The response of global farmers to rises in the prices of pulses shows that India has a commanding position in terms of price-setting.
  • Sunday, August 21, 2016 - 13:35

By Sudhakar Gummula

India’s wholesale food price inflation hit double digits in July, breaching the comfort level of 5-6%. This increase was led by a steep 36% year-on-year rise in the pulses price index. Last year, in December 2015, pulses price inflation was higher, at 56 percent, with the prices of gram, arhar and urad rising 61%, 82% and 82% respectively, finally pushing headline inflation into positive territory.

Although such fluctuations are not uncommon in pulses prices, what is surprising this time is the huge surge in imports to upwards of 55 lakh tons of pulses during the fiscal year ending March 2016.

Pulses vs Vegetable oils

India despite being the largest producer of pulses is also the largest importer, due to the perceived large consumption. Lack of high-yielding crop varieties, fluctuating prices and an inefficient public procurement system have prevented farmers from taking up large-scale cultivation of pulses, creating a supply deficit in the domestic market. Nevertheless, this kind of situation is not special to pulses, and can also be seen in the case of oil seeds and the vegetable oil sector.

 Although there is a larger deficit in the vegetable oil sector, the inflation trends in vegetable oils reveal a structured and orderly pattern largely linked to international prices. A highly organized and transparent global trade system, supported by efficient commodity exchanges like the Chicago Mercantile Exchange (CME) in USA and the Bursa Malaysia Derivatives Exchange (BMD) in Malaysia facilitate better price discovery.

As a result, India, despite being the second largest consumer of vegetable oils, has largely remained a price-taker leaving little scope for price manipulation by the import lobby, either at the international level or the domestic level, besides tinkering with import duties. With pulses, on the other hand, the global trade system is highly opaque and largely dependent on India, due to its high production and consumption. In surplus-producing countries like Canada and Australia pulses are categorized as minor crops, while in Myanmar they seem to be producing only for Indian consumers.

Exaggerated Demand Projections

Recently a lot of private demand estimates – which have seemingly been adopted by government functionaries – show a huge supply-demand gap for pulses, with import requirements as high as 10 million tons, under conditions of declining domestic production. However, an analysis of data from the last 28 years shows that there was actually a decline in domestic consumption (calculated as the sum of production and imports) whenever there was a decline in domestic production, and import did not necessarily occur.

Pulses unlike cereals and vegetable oils, are highly substitutable especially with eggs, meat and fish, and for those consumers not concerned with daily protein intake, they can be substituted with vegetables like potatoes, while milk is consumed for protein. This is also reflected in the recent change of commodity weights for calculation of Consumer Price Index (CPI) when the base year was being revised from 2010 to 2012, which was adopted from January 2015.

The combined – rural and urban – commodity weight for the pulses and products group has seen a decline of 10%, while the eggs, meat and fish group has seen an increase of 40%. These revisions were noted for both rural and urban areas, based on the 68th round of the Consumer Expenditure Survey by the National Sample Survey Organization (NSSO).

Recent developments in the pulses market

Since the 2008-09 food price crisis – during which the country saw a 20% food inflation – the government has taken a keen interest in inducing farmers to raise pulses production through various means – one of which has been the sharp increase in Minimum Support Prices. Although MSPs are not as effective in the case of pulses as of cereals – due to the lack of a public procurement agency – their wide publication helps farmers while negotiating prices for their crops.

However, the interesting fact is that the recent increase in MSPs has had a remarkable impact on farmers elsewhere in the world. The average area under cultivation of chickpea, also known as gram, rose by 150% in Australia after the increase of MSPs in India. In Canada, the average area seeded under lentils and dry peas rose by 33% during the same period. In India, during the comparable period the growth in area for cultivation of all pulses was only 8%. And while the yield of pulses in these countries hovers in the range of one to two tons per hectare, in India it is less than 800kg per hectare.

An above normal monsoon for consecutive years - before the onset of 2014 drought – led to the highest ever crop yields and biggest ever Indian pulses crop (19.25 million tons) in 2013-14, which largely suppressed domestic prices. At the international level, the increases in both average area and yields contributed to higher production in the period before and after 2008/09. While MSPs have acted as floor prices in domestic markets, for imported pulses the sharp depreciation in rupee value has affected import margins, necessitating price manipulation in domestic markets with drought conditions providing an opportunity.

The Way Forward

India is in strategically advantageous position as far as pulses market is concerned. The response of the global farmers, not only in the recent years, but also historically, to rising Indian pulses prices is a clear example of India’s commanding position in pulse crop price-setting, at least in the short term.

Hence, the government needs to take steps that benefit both farmers and consumers. The government should establish a mechanism to ensure import prices of pulses don’t cross certain levels by announcing maximum import prices, directly linked to changes in minimum support prices for domestic farmers. This will lead to the establishment of a price band for pulses, protecting both consumers as well as farmers.

The government should also look at the option of announcing legally binding price ceilings for certain pulses after adjusting for necessary supply chain costs.

Taking the current price crisis in pulses as a lesson, the government should walk the extra mile and bring pulses under the National Food Security Act (NFSA) – which currently provides for only rice, wheat and coarse cereals – so that poor consumers are not affected by market price manipulations.

Sudhakar Gummula is an agri-business consultant.

Note: The views expressed here are the personal opinions of the author.