Subsidies distort the markets

Shekhar Gupta
Shekhar GuptaJun 29, 2015 | 13:57

Subsidies distort the markets

Suicides by farmers is a story, but a bigger one is farmers' boys fleeing agriculture because they want better lives.

We Indians are not heartless or anti-poor. We are just plain stupid in figuring out who exactly is poor, and how poverty is to be defined in 2014.

Much of the talk on India's economy is dominated by one word: distortionary. So subsidies-direct, like for food and fuel, and indirect, like guaranteed procurement prices for grains- distort the markets, unreasonable taxes and regulations lead to corruption and black economy, distorting the fisc, current account deficit and so on. I am generalising, of course, and being a little imprecise, but we saw this play out most starkly during UPA's 10 years. We were made to believe that India had not broken out of its past of starvation, so most of us had to be fed free grain and given subsistence wages for doing nothing. We collectively fell for this silly deception because it was the most philosophically convenient and intellectually smug thing to do: Just feel sorry for the starving poor and salve your conscience. Even if they do not exist any more.


Oops! Do I really want to be making such an outrageous, stupid and insensitive claim in a country with so much poverty? Does India not have crores still under the poverty line? It does. And I am still not backing off. India still has a lot of poor people, but they are not starving for food in the old-fashioned sense of going to sleep on empty bellies. On the other hand, India has a lot of middle class people, across the wide socioeconomic swathe which defines that class, who are not reeling from the rise of onion prices. Or those of potatoes, LPG, petrol, metro fares and college fees, as TV anchors would tell you in a secular seizure that convulses your television screens every late summer, a couple of months after India's onion harvest. This is the beginning of that season again. There is talk of evil hoarders and crackdowns, strengthening the Essential Commodities Act, Government selling onion at fixed prices, well-to-do women preening before TV cameras and grimly declaring they will now be forced to drop onion from their shopping lists, and everybody asking what happened to achche din.


From alleged starvation leading to almost free grain, to expensive onions resulting in the Government becoming a benevolent streetside grocer to state governments competing to add to the number of subsidised gas cylinders sounds like a complicated story. But it isn't. It is all part of the same, very Indian phenomenon that distorts economics, politics and our collective conscience. Let's call it Onionomics.

We Indians are not heartless. We are not anti-poor. But sometimes we can be plain stupid. As in unquestioningly accepting carefully perpetuated mythologies, from povertarianism to Onionomics and not looking at facts to check who exactly is poor in today's India, and how poverty is to be defined in 2014.

The fact is, nearly a quarter century of growth has brought about revolutionary transformations in India's household economies, as Saurabh Singh's brilliant charts accompanying this week's National Interest show. Too many Indians are still poor, and starving. But they are not starving for foodgrain. They are starving for better healthcare and education. And yes, they are also hungry, but they are hungry not for more roti and chawal but for milk, meat, fish, eggs and chicken. My young friend and brilliant Credit Suisse economist Neelkanth Mishra first drew my attention to these remarkable changes in our kitchens that put both starvation and onion prices in an entirely different perspective. He pointed out to me the Monthly Per Capita Expenditure (MPCE) data put out by the National Sample Survey Office (NSSO) that tells us an average urban Indian household now (we are focusing on city-wallahs for the moment as they complain most about onion prices and other such) spends more on milk and milk products than on foodgrain. Villagers are following the same trend, even if they are trailing. Further, it spends just marginally less on fruits and vegetables than on cereals and pulses put together.


But guess what is the largest single item on its monthly expenditure on food? It is the category described as beverages, refreshments and processed food. Or cola, chips, samosas, murukku, bhelpuri, etc. Today the urban household spend on entertainment is inching close to what is spent on cereals. Yet, nobody ever protests, no TV channel ever goes apoplectic and no politician taunts their rivals on their promise of achche din, or haath garib ke saath-type assurances, when multiplex ticket prices go up. And whoever protests rising MRPs on packets of chips and chewda? But talk LPG, metro and bus fares or onions, and all hell breaks loose.

The real story of socio-economic change in India is hidden in the data on evolving food habits. NSSO also tells you our per capita grain consumption has been declining (net of rural and urban). It fell 1.3 per cent CAGR (compound annual growth rate) between 2005 and 2010 and is declining further. But watch what is increasing: milk and milk products (1.5), mutton (2.4), fish (5.0), edible oil (5.3), eggs (10.6) and chicken (hold your breath, at 18.4). Don't blame just Punjabis, all of India is becoming a kukkad nation now. But more seriously, we Indians, fed up of mere grain, now want better quality foods: fruits, vegetables and, most importantly, oil and proteins. Indians, across social classes, are now eating on the basis of yeh dil maange more, and junking the old notion of khali pet maange more.

It shows in the broader economic figures. Credit Suisse's Mishra has written a telling report on how poultry has become the big new growth engine and job-generator in rural India. Our milk production (according to the Economic Survey) is growing at 4.04 per cent per year, which is almost twice the global average, and we are still short and milk prices are going up. The farm gate value of milk and milk products now exceeds that of wheat and rice combined. Or, more than oilseeds, cotton, sugarcane and pulses all put together. Such is the revolution in Indian farm economics, driven by the changing market and the consumer going up the food chain. And we shed tears over onions. Meat, eggs, vegetables, fruits are all booming. Yet, demand is still exceeding supply.

One of UPA's biggest follies was to persist with the mythology of farmers' distress while, in fact, it could have claimed a stellar record at least in that one sector, even if it meant letting Sharad Pawar hog the credit. Indian agriculture, horticulture, dairy and poultry have grown phenomenally in the past decade. India is now the largest producer of milk, second largest of fruits and vegetables and, notably, the largest producer by far of mango, banana, coconut, cashew and papaya and pomegranate (all figures from Economic Survey). And yet prices of all are going up. We are starving for sure, but starving for goodies on our dining tables.

A distorted intellectual discourse leads to distorted policies and allocations. As in India's unthinking persistence on a farm economy driven by procurement-support price. Our farmers being driven into a life of lazy underemployment is a bigger scourge than the sporadic distress of crop failure or indebtedness. Check out the agriculture chapter in the Economic Survey again, where I can detect the fingerprints of the finance ministry's principal economic adviser Ila Patnaik, who has also been my consulting editor, columnist and teacher in my previous innings. It tells you the share of agriculture in India's GDP has now declined to 13.9 per cent. But it underlines two more things. First, that this 13.9 per cent is made by 54.6 per cent of India's employed workforce. Put more simply, more than half of all of Indian workers toil to produce less than one-seventh of its GDP. That is the nub of Indian poverty, that is what makes so many crores of us feel deprived, left out and starving, not for food, but for better life. The second fact the Survey highlights is a stunning one even if the Survey merely uses the euphemism "unprecedented": between the censuses of 2001 and 2011, while India's population went up by nearly 20 crore, the number of cultivators declined by nearly a crore, or almost 7 per cent, from 12.73 crore to 11.87 crore. Suicides by farmers is a story, but a bigger one, I beg to recklessly submit, is farmers' boys fleeing agriculture because they want better lives.

You cannot deal with the problems and challenges of this new India, or exploit this wonderfully virtuous momentum, if you overlook this transformation. In their landmark book, Poor Economics, Abhijit Banerjee and Esther Duflo explain the paradox of declining per capita calorie intake in India for three decades now, and yet fewer and fewer people complaining of not having enough food. In fact, they say, that number fell from 17 to just 2 per cent in 2005 and, by that logic, should be statistically insignificant now. They say it could be because people need less food now, because of automation, improving quality of life, shift to proteins and so on. This new India is starving for more: better food, education, healthcare and safety. It isn't starving for free grain, cheap LPG, and definitely not dying for subsidised onions.

Last updated: May 03, 2017 | 10:56
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