Agriculture Reference
In-Depth Information
In the 1960s, two other events reinforced the necessity for implementing
the FEC's recommendation to establish a food price stabilization organization.
First, in 1963 India experimented with HYV wheat, and the prospects of in-
creasing production with the new technology appeared promising. However,
with fragmented domestic markets, weak extension services, and incomplete
risk-mitigating institutions, transferring the technology to farmers became a
real policy challenge. The government was convinced that a price stabilization
agency, which would act in the public interest,
2
was necessary to prevent spec-
ulation by traders and to help promote the diffusion of new technology. This
understanding led to the establishment of the Food Corporation of India (FCI)
and the Agricultural Prices Commission (APC) in early 1965.
Assessment of Policy Rationale
There are four commonly accepted justifications for public interventions in In-
dian grain markets: (1) lack of market integration because of inadequate infra-
structure, (2) risk mitigation for technology promotion, (3) lack of institutional
mechanisms to deal with thinness and volatility of world grain markets, and
(4) considerations of international liquidity constraints.
3
How valid are these
justifications today? This section provides empirics to answer this question.
Infrastructure and Information Flow
In the 1960s when integrated food policy was being adopted, transport and com-
munication infrastructures were either lacking or limited across Indian states.
The arbitrage failures, evidenced by localized supply shortages and price hikes,
were frequent challenges to policymakers. However, conditions have changed
over the past four decades. Indicators of infrastructure and information flow in
India—represented by number of paved roads and telephone, radio, and televi-
sion densities—have improved dramatically. Between 1970 and 2000, the
paved-road network more than quadrupled from 334,000 kilometers to 1.363
million kilometers, an increase significantly higher than those experienced by
India's South Asian neighbors, such as Pakistan and Bangladesh, or even East
Asian countries like Indonesia and the Philippines.
4
2. In his inaugural speech, C. Subramaniam, then Food Minister, devoted considerable time
in lamenting the role of the trading community, who “ignored their social function in preference to
their individual gains.... The situation of living ship to mouth . . . had placed the community at
the mercy of what little conscience the trading community had.... Based on these hard and harsh
lessons of experience we decided to set up the Food Corporation as a balancing force which, if nec-
essary, could expand its activities to discipline the chaotic tendencies of private trade” (MCA 1966,
as cited in Gulati and Kahkonen 1996, 10).
3. See Timmer (1989) for a detailed discussion on the rationale for public intervention in the
foodgrain market.
4. Comparisons are based on World Bank's World Development Indicator database (World
Bank 2003). For exact magnitudes of increase, see Rashid, Cummings, and Gulati (2005).
