfall. In 2013-2014, the total production of pulses had stood at 19.8 million tonnes. This fell to 17.2 million tonnes in 2014-2015 and it fell further to 16.5 million tonnes in 2015-2016.

The sharp decline in the numbers above beg the question how.

It's an established fact that major food grains, i.e. rice and wheat, are grown on the most fertile and irrigated areas of the country.1 Let's take the case of portion of crops under irrigated area. In 2011-2012, (the latest official figure available) the portion of total food grains under irrigation stood at 49.8 per cent. Hence, half of the area under food grain production in India had access to irrigation. In 1986-1987, this figure had stood at 32.7 per cent.2

The trouble with averages is that they never give you the complete picture. How do things look for different kinds of food grains? When it comes to rice, in 2011-2012, 58.7 per cent of area under production was irrigated. In 1986-1987, the figure had stood at 44.1 per cent.

How do things look with wheat? In 2011-2012, 92.9 per cent of the area under production had access to irrigation. In 1986-1987, the number had stood at 76.3 per cent.3 What this tells us is that almost of all wheat being produced comes under irrigated area and so does close to three-fifths of the rice being produced. But when it comes to pulses, in 2011-2012, the area under irrigation was just 16.1 per cent. In 1986-1987, the number had stood at 9.6 per cent.4

This basically means that if the monsoon is below normal, it has a negative impact on the production of pulses-which is primarily what happened during the last two financial years in the production of pulses.

Thankfully that is not going to be a problem this time around. This time around, the India Meteorological Department expects the monsoon to be around 97-98 per cent of the long period average. Of course, there will be variations across the country. Nevertheless, the area under kharif pulses as on September 9, 2016, stood at 143.95 lakh hectares, up 29.1 per cent from the last year. Hence, there is likely to be relief on the price front as far as pulses are concerned in the months to come.

As the Report points out: "In recent months, scarcity has ceded to surplus, near-famine to near-feast. High prices in the pre-kharif sowing period and a good monsoon have led to a sharp increase in acreage planted. In anticipation of this positive supply shock (in India and overseas where too supply has surged), prices have started plummeting."

Another question which arises here would be why do rice and wheat grow on the most fertile and irrigated areas of the country, and not pulses? Here's the reason: up until now, the government, working through the Food Corporation of India and other state procurement agencies, procured rice and wheat directly from the farmer. This gave the farmers some semblance of a fixed price for their crop and hence, they preferred to grow rice and wheat. However, the government has now decided to build a buffer stock of two million tonnes for pulses, like is the case with rice and wheat.

As the Report suggests: "Build up 2 million tonnes of pulses stock with targets for individual pulses, especially tur (3.5 lakh tonnes) and urad (2 lakh tonnes). These should be built up gradually but opportunistically, buying when prices are low as in the current year."

So this fulfils two aims: One is to offer a fixed price to the farmer and encourage him to plant pulses, like he had been planting rice and wheat. This will help increase production of pulses. The second aim is to build a buffer stock of pulses so as if the prices go up, this stock can be released into the market, in the hope of bringing down prices.

The trouble is that unlike rice and wheat pulses can't be stored for a long period of time. As Seetha points out in a column on Swarajya: "Pulses cannot be stored for more than six months. They tend to absorb moisture and are susceptible to infestation by insects and pests. Therefore, they need to be stored in dehumidified conditions (moisture levels should not exceed 10-12 percent), with temperature controlled at 50 degrees centigrade."

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The Report basically suggests that the government should build a new institution for the procurement of pulses. As it suggests: "Create a new institution as a Public Private Partnership (PPP) to compete with and complement existing institutions to procure, stock and dispose pulses." This suggestion comes from the fact that the Food Corporation of India has an expertise (for the lack of a better word) in the procurement of rice and wheat, and not pulses. An old institution can take years to change. Hence, a new institution with a new mandate can get up and running faster. At the same time, if past experience is any indicator, there is no guarantee that the new institution will perform any better in comparison to similar government institutions which already exist.

Further, in the process of building a buffer stock, the government shouldn't end up taking away pulses from the market and driving up prices in the process-the exercise would become counter-productive otherwise. This is something that has happened during the course of this year, as the government has tried to build some suffer stock in pulses, leading to the price of pulses rising by 33.7 per cent during the first seven months of 2016.

The government will have to be very careful in the way it manages the buffer stock of pulses. It can't be storing pulses which eventually go bad. This will result in a price rise which is exactly what we're trying to avoid. And if the government fails to effectively store the produce, it will ensure that red curve in the following chart which is on its way down, will start going up again. Does it ring a bell? Something similar had happened with rice and wheat a few years back, when the godowns of Food Corporation of India were rotting with grains, but market prices were on their way up.

Consumer pricec and pulses inflation

Further, the Report also recommends that: "In order to prevent further declines in prices, stock limits and export bans must be lifted immediately. At the very least, stock limits on wholesalers must be lifted followed by similar actions in relation to retailers. State governments should also be encouraged to take pulses out of their APMC Acts."

To conclude, the Report does not push the envelope enough. Ultimately, price of pulses will stabilise once we have a fully functioning open market in them. As of now that doesn't seem to be a possibility.

--------------------------------------------------------------------------------------
1.Economic Survey 2015-2016
2.Agricultural Statistics at a Glance 2014
3.Ibid
4.Ibid


Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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3 Responses to "More About Dalonomics 101"

KD

Sep 22, 2016

Hundreds of different kind of derivatives are there in agriculture commodities. Farmers can hedge their risk many ways. I still do not understand why inefficient organisations like FCI exist. Moreover, if pulses are very expensive then why do not government import it.

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KIRIT SARAIYA

Sep 21, 2016

To keep govt. out of storing pulses, it is desirable that let people store themselves as was tradition long back. for this some system of financing needs to develop. In season, pulses are cheaper, people will be glad to store and keep, well maintained. this will reduce wastage also. this was tradition for generations in past. let it get restarted.

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sshri

Sep 21, 2016

Mr.Kaul,
appreciate your post.
1.
Your graph on "Domestic Production and Nett. Availability of pulses" would
have been MORE informative if you could ADD a PRICE per KG of any of the pulses...
2.
What can explain the drops in 2003 and 2005 from the previous year. (was the demand less, or was there a drought).

regards

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