Agriculture Reference
In-Depth Information
Challenges to Reforms
World Bank (2005) provides a comprehensive review of experiences with food
price policy reforms across developing countries. The striking conclusion is that
the liberalization has been partial in most countries, reversed in many, and has
succeeded in only a few. Indian liberalization has clearly been partial and
has experienced some reversals. Why? A large part of the answer perhaps lies
in the realm of political economy and in the challenge of delinking social safety
net programs from the price policies. This section provides brief discussions on
these two challenges to reforms.
Considerations of Political Economy
After making a devastating case against commodity price stabilization, Williams
and Wright (1991) concluded that it is mysterious why so many economists fa-
vor price stabilization and so many governments practice it. This question points
to the central challenge of reforming parastatals, the political economy of food
price policy. With such a large system of grain management and a complex set
of regulations, there will obviously be large interest groups to resist reform. FCI
employees, its casual workers, and millions of others who collect rents from the
system will obviously be at the frontline of resistance. However, there are re-
ports that politicians also gain from the system. We provide two examples to il-
lustrate it, one from the surplus states and the other from deficit states.
Many reports indicate that the politicians and farmers in the surplus states
have recently been able to influence the minimum support prices in India (Dev
2003). The vested interests are not hard to understand: higher support prices
mean more secured markets for the farmers, larger procurement for FCI, and
higher tax revenues for the politicians in the states. Guaranteed markets make
farmers happy, and the happier the farmers, especially the larger ones, the
greater are the chances for politicians to get re-elected.
A simple comparison of price series and land allocation data demonstrates
the fact. Between 1996/97 and 2001/02, the government's support prices for
wheat and rice grew faster by about 24 and 10 percent than their respective
wholesale prices; the farmers in the surplus states responded to these artificially
created incentives by allocating more land to rice and wheat during the same
period. For example, although the area under rice increased by about 4 percent
at the national level, it increased by 27 percent in Haryana, 21 percent in Pun-
jab, and about 15 percent in Andhra Pradesh during 1995/96-2000/01. In case
of wheat, land allocation has increased by about 10 percent at the national level,
26 percent in the state of Andhra Pradesh, 17 percent in Haryana, 16 percent in
Madhya Pradesh, 50 percent in Maharashtra, and 5 percent each in the states of
Punjab and Uttar Pradesh.
16
16. The price figures are from GOI (2002a); land-allocation figures are the authors' calcu-
lations based on GOI (2005).
