• UGI USER
  • May 27, 2024
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A TO-DO LIST FOR INFLATION

Syllabus:

GS-2:

Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.

Why in the news?

  • Decline in agricultural imports by 8% in 2023-24.
  • Government liberalizes pulses at zero duty to control inflation.
  • Need for integrating trade policy with MSP highlighted.

source:slideshare

Focus:

Effective trade policies, particularly import liberalization, need to be well-integrated with Minimum Support Price (MSP) policies to regulate prices and support farmers.

Current Status of Agricultural Imports

  • Agricultural imports in India decreased by 8% from $35.7 billion in 2022-23 to $32.8 billion in 2023-24.
  • Edible oils and pulses are significant components of these imports.

Edible Oils:

  • Imports of edible oils dropped 5% in value due to falling international prices, though quantity remained stable.
  • Palm oil, constituting over 50% of edible oil imports, saw reduced prices, lowering the overall import bill.

Pulses:

  • Pulses imports doubled from $1.9 billion in 2022-23 to $3.7 billion in 2023-24.
  • Domestic pulses production has been sluggish, leading to inflation in this sector, with a 31% inflation rate in April 2024.

Challenges and Government Response

  • Export controls on wheat, rice, sugar, and onions helped consumers but hurt farmers.
  • Import restrictions on pulses aimed to protect domestic prices, but sluggish production led to high inflation.
  • The government has now liberalized pulses imports at zero duty until the end of 2024-25 to control prices.
Understanding Consumer Food Price Inflation (CFPI):

  • Definition: Measures inflation solely in food prices within a consumer’s basket of goods.
  • Calculation: Determines the rate of increase in prices of food items consumed by an average household.
  • Sub-component of CPI: Part of the Consumer Price Index (CPI), specifically CPI-Combined (CPI-C), used by the Reserve Bank of India (RBI).
  • Tracking: Monitors price changes of common food items like cereals, vegetables, fruits, dairy products, meat, and staples.

Consumer Price Index (CPI): Key Points

  • Definition: Measures the rate of increase in prices of goods and services for personal use (retail inflation).
  • Components: Tracks changes in the cost of a basket of household purchases including food, clothing, housing, transportation, and medical care.

Types:

  • CPI for Industrial Workers (IW)
  • CPI for Agricultural Labourer (AL)
  • CPI for Rural Labourer (RL)
  • CPI for Urban Non-Manual Employees (UNME)

Compilation:

  • IW, AL, and RL compiled by the Labour Bureau in the Ministry of Labour and Employment.
  • UNME compiled by the National Statistical Office (NSO) in the Ministry of Statistics and Programme Implementation.

Suggested Trade Policy Reforms:

  • Calibrated Import Duty Reductions
    • Avoid sudden drops to zero import duty.
    • Gradual reduction helps balance farmer and consumer interests.
  • Price Parity with MSP
    • Ensure imported pulses’ landed prices are not below the MSP.
    • Protects domestic farmers from unfair competition.
  • Buffer Stock Management
    • NAFED should procure pulses at MSP when domestic prices fall below MSP.
    • Helps stabilize market prices and supports farmers.

Edible Oils and Oilseeds Policy:

  • The policy should ensure imported edible oils’ prices are not below the MSP of domestic oilseeds.
  • Promote the National Edible Oil Mission – Oil Palm (NEOM-OP) to achieve self-reliance in edible oils.
  • Focus on palm oil cultivation due to its high oil yield per hectare.
About National Agricultural Cooperative Marketing Federation of India Ltd(NAFED):

  • Establishment: Founded on October 2, 1958.
  • Purpose: Promotes trade of agricultural produce and forest resources in India.
  • Legal Status: Registered under the Multi State Co-operative Societies Act.
  • Infrastructure: Headquarters in New Delhi, with regional and zonal offices across major cities.

Minimum Support Price (MSP): Key Points

  • Introduction: Launched in 1966-67 as part of agricultural reforms.
  • Definition: Minimum price deemed remunerative for farmers, offered by the government.
  • Purpose: Protects farmers from market and natural uncertainties.
  • Statutory Status: No legal backing or enforcement mandate.
  • Crops Covered Under MSP:
  • Total Crops: MSP set for 23 crops by the Central Government.
  • Cereals: Bajra, wheat, maize, paddy, barley, ragi, and jowar.
  • Pulses: Tur, chana, masur, urad, and moong.
  • Oilseeds: Safflower, mustard, niger seed, soyabean, groundnut, sesame, and sunflower.
  • Commercial Crops: Raw jute, cotton, copra, and sugarcane.

Legal Guarantee for MSP: Options and Consequences:

  • Options:
    • Mandate MSP as Baseline Price: Private players must pay MSP, risking price rises.
    • Government Procurement: Government buys all 23 crops at MSP.
  • Consequences:
    • Economic Impact: Unsupported prices by demand and supply are unsustainable (NITI Aayog).
    • Inflation: Higher procurement costs raise food prices, affecting the poor.
    • Practical Challenges: Difficulties for private sector compliance, as seen in sugarcane FRP arrears.
  • Suggestions:
    • Direct Income Support: Target poor, regardless of farmer status.
    • Infrastructure Investment: Improve irrigation, credit access, power, warehouses, and marketing services.
    • Eliminate Disguised Unemployment: Boost industrial and services sectors to absorb excess agricultural labor.

Role of the Commission for Agricultural Costs and Prices (CACP):

  • Establishment: Formed in 1965 as a decentralized agency of the Government of India (GoI).
  • Expert Body: Specializes in recommending Minimum Support Prices (MSPs) for agricultural commodities.
  • Consideration of Factors: Takes into account various factors such as production costs, market trends, demand-supply dynamics, and farm income.
  • Recommendations: Provides advice to the government on MSPs to ensure fair remuneration for farmers and stabilize agricultural prices.
  • Objective: Aims to support farmers by ensuring price security and mitigating risks associated with market fluctuations.
What is the Food and Agriculture Organization (FAO)?

  • UN Agency: Specialized agency of the United Nations.
  • Mission: Aims to end hunger and enhance food security and nutrition worldwide.
  • Objectives: Enhance nutrition, boost agricultural productivity, improve rural livelihoods, and foster global economic growth.

Challenges in Integrating Trade Policy with MSP:

  • Calibrated Import Duty: Instead of abrupt drops, a gradual reduction in import duty is needed.
  • Ensuring Landed Price: Landed price of major pulses should not fall below MSP to safeguard farmers’ interests.
  • NAFED Procurement: Large-scale procurement by NAFED at MSP is crucial to prevent farmer losses.
  • Consumer Bias: Balancing consumer prices while protecting farmer interests.

Key Takeaways on Agricultural Policy Stability and Trade:

  • Policy Stability and Predictability
  • Farmers and agri-traders prioritize policy stability and predictability.
  • Abrupt bans or restrictions on agri exports favor consumers but harm producers.
  • Overnight actions, like sudden bans on wheat exports, exacerbate the impact.
  • Building Export Markets
  • Establishing export markets requires time and effort.
  • A more predictable and rules-based policy approach is preferable.
  • Temporary tariffs are suggested instead of outright bans or quantitative restrictions.
  • Impact of Import Duties on Crop Diversification
  • Government eliminated import duties on most pulses (arhar, urad, masoor, etc.).
  • Import duty rate maintained at 5.5% for crude palm, soyabean, and sunflower oil.
  • Contradicts the government’s aim to promote crop diversification away from rice, wheat, and sugarcane.
  • Pulses and oilseeds, being less water-intensive and significantly imported, are targeted for cultivation.
  • Implications of Zero/Low Import Duties
  • Zero/low import duties hinder efforts to shift farmers to pulses and oilseeds cultivation.
  • Conflicts with the government’s objective to reduce dependency on water-intensive crops.
  • Import duties play a crucial role in incentivizing domestic production and promoting self-sufficiency.
  • Challenges in Crop Diversification
  • Transitioning farmers from rice, wheat, and sugarcane to pulses and oilseeds cultivation faces hurdles.
  • Behavioral changes and investment in infrastructure are necessary to support crop diversification.
  • Addressing water scarcity and promoting sustainable agricultural practices are key to successful diversification efforts.
  • Need for Holistic Policy Approach
  • A comprehensive policy approach is required to balance the interests of farmers, consumers, and the economy.
  • Long-term planning and consistent implementation are essential for effective agricultural policy.
  • Role of Government Intervention
  • Government intervention should aim to create an enabling environment for agricultural diversification.
  • Incentives, subsidies, and infrastructure development can support farmers in transitioning to new crops.
  • Collaboration with Stakeholders
  • Collaboration between government, farmers, traders, and other stakeholders is crucial for successful policy implementation.
  • Consultation and feedback mechanisms should be established to ensure policies meet the needs of all stakeholders.
  • Addressing Trade Imbalances
  • Balancing trade policies to support domestic producers while meeting consumer demand is a delicate task.
  • Strategic tariffs and trade agreements can help address trade imbalances and protect domestic industries.
  • Ensuring Sustainability
  • Sustainability should be a guiding principle in agricultural policy formulation.
  • Encouraging environmentally friendly farming practices and preserving natural resources are essential for long-term agricultural viability.

Conclusion:

  • Integrating trade policy with MSP is crucial for balancing the interests of farmers and consumers.
  • Rational trade policies and effective MSP implementation can help manage inflation and promote sustainable agricultural growth.

Source: The Indian Express

Mains Practice Question:

Discuss the importance of integrating trade policy, especially import liberalization, with the Minimum Support Price (MSP) policy to regulate prices and support farmers in India. Evaluate the challenges and potential solutions in the context of agricultural imports and inflation control. Use recent data and policy measures as examples to substantiate your answer. (250 words)