Getting rid of adhocism for profitable trade

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By: Anirudh Prakash

A major concern of central bankers, political leaders, economists and financial journalists has been the weakening of global growth. There is near consensus that a major reason behind this weakness is the ongoing trade war. Indeed, trade disruptions would have played a major role as far as causing uncertainty which would have adversely affected global growth. But, at the same time it is extremely important to recognise that a major reason behind this was the non-transparent conduct of certain countries over the last decade or so. The fact that there are both gainers and losers from relatively free trade was well recognised, yet, there was little done to compensate the losers and that is perhaps why we are witnessing the current trade war.

However, we are soon approaching the end of the trade war, and the recent US-Japanese trade deal is a sign of more such deals soon. Very likely, India and the US may also witness a trade deal that resolves a bulk of our issues. But, entering a deal would require us to reconsider our agricultural policies – especially with respect to the ad hoc import and export policies. It is no secret that onion prices have shot up over the last couple of weeks. Consequently, the government has imposed export restrictions on it. This is a classic example of a knee-jerk reaction that does little good but a greater harm. It is reminiscent of the Nehru-Indira legacy that we as a nation are trying hard to get rid of. India is an agrarian society, but most developing countries have primarily had an agrarian based economy before industrialisation. The question is if other countries were able to do it then why not India? The answer lies in our faulty policies. Recall that even Indira Gandhi in her second avatar was not that big a believer in the socialist policies pursued by her and Jawaharlal Nehru. It is therefore imperative that we recognise the flawed set of policies and hold them responsible for the lack of progress in Indian agriculture. A temporary high price of onion may have benefitted the farmers even if consumers would have had to shell out more for a few weeks.

Yet, we have deprived farmers and wholesale traders of this opportunity and intervened in markets. Such intervention has time and again proved to do more damage than good. It is further worth highlighting that our price policy too is skewed against the farmers and therefore, it is no surprise that our agricultural sector has failed to produce enough marketable surplus, which could be utilised by the manufacturing sector. It is important to realise that agriculture is just like any other business activity. This realisation is important for a new policy framework that focuses on revival of the sector. The sector badly needs investment in technology, storage facilities and logistics.

Unfortunately, the government cannot meet this need and private sector will not intervene unless it’s assured of limited or no government intervention. The only solution to India’s frequent agrarian challenges is to limit the role of government and embrace private capital in the same. Do note the extent of efficiency gains that happened thanks to private courier services or the growth of telecom, the moment private sector was allowed in the same. The same is likely to happen the moment we break down the monopoly of Food Corporation of India (FCI) and get rid of the Agricultural Produce Market Committee (APMC) and Essential Commodities Act.

Luckily, the government is working on reforming the APMC Act, but the present export controls are disappointing. There is a unique opportunity with the government to transform India’s agrarian landscape. With PM Kisan scheme there is a necessary and robust framework in place to provide direct income support to farmers. Consequently, the government should stop procurement from farmers and simultaneously dismantle the public distribution system (PDS) and move towards a direct benefit transfer framework. The FCI should be transformed into a special purpose vehicle that focuses solely on storage and logistics. This special purpose vehicle should be privatised in order to bring in professional management into the agrarian supply chain in India.

At the same time, agricultural companies and farmers alike should be subject to standard taxation norms as applicable under the direct tax code. It may not be politically feasible to tax agricultural income; however, it is the next step towards strengthening India’s fight against corruption and black money. Any trade deal with India would require us to address the concerns with respect to our ad-hoc agricultural export-import policies. But there are other far more important domestic reasons why we need to move away from them. If we truly want to serve both farmers and consumers, then we must undertake strong pro-market reforms in the agricultural space. Doing so will increase farmers’ income while improved efficiency will only reduce the consumer costs. India’s farmers are yearning for a new deal and the best deal would be to let them be. In this instance, the government is not the solution – but as former US president Ronald Reagan famously mentioned – it is the problem. INAV

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