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4 CONTENTS S. No. Description Page Acronyms i List of Tables iv List of Charts v List of Annex Tables vii Summary of Recommendations viii 1. Overview 1 2. Demand-Supply, Procurement, Prices and Market Distortions 8 3. Trade Competitiveness of Indian Agriculture Costs, Returns and Inter Crop Price Parity Productivity and Costs Recommendations for Price Policy 47

5 List of Acronyms A2+FL AAY APEDA APMC BE C2 CACP CAGR/CARG CAP CBOT CCTs CIF CF CoP CS CSO CV Actual paid out cost plus imputed value of family labour Antyodaya Anna Yojana Agricultural and Processed Food Products Export Development Authority Agricultural Produce Market Committee Budget Estimates Comprehensive cost including imputed rent and interest on owned land and capital respectively. Commission for Agricultural Costs and Prices Compound Annual Growth Rate/Compound Annual Rate of Growth Cover and Plinth Chicago Board of Trade Conditional Cash Transfers Cost, Insurance & Freight Correction factor Cost of Production Comprehensive Scheme Central Statistics Office Coefficient of Variation i

6 CWC DAC DCT DES DFPD DGCI&S DGFT DIPP DTA ECA EDI FAI FAO FCI FFPI FOB FMC FY GCF GDP GVO HRW HSDO IPGA KMS LCS LDO LPA MEP MGNREGA MORTH MP MRP MSP MSR Central Warehousing Corporation Department of Agriculture & Cooperation Direct Cash Transfer Directorate of Economics & Statistics Department of Food & Public Distribution Directorate General of Commercial Intelligence and Statistics Directorate General of Foreign Trade Department of Industrial Policy & Promotion Domestic Tariff Area Essential Commodities Act Electronic Data Interchange Fertilizer Association of India Food and Agriculture Organization Food Corporation of India FAO Food Price Index Free on Board Forward Markets Commission Financial Year Gross Capital Formation Gross Domestic Product Gross Value of Output Hard Red Winter High Speed Diesel Oil India Pulses & Grains Association Kharif Marketing Season Land Customs Stations Light Diesel Oil Long Period Average Minimum Export Price Mahatma Gandhi National Rural Employment Guarantee Act Ministry of Road Transport & Highways Madhya Pradesh Maximum Retail Prices Minimum Support Price Marketed Surplus Ratio ii

7 NAFED NBS NCAER NCCF NFSO NSC NSSO OEA OECD OGL p.a PACS PSS Q1, Q2, Q3, Q4 Qtl R&M RCA RMS SEAI SRW TE TFP TPDS UNDP USDA VVOF wef WPI WTO National Agricultural Cooperative Marketing Federation of India Limited Nutrient Based Subsidy National Council of Applied Economic Research National Cooperative Consumers Federation of India Limited National Food Security Ordinance National Seeds Corporation National Sample Survey Organization Office of Economic Adviser Organization for Economic Co-operation and Development Open General License per annum Primary Agricultural Cooperative Societies Price Support Scheme Quarters pertaining to financial year Quintal Rapeseed and Mustard Revealed Comparative Advantage Rabi Marketing Season Solvent Extractors Association of India Soft Red Winter Triennium Ending Total Factor Productivity Targeted Public Distribution System United Nations Development Programme United States Department of Agriculture Directorate of Vanaspati, Vegetable Oils and Fats with effect from Wholesale Price Index World Trade Organization iii

8 List of Tables Table No. Topic Page No. Table S.1 Actual and Recommended MSPs of Rabi crops xiii Table 2.1 Stock- to- Use Ratios of Rabi Crops (%) to Table 2.2 MSP and State Bonuses over MSP in the last four years (Rs/qtl) 14 Table 2.3 Increases in Statutory Levies in Major Wheat & Rice Producing 16 States Table 2.4 Index Table and Ranking (Wheat) 21 Table 3.1 RCA Index for India s Agri Exports 1980 to Table 3.2 Forecasts for International Prices 30 Table 4.1 All India Gross and Net Returns over Actual Cost of Cultivation 34 of Rabi Crops Table 4.2 All India Projected Cost of Production (A2+FL & C2) for Rabi crops 37 for Crop Season Table 4.3 Relative returns (%) of Rabi crops over A2+FL and C2 40 (Average from to ) Table 4.4 All India Estimated Cost of Production for Rabi Season 41 (RMS ) (Inclusive of Marketing, Transportation and Crop Insurance premium) Table 5.1 Growth rate of Rabi Crops at All India level during 1980s, 1990s 43 and 2000s Table 5.2 Benchmarking Productivity of Important Crops 44 Table 5.3 Impact of Variation in Yield on CoP 45 Table 5.4 Drivers of Yield 46 Table 6.1 Recommended MSPs of Rabi Crops (RMS ) and their 52 Justification Box 2.1 MP: Continuing state policy leading to distortions in wheat market 13 iv

9 List of Charts Figure No. Topic Page No. Chart 1.1 Inflation in Wheat & Rice during Chart 1.2 Central Pool Stocks with FCI 2 Chart 1.3 Production of major Agricultural Commodities, & Chart 1.4 (a) Exports & Imports of Agri-Commodities 6 Chart 1.4 (b) Composition of Agri-Exports, (%) 6 Chart 2.1 Chart 2.2 Chart 2.3 Foodgrain stocks in Central Pool & Inflation Rates of Wheat & Rice Wheat Procurement as Percent of Production & Marketed Surplus ( to ) Wheat Procurement as a percent of Market Arrivals, TE Chart 2.4 Procurement as a share of production in MP ( to ) Chart 2.5 Share of major crops in incremental irrigated area in MP ( over ) Chart 2.6 Economic cost of Wheat Procurement to FCI v

10 Chart 2.7 Statutory Levies Imposed by States (as % of MSP) (KMS & RMS ) Chart 2.8 (a) (f) Wholesale prices of rabi crops & their MSPs 18 Chart 3.1 Domestic Wholesale Prices, MSP and International Prices of Wheat & Barley Chart 3.2 India s Imports of Pulses from to Chart 3.3 Domestic Wholesale Prices, MSP and International Prices of Gram & Lentil Chart 3.4 India s Imports of Edible Oils from to Chart 3.5 Chart 4.1 Chart 4.2 Chart 4.3 Domestic Wholesale Prices, MSP and International prices of R&M Oilseed/Oil All-India Profitability of Rabi Crops (Average from to ) Average Annual Growth Rate of Agriculture Labour Wage Rate (Rs/day) by States and at All-India Level in Nominal Terms (May 2009-April, 2010 to May 2012-April 2013) WPI and Percentage Increase in Prices of Farm Inputs (May 2013 over May 2012) Chart 4.4 Relative Prices of Urea, DAP & MOP 37 Chart 4.5 (a to e) Projected Cost and Supply of Rabi crops by states for RMS vi

11 List of Annex Tables Table No. Topic Page No. Annex Table 2.1 All India Estimates of Area, Production and Yield of All 54 Crops Annex Table 2.2 Availability of Rabi Crops 57 Annex 2.3 Methodology of Ranking of States by the Nature and 60 Degree of Distortions in Wheat Annex Table 2.4 Nature & Degree of Market Distortions in Wheat 64 Annex Table 4.1 State-wise Gross and Net returns on actual estimates 65 of cost of cultivation of Rabi crops (Average of to ) Annex Table 4.2 Month-wise average daily wage rates for Agricultural 67 Labour (Man) Annex Table 4.3 Farm Inputs: Index Numbers of Wholesale Prices 69 (Base =100) Annex Table 4.4 State-wise Projected Cost of Production (C2 & A2+FL) 71 for Rabi and their shares in Production in increasing order of Cost Annex Table 4.5 Index of Terms of Trade Between Agriculture and Non- 73 Agriculture Sectors Annex Table 6.1 MSP Suggested by State Governments for the Rabi Crops of to be Marketed in vii

12 Summary of Recommendations S.1 In the last report on price policy for rabi crops, season, the Commission had focused on getting the markets right to enable efficient functioning of agrimarkets, remunerative prices for farmers and taking Indian agriculture forward to a high growth trajectory. This focus continues in the current report with minor realignment of prices for the six rabi crops. Non-price Policy Recommendations Paradox of overflowing granaries and rising food prices S.2 The major challenge faced by the Indian food sector since last year has been to prudently manage the paradox of overflowing granaries and high cereal inflation. The existence of overflowing granaries (73.9 million tonnes of grain stocks on 1st July, 2013) co-existing with a sharp rise in prices of rice & wheat (in March 2013, wheat and rice prices were higher by 19.6 percent and 17.1 percent respectively over March, 2012) indicates sub-optimal management of food economy. Accordingly, the Commission makes the following non-price policy recommendations: Liquidation of Stocks S.3 As recommended in the Kharif Price Policy Report, , the Commission reiterates that at least 15 million tonnes of stocks need to be urgently liquidated as it will help ease domestic prices as also save large carrying costs of excessive stocks. viii

13 The Government has appreciably taken some steps in that direction by announcing a decision to liquidate about 10 million tonnes of wheat stocks at Rs 15,000/tonne (ex- Punjab). But so far, the actual liquidation has been very modest. One of the reasons is high sales price. The Commission feels that in order to quickly liquidate large quantities from stocks, especially which are more than one year old, Government will have to be much more pragmatic. As per the Commission s calculations, any price based on the procurement price at which that crop was bought, plus a maximum of 5 percent towards taxes/cesses etc, should be fine to recover. Else, the Commission feels that the Government will be unnecessarily carrying large quantities of excessive stocks, without much purpose, and which are putting inflationary pressures in the economy. Review of Open-Ended Procurement Policy S.4 Due to increased scale of procurement in recent years, the Government has emerged as the single largest procurer and hoarder of foodgrains. In major states like Punjab, Haryana, Andhra Pradesh and lately in MP and Chhattisgarh, the State procures much of the market arrivals (almost 70 percent) of wheat and rice. This is triggered by open-ended procurement policy on one hand and high taxes (statutory levies)/bonuses announced by some states on the other. It is driving out private sector from the market, leading to a de-facto state takeover of grain trade in these states. The Commission feels that this is not a good trend and not in the best interest of the country. Operations of public agencies are often more expensive. Just to cite one example, the cost of departmental labour in FCI for loading and unloading grain is 7 to 8 times the cost of a contract labour doing the same job. The Commission, therefore, recommends that Competition Commission of India (CCI) look into these aspects of public procurement which are leading to monopsony of state agencies, and thereby anti-competitive market behavior. S.5 The Centre also needs to review its open ended procurement policy and take a policy decision to limit procurement from states that impose taxes and levies beyond 5 percent of MSP, or give special bonus on top of MSP. This is a necessary step to bring about rationality in pricing, contain the food subsidy bill and getting the markets right. Else, the Commission fears that a major crisis in food management can unfold, leading to large economic losses that the country can ill afford. Adoption of Warehouse Receipts S.6 As an alternative to public procurement and holding physical stocks, Warehouse Receipts (WRs) need to be increasingly encouraged. These negotiable instruments, backed by the underlying commodities, contribute to the creation of cash and forward markets and thus enhance competition, reduce transaction costs, and promote efficiency in markets, which ultimately benefits the society at large. ix

14 Making NFSO More Effective S.7 The National Food Security Ordinance (NFSO) legally entitles two-thirds of the country s population to subsidized grain (basically 5 kg, per capita per month, except under AAY where this allocation is 7 kg per person). It implies a massive procurement of food grains and entails large financial expenditure given the existing inefficient food security complex of procurement, stocking and distribution (currently the leakages amount to about 40 percent as per the Commission s calculations). It is likely to crowd out private sector operations further with an adverse effect on overall efficiency of procurement, storage and distribution operations as well as on magnitude of food subsidies and open market prices. Given that, on an average, the per capita consumption of cereals per month is around 10.7 kg (NSSO, 2009), it would still require that a substantial part of it is to be bought from the open market. It is plausible that high open market prices, driven by large procurements, would nullify a part of the welfare effects of subsidized grain being made available through PDS. Also, the ordinance s focus on rice and wheat goes against the trend for diversifying diets to protein-rich foods such as dairy products, eggs and poultry, as well as fruit and vegetables, and would slow down the process of diversification in agriculture. S.8 Literature, international experience and pilot studies in India itself have shown that cash transfers are more efficient and cost effective in promoting food and nutritional security. Thus, NFSO could be integrated with the Direct Cash Transfer (DCT) scheme especially in 33 cities of more than one million population and cereal surplus states. This approach, i.e., using the right policy instrument (income policy rather than price policy) will not only empower the poor but also allow the foodgrain markets to function effectively with an active private sector, allow natural process of diversification/growth in agriculture and plug leakages in distribution via use of IT under Aadhaar Platform. Removing domestic market distortions S.9 It is time for some of the restrictive laws dealing with agriculture (e.g., Essential Commodities Act (ECA), 1955; APMC Act, tenancy laws, etc) to be reviewed and made much more liberal to let the markets function openly and competitively. It is vital that these laws are modified to facilitate the development of a barrier-free national market. Review Fertilizer Pricing S.10 Fertilizer subsidy, which has increased by more than five times during the last ten years, must be restructured and rationalized. Since the adoption of NBS, the retail prices of P&K fertilizers have risen while the price of urea (N) has remained fixed. The differential between the prices of urea and P&K fertilizers has widened leading to excess use of N at the expense of P&K fertilizers. The price of urea needs to be increased by at least 15 percent and the subsidy enhanced on P&K fertilizers to reduce their effective MRPs keeping the fertilizer subsidy constant. In the long term, x

15 direct transfer of fertilizer subsidy to farmers on per hectare basis and decontrolling the fertilizer sector with free imports should be aimed. Stable, Open and Neutral Agri-Trade Policy S.11 In , agri-exports were to the tune of US$ 41 billion vis-a-vis an import of only US$ 20 billion, earning a net surplus of US$ 21 billion. Therefore, an open, stable, neutral and rational agri-trade policy with moderate duties (not more than 15 percent during normal times) needs to be instituted. In case of abrupt and large falls in international prices, trigger points can be identified for quick action to raise import duties. The Commission recommends fully opening up the exports, even for pulses and oilseeds/edible oils, as their imports are already open at zero or low import duties to make the trade policy neutral to producers and consumers. This will promote resource use efficiency, generate surpluses and promote agri-growth. S.12 Imports of oilseeds continue to be restricted with 30 percent import duty even when import duty on edible oils has been reduced to 2.5 percent for crude oil and 7.5 percent for refined oils. Logically, the import duty is graduated from low on raw material to the highest on refined product. The extant duty structure on oilseeds, raw and refined oils needs a review and revised as per economic rationality; say at 5, 7.5 and 15 percent respectively on oil seeds, crude edible oils and refined edible oils. This would also facilitate better capacity utilization of existing oilseed crushing and refining industry. The Commission also recommends that imports of pulses should have a 10 percent import duty for the next three years to promote their production at home, given pulses worth Rs 12,730 crore were imported in Oil Palm Development S.13 Developing oil palm on two million hectares that is identified as suitable for its cultivation is the main answer to bridging the gap between demand and supply of edible oils. The Commission has already submitted a separate report in January 2012 in this regard and recommends that oil palm development in the country should be taken up on a high priority, as it will benefit large numbers of farmers and consumers alike, and also save on the large and growing import bill which was worth Rs 61,106 crore in De-reservation of Mustard Seed Processing Units S.14 The Commission recommends de-reservation for mustard seed processing units (also groundnut) from the micro and small-scale sector, along with emphasis on their technology up-gradation and modernization to make them efficient in terms of higher oil recovery leading to cost effectiveness. Emphasis on Increasing Productivity S.15 The prudent solution to increasing costs of production lies in enhancing productivity. The actual cost estimates available for the year corroborates xi

16 this. A jump of around 7.5 percent in the yield of wheat in at all India level has contained the rise in the costs of production in major States. More emphasis on R&D, irrigation, and better farm practices in this regard will go a long way. Creation of Insurance Fund/Income Stabilization Fund S.16 During the Commission s intensive interactions with State Governments and farmers representatives, one of the concerns which emerged was stabilization of agricultural incomes given the high risks (of weather and market) involved. The suggested solution to this may be creation of an Insurance fund or Income Stabilization Fund with a starting corpus of say, Rs 5000 crore. The basis of operations could be an analysis of last three years yield levels and prices and a suitable compensation given if the income level in the current year falls below the above average level. The Commission recommends the setting up of such a fund as this would provide a necessary bridge for transition from price policy support to income policy support. Review of Number of Crops under Commission s mandate S.17 The Commission has carefully examined that the number of commodities under its mandate is too large at 24. As the supportive procurement infrastructure is effective only for a few commodities, recommending MSP for all of these commodities does not serve any purpose. Therefore, it is recommended that the number of commodities under the MSP regime may be reduced to 12 viz., rabi crops of wheat, gram, R&M; kharif crops of paddy, maize, tur, soyabean, groundnut, cotton; sugarcane; jute and copra. This would also enable the Commission to make an in-depth analysis of these major crops and serve the country better. Price Policy Recommendations: S.18 The Commission, as per its mandate, has carefully considered the overall demand and supply situation of various crops, especially the excessive stocks of rice and wheat with government agencies, their costs of production, their domestic and international price situation along with export/import possibilities, the overall terms of trade between agriculture and industry, the issue of food inflation in the country and optimal utilization of land and water resources. These are detailed in various chapters of this report. Based on these factors, the Commission recommends the following MSPs as given in the table S.1 below. The table also delineates the MSP increases during the last three years to give a medium term perspective of the price policy recommendations. xii

17 Table S.1: Actual and Recommended MSPs of Rabi crops (Rs/quintal) CROP Projected Modified C2* cost for RMS Recommendation for RMS Justification RMS RMS RMS Wheat (3.7) Excessive stocks under Central Pool; Costs contained because of significant increase in yield levels especially in ; Existing MSP comfortably higher than the projected cost; Exports of wheat increasingly becoming unviable; domestic cereal inflation already very high (5.1) 1285 (9.8) 1170 (6.4) Barley (12.2) Demand-supply in balance; need to cover cost; domestic prices hovering around this level. 980 (0.0) 980 (25.6) 780 (4.0) Gram (3.3) MSPs of last three years raised by almost 60 percent; demand-supply in balance; domestic and international prices showing downward trend (7.1) 2800 (33.3) 2100 (19.3) Lentil (1.7) Last three years MSP raised by 48 percent; demand supply in balance; costs covered; containing food inflation (3.6) 2800 (24.4) 2250 (20.3) Rapeseed/ Mustard (1.7) Last three years MSP raised by 56 percent; costs well covered with ample profits to incentivize diversification. Domestic and international prices of edible oils bearish (20.0) 2500 (35.1) 1850 (1.1) Safflower (7.1) Last three years, MSP raised by 58 percent; Rain-fed crop, low yields; domestic price hovering around this level (12.0) 2500 (38.9) 1800 (7.1) Note: Figures in parentheses are percentage increases over the previous year. *This includes all actual expenses in cash and kind incurred in production by owner + rent paid for leased in land + imputed value of family labour + interest on value of owned capital assets (exc land) +rental value of owned land (net of land revenue) + costs of marketing, transportation and insurance premium xiii

18 Chapter-1 An Overview Challenge of Foodgrain Management 1.1 The major challenge faced by the Indian food sector since last year has been to prudently manage the paradox of overflowing granaries and high cereal inflation. The country had a record production of wheat (94.9 million tonnes) and rice (105.3 million tonnes) in As against the buffer stock norm of 31.9 million tonnes of rice & wheat (as on 1st July of each year), total Central Pool stocks were more than double at 80.5 million tonnes (30.7 million tonnes of rice and 49.8 million tonnes of wheat) on 1st July, Yet, the monthly inflation in wheat reached a peak at 23.3 percent in November, 2012 and slightly moderated to 19.3 percent in March, 2013 (Chart 1.1). This is despite the fact that, the minimum support price (MSP) for wheat was increased by 9.8 percent for RMS and only 5.1 percent for RMS This coexistence of good production, bulging central pool stocks and double digit inflation in rice and wheat indicates sub-optimal management of food economy. Indian food sector faces a major challenge of prudently managing the paradox of overflowing granaries and high cereal inflation 1

19 Chart 1.1: Inflation in Wheat & Rice during The primary reason for high cereal inflation has been the government emerging as the largest holder of grain Source: OEA, DIPP 1.2 This year too, the total Central Pool stocks, are more than double at 73.9 million tonnes (31.5 million tonnes of rice and 42.4 million tonnes of wheat) on 1 st July, 2013 against the existing buffer stock norm of 31.9 million tonnes of rice & wheat (as on 1st July of each year) (Chart 1.2). The slight fall in stocks this year has been mainly due to unexpected lower public procurement of wheat in RMS rather than any policy choice. So for two years in a row, the country has been holding hugely excessive stocks. These excess stocks deprive the domestic market of fluid grain exerting an upward pressure on the prices besides having huge cost implications in carrying and storage. The primary reason for high inflation in wheat and rice has been due to the government emerging as the largest holder of grain. In major wheat procuring states like Punjab, Haryana and Madhya Pradesh, the state has emerged as a virtual monopsonist wiping away more than 80 percent of the marketed arrivals. Chart 1.2: Central Pool Stocks with FCI Source: FCI Note: Stocks are shown as on 1 st July of each year 2

20 Impact of National Food Security Ordinance (NFSO) 1.4 NFSO, signed by the Hon ble President of India on 5 th July, 2013, marks a paradigm shift in addressing the problem of food security from the current welfare approach to a rights based approach. Besides expanding the coverage of the Targeted Public Distribution System (TPDS), the proposed legislation would confer legal rights on eligible beneficiaries to receive entitled quantities of foodgrains at highly subsidized prices. The central pivot of the Ordinance is large-scale subsidized grain distribution to almost two-thirds of the country s population of 1.2 billion. This would perhaps be the biggest ever experiment in the world to distribute subsidized grain to achieve food and nutritional security. The government already procures one-third of the cereals production (more than 40 percent of marketed surplus) and any increase in procurement will have enormous ramifications on the cereal economy/markets and would crowd out private sector operations with a consequent effect on open market prices 1. This is already being experienced as has been illustrated above. 1.5 Under NFSO, it is proposed to provide 5kg each of cereals per month to 67 percent of the entire population. It needs to be noted here that as per NSSO, the all-india per capita monthly consumption of cereals was 10.7 kg in (11.3 kg in rural areas and 9.4 kg in urban areas). This implies that on an average, a person would have to acquire more than half of his monthly cereal requirements from the market. A double digit inflation in open market prices of cereals hits the poorest of the poor hard. Therefore, if government policies have resulted in high inflation, then a complete overhaul of the food management policy design is required. 1.6 The current buffer stock norms need to be certainly revised in the light of NFSO and the underlying statutory commitments. A discussion paper of the Commission estimates 2 that the most probabilistic and desirable buffer stock norm, as on 1st of July, could be 46.7 million tonnes of rice and wheat (assuming no imports). This would cover the operational needs under NFSO as well as insure against roughly 95 percent risk regarding drop in production of wheat and rice, based on past 20 years of production pattern. (It cannot cover the risk of a year like , when grain production dropped by 38 million tonnes over levels. What will the Government do in such a year, when food is a legal right, is an issue to ponder). Despite revision of these norms, the excess buffer stocks as on 1 st July, 2013 are around 27 million tonnes with excess holding of around 14 million tonnes of rice and 13 million tonnes of wheat. The value locked in these excess stocks, estimated at their economic cost 3, exceeds Rs 64,000 crore. This infusion of excess money into High inflation hits the poorest of the poor hard as even under NFSO, a person would acquire more than half of his monthly requirements from the market Despite estimated revision of buffer stock norms in wake of NFSO, the excess buffer stocks as on 1 st July, 2013 are around 27 million tonnes 1 National Food Security Bill: Challenges & Options, Discussion paper No. 2, CACP 2 Buffer Stocking Policy in the wake of NFSB: Concepts, Empirics, and Policy Implications, Discussion Paper No. 6, CACP per tonne for wheat and Rs per tonne for rice 3

21 the economy without corresponding flow of goods is evident in the paradox of rising prices of rice & wheat amidst overflowing stocks in government godowns. At least 15 million tonnes of excess Central Pool stocks need to be urgently liquidated 1.7 It will be a much rational policy choice to liquidate these excessive stocks. The Commission, in its Kharif Price Policy Report, , has already recommended urgent liquidation of at least 15 million tonnes of stocks at the last year s MSP plus a maximum of 5 percent towards taxes/cesses etc i.e., wheat at Rs 1350/qtl and rice at Rs 1900/qtl, say ex-punjab. In this context, the Commission welcomes the recent decision 5 of the Government to off-load 10 million tonnes of wheat in the domestic market. But the offer price being Rs 15,000/tonne, ex-punjab, one wonders whether there would be enough takers for this as quite a bit of this wheat is one to two years old. And now that the global prices are showing a bearish trend, it is all the more difficult to liquidate at this price, unless rupee keeps sliding down against the US dollar. The Commission is of the opinion that the offer price will have to take cognizance of market realities and the key issue is of saving the carrying costs of excess stocks and taming domestic prices. So far the government has not announced any plans to liquidate excessive rice stocks for the domestic market or for exports. Commission s calculations show that the situation is as serious in rice as in wheat as far as excess stocks with the government are concerned, and therefore, the government can be more pro-active in liquidating these stocks and taming domestic prices, and earn some foreign exchange and reduce current account deficit as well as fiscal deficit. Agricultural Performance in : Production & Trade Agriculture is expected to grow at 1.9 percent in as compared to 3.6 percent last year 1.8 The year witnessed a remarkable performance by Indian agricultural sector with a record production of million tonnes of food grains (5.9 percent increase compared to ). In , the agricultural sector as a whole is expected to grow at 1.9 percent as compared to 3.6 percent last year 6. It is expected that foodgrain production would fall by 1.5 percent to million tonnes in Wheat production is expected to fall marginally by 1.3 percent to 93.6 million tonnes in as compared to record 94.9 million tonnes in (Chart 1.3). But, as per USDA estimates 8, wheat production in India may fall sharply by 8.3 percent to 87 million tonnes in Agri watch has put India s wheat production at 88 million tonnes. The Commission s interactions with various stakeholders also corroborate a fall in wheat production, though it is difficult to estimate the exact scale of this drop. The unexpected fall in procurement of wheat in RMS from 4 Available on the website of the Commission at Provisional Estimates of National Income, , CSO 7 Third Advance Estimates, DES 8 USDA GAIN Report, India: Grain & Feed Report, June

22 targeted 44 million tonnes to 25.1 million tonnes is also a pointer to this. Therefore, the figure of 93.6 million tonnes needs closer scrutiny, including cross verification from satellite imageries. 1.9 The fall in production is steeper for coarse cereals as a whole at 6.0 percent as compared to last year with sharp fall in output of jowar ((-)11.8 percent), bajra ((-)15.3 percent) and ragi ((-)16.6 percent). An appreciable increase of 5.3 percent in total pulses production is expected in at 18.0 million tonnes as compared to last year. The production of tur and gram is expected to reach 3.0 million tonnes (increase of 14.7 percent as compared to last year) and record 8.5 million tonnes (increase of 10.3 percent) in The production of total nine oilseeds in is also expected to be higher by 3.1 percent at 30.7 million tonnes. The production of soyabean is expected to increase to a record of 14.1 million tonnes (increase of 15.8 percent) and that of R&M to a high of 7.4 million tonnes (increase by 12.7 percent). This increase in the production of pulses and oilseeds bodes well for a much needed shift in the composition of agricultural output from cereals to pulses & oilseeds. Gram, Tur, Soyabean and R&M have recorded high increase in production in Chart 1.3: Production of major Agricultural Commodities, & Million Tonnes Rice Wheat Coarse Cereals Pulses Total Nine Oilseeds Source: DES, Ministry of Agriculture 1.10 Agri-exports 9 by India during the FY were US$ 40.8 billion against an import of agri-commodities worth US$ 20.1 billion with the agricultural sector emerging as a large trade surplus sector (Chart 1.4 (a)). Since the lifting of the ban on wheat and rice exports in September, 2011, India has emerged as the world s leading exporter of rice and a large exporter of wheat in India has exported a record quantity of cereals in Defined as per the classification used in Agricultural statistics at a Glance. It excludes paper/wood products & Spirits and Beverages. 5

23 India exported a record 10.1 million tonnes of rice (US$ 6.2 billion), record 4.8 million tonnes of maize (US$ 1.3 billion) and 6.5 million tonnes of wheat (US$ 1.9 billion) in (Chart 1.4 (b)). Other major agri exports were guargum meal (US$ 3.9 billion), raw cotton (US$ 3.6 billion), marine products (US$ 3.5 billion) and meat & preparations (US$ 3.3 billion). India also emerged as the largest importer of edible oils (with imports exceeding 10 million tonnes worth US$ 11.2 billion) and pulses (with imports exceeding 3.8 million tonnes worth US$ 2.3 billion). Despite this, the agriculture sector remains a net exporter and to enable the sector to realize its full potential, an open, stable, neutral and rational agri-trade policy with moderate duties is the need of the hour. The guiding principles of such a policy should be the alignment of domestic and international prices along long-term trends, while guarding against sharp spikes and troughs through provision of special safeguards. Chart 1.4 (a): Exports & Imports of Agri-Commodities Chart 1.4 (b): Composition of Agri-Exports, (%) US$ Billion Expanding Trade Surplus Sugar & Molasses, 4.0 Wheat, 4.7 Spices, 6.9 Oil Meals, 7.2 Maize, 3.2 Others, Agri-Imports Agri-Exports Meat & Prep, 8.1 Marine Products, 8.5 Cotton, 9.0 Guargum Meal, 9.6 Rice, 15.3 Source: Agricultural Statistics at a glance- various issues & Department of Commerce Outlook for Agricultural Sector in By June end, 92% of the country received normal/excess rainfall 1.11 In April, Indian Metrological Department (IMD) had predicted a normal monsoon with India receiving 98 percent of its average of 89 cm of rain during the June- September monsoon. Against this prediction, the southwest monsoon covered the entire country on 16 th June, quite ahead of schedule and the earliest arrival recorded. So far, this portends well with advanced sowing and hopes for a bumper output of summer-sown kharif crops such as rice, oilseeds and cotton, provided in the remaining period monsoon does not play truant. By the end of June, 2013, 92 per cent of the geographical area of the country has received either normal or excess rainfall which should help the severe drought hit areas of Maharashtra and Karnataka. A comfortable level of water in reservoirs should also lead to a better rabi output. 6

24 Global Outlook 1.12 According to FAO Food Outlook, June 2013, food commodity markets are set to be relatively balanced in , in particular cereals. Record world wheat production and thereby declining world trade in 2013, global wheat markets would remain stable under generally lower prices. As per CBOT, wheat prices are expected to range between US$ per tonne during Positive early production forecasts for oilseeds for suggest a more balanced world supply and demand situation and thus a general easing of prices. The FAO Food Price Index (FFPI), with the base of , averaged points in May 2013, close to its April value but 5 percent higher than in May last year. At that level, the index is nearly 10 percent below the peak reached in February The overall Food Price Index of FAO is showing signs of moderation in 2013 and combined with the trends in the futures market, the global market conditions are expected to be stable in the short-term. Food commodity markets are set to be relatively balanced in Structure of the Report 1.13 Indian agriculture is a critical economic activity contributing about 14 per cent to overall GDP of the country and with half the workforce employed in it. But as the Kharif Price Policy Report, highlighted, it is stifled by various controls ranging from trade to domestic marketing and stocking. It is high time that one focuses on reforming the agri-market distortions which would create greater competition and promote efficiency and growth. Getting markets right for both agri-outputs as well as crucial inputs is essential for getting the prices right. Accordingly, this report focuses on the need for getting the markets right. Chapter 2 of this report delineates the various market distortions for principal rabi crops and also recommends what needs to be done. Chapter 3 looks at domestic prices in relation to international prices and trade policies with a view to reduce distortions with respect to international trade. Chapter 4 presents the costs projections for the rabi crops. Chapter 5 looks at the relation between yields and real costs of production indicating clearly that if costs are to be contained and thereby real prices of agricultural products, there is no soft option but to increase yields by increasing investment in agri R&D (seeds), irrigation and better farm practices. Finally in chapter 6, major highlights of all chapters are presented leading to the key price and non-price policy recommendations. 7

25 Chapter-2 Demand-Supply, Procurement and Efficacy of Price Policy Domestic Market Scenario The year is expected to show mixed variation on the supply side of rabi crops 2.1 The year , as per Third Advance Estimates, is expected to register a marginal fall of 1.5 percent in total foodgrain production to million tonnes as compared to a record production of million tonnes in Production of wheat is estimated to marginally decline to 93.6 million tonnes as compared to 94.9 million tonnes in Barley production is expected to increase by 2.5 percent to 1.7 million tonnes. Gram is expected to register a record crop of 8.5 million tonnes as compared to 7.7 million tonnes last year. R&M production is expected to increase by 12.7 percent to 7.4 million tonnes as compared to 6.6 million tonnes last year; whereas Safflower is expected to record a substantial fall of 40 percent with an expected production figure of about 0.1 million tonnes. (Annex table 2.1). 2.2 Prices, however, are ultimately determined by the interplay of the forces of demand and supply. In this context, the stocks-to-use ratio is an important parameter to gauge the degree of availability of a commodity vis-à-vis its demand. In the case of seasonal crops the norm is that percent of production should be in the form of year-end-stocks to cater to demand till the next crop arrivals. While the estimates on stocks of rice and wheat, which are 8

26 largely kept in the Central Pool, are known and fairly reliable, the estimated stocks of other commodities that are predominantly held in the private sector are obtained through other sources, whose reliability is contestable. However, these estimates are used by the Commission to understand the price behavior of these commodities. Accordingly, more than one estimate on the stocks-touse ratios is reported. (table 2.1 and annex table 2.2). Table 2.1: Stock- to-use Ratios of Rabi Crops* (%) to Commodity Wheat Wheat # Barley Barley # Gram Gram # NA Lentil Lentil # R&M R&M # Notes: * Details on Safflower were not available; NA- Not Available; # - Trade & Other Estimates; Use is defined as Total Domestic Consumption plus Exports Sources DAC, DGCIS, USDA, IPGA, NCAER Stock-to-use ratios are comfortable in the case of most of the Rabi crops except barley as per Government data 2.3 Prima facie, it is apparent that the stock-to-use ratios seem comfortable in the case of most of the major crops except barley as per Government estimates although trade estimates are low for gram, lentil and R&M. There is a wide difference between stock-to use-ratios derived from Government sources of data and trade sources in respect of all the rabi crops except wheat. The wide gap between the government figures and trade figures (IPGA and USDA) is because of the difference in the production and export figures of these sources indicating the need to examine their authenticity and reliability. It may be highlighted that the declining price trend observed in case of most of the rabi crops except wheat and lentil do not corroborate tight stock-to-use ratio derived on the basis of government estimates (barley) and trade estimates (gram and R&M). In the case of lentil, a comfortable stock-to-use ratio based on the government estimates is not validated by its rising price trend. Cereals- Wheat 2.4 With respect to wheat, owing to high production and procurement levels, there are no supply constraints; the stock position has increased dramatically leading to a high stocks-to-use ratio, up from 26.3 percent in to 42.3 percent in (table 2.1). Wheat Balance Sheet is given in annex table 2.2. Although USDA estimates a fall in wheat production, the stocks-to-use ratio is still high. However, despite the successively and significantly improving stocks, the price of wheat (as well as rice) was increasing as revealed by the WPI based inflation rates and shown in chart 2.1. This anomaly of high stockto-use ratio and high rate of inflation in wheat prices is largely due to the large High prices of wheat is largely due to high stocks held by state agencies 9

27 scale state procurement and stocking of wheat, with little available for the open market. Chart 2.1: Foodgrain stocks in Central Pool & Inflation Rates of Wheat & Rice Sources: FCI, DIPP Coarse Cereals - Barley 2.5 As per the Third Advance Estimates, the estimated total production of coarse cereals is 39.5 million tonnes, which is lower than last year s production of 42 million tonnes; however a marginal increase in the production of barley is estimated to 1.66 million tonnes. 2.6 The stocks-to-use ratio for barley has sharply declined from 32.9 percent in to 16.1 percent in largely due to higher exports. However, USDA estimates a higher stocks-to-use ratio at 35.7 per cent (Table 2.1), which is not supported by the increasing trend in barley prices. Barley Balance Sheet is given in annex table 2.2. Oilseeds R&M & Safflower 2.7 R&M is India s biggest domestic oil bearing oilseed. As per the Third Advance Estimates, the output for the nine oilseeds as a whole is estimated to be 30.7 million tonnes, as against 29.8 million tonnes in Production of R&M is estimated to increase by 12.7 percent to 7.4 million tonnes. After reaching a peak level of 0.24 million tonnes in , production of safflower has been steadily declining and is now less than 0.1 million tonnes. 2.8 With the government estimates, the stocks-to-use ratio for R&M shows a comfortable situation, while as per the USDA estimates there is a moderate increase in stocks-to-use ratio, but it is lower at 7.4 per cent, indicating a tight supply situation. However, the current declining trend in prices does not reflect this situation. The R&M Balance Sheet is given in annex table

28 Pulses 2.9 India s pulses production peaked in at 18.2 million tonnes. As per the Third Advance Estimates, production of pulses is estimated to be 18 million tonnes in , an increase of about 1 million tonnes over Of the total pulses production during the triennium ending , 45.8 per cent was contributed by gram; gram production in is estimated at a record 8.5 million tonnes While government estimates indicate a comfortable stocks-to-use ratio of gram, trade estimates a tight situation although a record production in gram is anticipated for However, prices of gram are currently showing a declining trend. In the case of lentil also the trade estimates indicate a continued situation of tight supplies, which is confirmed by the rising prices of lentil. Procurement- Policy and Operations 2.11 Among the rabi crops, Food Corporation of India s (FCI) procurement operations is largely limited to wheat. National Agricultural Cooperative Marketing Federation of India Limited (NAFED), National Cooperative Consumers Federation of India Limited (NCCF) and Central Warehousing Corporation (CWC) are the Central nodal agencies of the Government of India for undertaking procurement of Oilseeds and Pulses under Price Support Scheme (PSS), when the market rates of a particular commodity fall below MSP. As the market prices of R&M and safflower seed and pulses, namely gram and lentil covered under PSS, ruled above MSP, market intervention under the Scheme has not been necessitated (Source: NAFED). Consequently, procurement related issues are focused on wheat The procurement of wheat as a percentage of production and marketed surplus from to is shown in chart 2.2. In , procurement crossed 40 per cent of the wheat production and cornered more than 50 percent of the marketed surplus. For the current year, a quantity of 44.1 million tonnes of wheat was expected to be procured. However, only 25.1 million tonnes have been procured by the end of June The decline in procurement may be attributed to the following reasons: (i) A possible decline in production-as per June 2013 USDA report, production of wheat is estimated at 87 million tonnes; Agriwatch puts it at million tonnes; however, the third advance estimates of DAC (93.6 million tonnes) show an increase over the second advance estimates (92.3 million tonnes); (ii) a possible increased procurement by private traders; and (iii) farmers could be holding back more quantities of wheat in anticipation of rise in prices. During the Commission s interactions, it was reported by representatives of the private traders and farmers associations that the quantities procured/held back respectively by these groups are not significant. A possible decline in wheat production, increased procurement by private traders & some holding back of wheat by farmers could be reasons for low wheat procurement 11

29 Chart 2.2: Wheat Procurement as Percent of Production & Marketed Surplus ( to ) Notes: Marketed Surplus Ratio is available upto only and repeated for the years after Sources: DES, DFPD, Agricultural Statistics at a Glance, 2012 Major states like Punjab, Haryana and MP procure more than 70 per cent of the marketed surplus, leading to almost a monopsony of the state visà-vis private trade 2.13 As is evident from chart 2.3, major states like Punjab, Haryana and Madhya Pradesh procure more than 70 per cent of the marketed surplus, leading to almost a monopsony of the state vis-à-vis private trade. In view of this, the Competition Commission of India (CCI) may look into these aspects of anticompetitive market behavior, which are not in the best interests of creation of vibrant cereal markets. Chart 2.3: Wheat Procurement as a percent of Marketed Surplus, TE Source: DFPD 12

30 2.14 During the last three years, the declining share in wheat procurement of Haryana and Punjab has been more than compensated by Madhya Pradesh and Rajasthan. The situation in MP has also been distorted due to state policy to declare additional bonus over the MSP. (Box 2.1). Box 2.1: MP-Continuing state policy leading to distortions in wheat market MP has been providing Rs 100/qtl bonus to its farmers since which was increased to Rs 150/qtl in In a span of five years, from to , area under wheat has increased from 3.7 million ha to 5.3 million ha and production of wheat from 6.0 million tonnes to 13.1million tonnes (3 rd Advance Estimates). MP has emerged as a major wheat procuring state almost matching the traditional grain procuring states of Punjab, Haryana and UP in terms of production and procurement. From procuring 0.8 percent of wheat produce in , the Government cornered 85 per cent of its total wheat produce in (RMS ). The state has procured 75 per cent of the total arrivals in RMS This has nearly wiped away the private trade in MP. (See chart below) Sudden drop in procurement in MP in (RMS ) is a puzzle. It suggests that in earlier years there could be possibility of UP wheat flowing into MP for procurement, as MP was giving a bonus on MSP while in much of UP the market prices ruled even below MSP. The new scheme of e-uparjan of MP is reported to have checked such inflow of wheat from other states. Chart 2.4: Procurement as a share of production in MP ( to ) Source: DES, FCI 2.15 In recent times, more state governments have been announcing crop specific bonuses, as shown in table

31 Table 2.2: MSP and state bonuses over MSP in the last four years (Rs/qtl) Mktg Year Sl. no States Paddy Wheat Paddy Wheat Paddy Wheat Paddy^ Wheat MSP # Crop specific bonuses affect inter-crop parity 1 Chhattisgarh Karnataka Kerala M.P. Comm=50 Gr A= Comm=50 Gr A= Comm=100 Gr A= Rajasthan Tamil Nadu Comm=50 - Comm=50 - Comm= Gr A=70 Gr A=70 Gr A=70 7 U.P Notes: Comm- common variety, Gr A Grade A variety of paddy; # - including Rs 50 per qtl incentive bonus for paddy procurement announced by Centre; including Rs 50 per qtl incentive bonus for wheat procurement announced by Centre; ^ - Paddy MSP has been announced on , states would announce additional bonuses later. Sources: FCI & state governments These have affected the inter-crop parity as they influence the farmer to grow a particular crop at the cost of other equally important crops and thus distort the production basket. Not surprisingly, given the additional bonuses declared by MP (from ), the incremental additions to irrigated areas have gone largely to wheat in MP as evident from chart 2.5. This unidirectional expansion in one crop is not healthy as it not only damages the soil health, but also goes against the needs of the nation which is short of edible oils and pulses. Chart 2.5: Share of major crops in incremental irrigated area in MP ( over ) Source: DAC 2.17 In this context, the Commission reiterates its recommendation that the government revisit the policy of following an open-ended procurement by FCI. The Centre also needs to take a policy decision to not accept more than say, 75 percent of last year s procurement from states that impose taxes and levies beyond 5 percent of MSP, or give special bonus on top of MSP. This would also 14