The perils of unregulated volatility

Interview with Utsa Patnaik, Professor of Economics, Jawaharlal Nehru University.

Utsa Patnaik, Professor of Economics at Jawaharlal Nehru University, has been a close observer of the Indian agrarian scene for close to three decades. Her contributions to the study of production relations are considered fundamental reading for a ny student of Indian agriculture. In a wide ranging interview with Sukumar Muralidharan, she placed on record her observations on the current state of health of the rural economy. Excerpts:

Does the situation of stagnation in agriculture today represent a qualitatively new situation in relation to earlier episodes of crisis?

Well, there are certain proximate factors which are unique to the 1990s. These have to do with the WTO regime and its implementation by India, which means that we have removed the protection we earlier had for our agriculture. There used to be controls e arlier on the export and import of agricultural products, and these have substantially gone now. Of course, the process started in the early-1990s, but it has been very sharply accelerated in the last two years, with the NDA (National Democratic Alliance ) government actually removing quantitative restrictions (QRs) on imports almost in indecent haste. The result is that our producers are now exposed to the volatility of global prices. I want to stress here that global commodity prices are always highly volatile. This has to do with supply conditions. In the space of a few months, it is not unusual to see a trebling of prices and then as sharp a drop.

The argument for free trade is that it all evens out in the long-term - that the producer in fact is better off through unrestricted trade.

There is a common belief that what you gain in the upswing of prices is lost in the downswing and at the end of the process, the producer is no worse off. But that is not the way it works in practice. If you take the concrete example of say rubber or cot ton production in the last decade, what actually happened was that when global prices were high, lakhs of small producers took loans, they even leased in land when they did not own enough, in the hope of making a profit. What then happened was that if, a s in cotton, yields were not up to expectations, or as in rubber, there was a crash in prices, expectations of profit were not realised, and the producers were ruined. When there is an unregulated export thrust as in the case of cotton, you have a whole lot of fly-by-night operators coming into the scene. Certified seed suppliers cannot keep up with the demand and so there are spurious operators who enter. Then the companies dealing in pesticides also get into the act. The cotton story has been one of a complete debacle, because drought struck and pest attacks multiplied, none of these inputs actually worked. What then happens is that a farmer who has borrowed heavily is unable to pay back and the only alternative would be to declare himself bankrupt, which means that he would not get any further access to credit.

The other feature of this kind of unregulated export thrust is that institutional credit has been curtailed under the structural adjustment programme, and increasingly farmers are borrowing from private creditors. This has led to a situation where a subs tantial number of the poorer farmers are pauperised and being forced to sell their land.

Would all this be the consequence of a very poor asset base? What about the better endowed farmers who should be able to deal better with situations of uncertainty?

Well, the extent of the volatility they have been subjected to, combined with the cutback in institutional credit, has been such that even well-to-do farmers are facing a problem. That is very clear if you look at farmers in Punjab for instance, where ev idence points to increasing levels of indebtedness even in well-to-do strata. And this is mostly in the informal credit market, since there has been a very substantial crunch in institutional credit. There has also been this well-publicised wave of suici des among farmers, of which there have been more than 800 over the last two years in Andhra Pradesh alone, mainly among cotton farmers. That of course is only the tip of the iceberg because there are several lakhs of farmers who are really mired in debt and are not taking this extreme step. But their position has definitely worsened to the extent that there has been a loss of land and other assets, and family members are forced to do daily wage labour.

This is not really a sustainable kind of situation. You cannot go on exposing the farmers to this kind of unregulated volatility of the international market. There has to be some kind of a renegotiation at the WTO, though I personally think that is going to be a very hard fight. The developed countries, once they have got our government to give up QRs, are not going to let us reimpose them in a hurry. The other alternative is to have variable import and export duties, that is depending upon the domestic supply situation and international price - you either raise or lower duties to keep domestic prices within reasonable bounds and supplies adequate.

But then how do you account for the situation in the grain economy - there has been a huge pileup of stocks with the government, which has been described as a paradox of plenty.

The situation is even more paradoxical than you would imagine, because in the 1990s, our growth rate of foodgrains output has been half what it was in the previous decade. And in spite of this, you have enormous stocks with the government. And the explan ation for that is actually the cutback in domestic demand and absorption by the mass of the population, through essentially, contractionary macroeconomic policies. These policies of course are the core of the structural adjustment programmes implemented under the tutelage of the Bretton Woods institutions by indebted governments. Since 1991 the Indian government has been implementing these policies. Of course, the contraction was most severe in the early-1990s when per capita GDP growth actually decline d. Then it became slightly more expansionary when the general elections approached. But in recent years again, it has been fairly contractionary. So essentially what the Bretton Woods institutions want and what the WTO provisions also seek to ensure is t hat the growth rate and absorption of their own food products is restricted for Third World populations.

How would this be in the interests of the advanced countries?

We really need to go into long-term factors such as the international division of labour to understand this. I think a very important factor which is not integrated into the analyses of most economists is that the developing countries are located in trop ical and sub-tropical areas of the world - their agricultural capacities are much larger, they can produce a greater range of commodities, they have more than one growing season - and where irrigation is assured, they can have multiple cropping. In compa rison, the advanced countries located in the temperate regions of the world have, generally speaking, only a single growing season. They can only produce a limited range of cereals, root crops, dairy products and of course, in their summer season, a limi ted range of fruits and vegetables.

So historically, what has happened is that the advanced countries have large surpluses of cereals and dairy products - in fact they are already dependent on external markets for disposing of their output. On the other hand, the developing countries are r equired to alter their own cropping patterns in such a manner as to devote a larger proportion of resources to crops that the advanced countries cannot produce at all, or cannot produce in their winters. So now you have the transnational companies seekin g to even out the seasonality of supply. In fact, in the advanced countries there is no seasonality of supply any more. If you go to any supermarket in western Europe or North America, on an average it would carry 12,000 items of food alone - in raw or p rocessed form - and there would be typically 60 to 70 per cent tropical import content.

So the strategy of the advanced countries always has been to have a completely liberalised trade. If you look at the global distribution of purchasing power, one-sixth of the world population lives in western Europe and North America, which however, has 80 per cent of world income. So this demand - which acts like a giant magnet - will restructure the cropping patterns in developing countries whenever they open up their frontiers and dispense with protection for agriculture.

The argument for free trade is that we should go by comparative advantages and specialisation. There is no harm, for instance, in exporting crops that we have a cost advantage in and importing essential cereals.

The point is that you have an asymmetric situation. Our countries have higher productive capacity in agriculture but the advanced countries have the purchasing power. And then in a situation where investment is not going into our agriculture, something h as to yield. And what gives in in order to accommodate the export thrust is domestic food production. Any substantial export thrust, whether in history or in contemporary times, has always been accompanied by a fall in food production. We have seen it in the colonial period and we have seen it in the 1980s in sub-Saharan Africa. The six most populous countries in sub-Saharan Africa went in for a highly successful primary exports drive in the 1980s, under structural adjustment. Their primary exports were growing at between 6 and 13 per cent per annum. This was only possible through diversion of irrigated land and resources to the export crops - at the expense of food crops. So you had a per capita cereals output decline of 20 per cent in some of these c ountries during the 1980s. And even with food aid, the per capita calorie intake went down.

But then you are saying that their increased exports were insufficient to finance imports of foodgrain on the necessary scale.

Absolutely. What we had was an adverse movement in terms of trade. The developed countries are few and well-organised, whereas the developing countries are many and poorly organised. So under similar structural adjustment programmes more than 80 developi ng countries have been competing against each other, with an exports thrust in similar products. And of course they have been competitively devaluing their currencies. When this happens, the only way international unit prices can go, is downwards. There has been a very sharp decline in the 1980s of the unit price of primary commodities. This decline has continued at a slower rate in the 1990s. On the other hand, the prices of cereals in the international market are completely administered, they have not hing to do with the market at all. Each American farmer on an average gets about $28,000 as support from the government. A Japanese farmer gets a higher amount and a typical European farmer, a slightly smaller support. So the terms of trade have shifted very significantly against the developing countries. If a country like Sudan or Kenya is pushing out in volume terms, agricultural exports growing at 8 per cent per annum, then over the decade of the 1980s, their earnings should have doubled. But over th e same decade, if the unit dollar price fell by 50 per cent, there would be no increase in foreign exchange earnings.

The second factor we have to bear in mind is, even with the limited exchange earnings they have, would they opt for food exports or not. The decision on that is not going to be taken by those who are suffering from food deprivation. They might well decid e to import cars and other luxury goods.

In a short-run sense, can we export our way out of the problem of embarrassingly high stocks of foodgrain?

Firstly, it is not very ethical to export food that has been procured for public distribution, because then the whole rationale of procurement is lost. It makes no ethical sense to export grain at a subsidy when you should be feeding your own people who are increasingly suffering from poverty. Again, it is not very ethical to divert a subsidy away from your own population to benefit foreign consumers.

In the mid-1990s, there was a similar situation of glut and then the government got out of the situation by exporting. Sharad Joshi and others - with even V.P. Singh joining in - agitated for allowing Indian farmers to access world prices. Well, what hap pened just a year after was that wheat prices fell to less than half their level then. And then all these people were very quiet. The point simply is that liberalisation is a two-way street - if you want to access international markets when you have a pr ice advantage, then you should be prepared to allow international producers in when their prices are lower than yours. And in fact, a few years back Tamil Nadu decided to import wheat rather than take it from the Central government pool. So exporting is no solution at all, since it means importing in another kind of context.

The real solution actually lies in a complete reversal of all the contractionary economic policies that we have followed over the last decade - a repudiation of all the policies that have been put in place by the Bretton Woods institutions. There is no s olution short of that.

And what would be the solution in the longer term - institutional change, as in land ownership and operational control; or should we be talking about higher public investment in agriculture, and ploughing in greater volumes of subsidies?

The whole question of asset distribution is of course very important. If the unfinished land reforms could be carried to fruition, it would enormously improve the asset position as well as the income position of the mass of our farmers. A better asset di stribution also means a better ability to access credit and to invest in new technology. In fact, the social base of investment would improve enormously if you had genuine land reforms.

What can be done in the immediate short-run is to go in for a policy of employment generation through the use of food stocks for a "food-for-work" programme. That would put purchasing power in the hands of those who have been deliberately deprived in the last few years. And it would enable them to increase their purchases from the public distribution system.

The main constraint here appears to be the impact a "food-for-work" programme would have on the fiscal deficit.

That view is based on wrong macro-economics. We have a situation now in which government economists and a substantial section of our academic intelligentsia have completely swallowed the neo-liberal theory - they imagine it is going to add to the fiscal deficit. But in no situation in which you have food stocks building up and unemployed labour, are you going to increase the fiscal deficit when you decide to use food stocks to generate employment.

There could be questions about how productive the expenditure on public works has been. Has it succeeded in imbedding an additional productive capacity in the rural areas, or has it been some kind of a dole - a populist gimmick in other words?

This whole idea that if you spend in the rural areas in employment generation programmes, it is some kind of dole, is, I think, completely misplaced. What are you spending out of? You are spending out of revenues raised through taxes that have been paid by the people who you are trying to benefit. They have a right to the taxes being spent in that manner. You are not doing them a favour. Government revenues do not belong to the government; they belong to the people who have contributed it. It is a compl etely wrong attitude to take, that you are spending on unproductive doles. On the other hand, what you do when you spend on employment generation programmes is that through them you provide income and a means of livelihood for lakhs of people. This incre ases their tax-paying capacity, which means an augmentation of the government's revenues.