Food Regulation

It was with great interest that I read Arun Firodia’s column “How to Tame Hunger” yesterday in the TOI.  http://timesofindia.indiatimes.com/home/opinion/edit-page/How-to-tame-hunger/articleshow/10032709.cms  Food price inflation is running at nearly 10%, and that is clearly a problem for individuals and families who are finding it more and more difficult to buy sufficient good food to feed their families.  I was glad to see Mr Firodia weighing into the debate.

Most of what he said was extremely helpful.  The APMC Act is certainly a major problem.  Anything that limits farmers’ options for distribution will drive down the prices they are able to get for their produce.  When the government market is the only place vegetables can be sold, then farmers can take the price offered there or nothing at all.  The amount the consumer is willing to pay is totally removed from the equation.  If it is true, as Mr Firodia says, that farmers receive only Rs 5 per kilo for onions, while consumers pay Rs 30 per kilo, then farmers could sell directly to consumers for Rs 15 per kilo and see their own revenues triple, while the cost to consumers would be cut in half.  Everyone would benefit.

Of course, if people preferred to buy their vegetables from a central location in a shop or market because it was more convenient or they found a better selection, that would remain an option.  And if farmers preferred to sell their produce in bulk to a shop rather than spending time selling very small quantities to many individual consumers, that would be fine, too.  Both of those processes involve “middle men,” but those “middle men” aren’t necessarily a problem.  They sometimes make the lives of both consumers and farmers easier by making the process of buying and selling simpler and less time consuming.  But the government doesn’t need to mandate or forbid any particular market, and it certainly doesn’t need to run one; farmers and consumers can make those choices for themselves.

So yes, get rid of the APMC Act.  That would allow all sorts of experiments, including the farmers markets and contract farming that Mr Firodia describes, as well as things no one’s even thought of yet.  The government doesn’t need to be involved in this market, so it should remove itself by scrapping the legislation.

He is also correct at the end of the piece when he talks about the importance of trade across state and national boundaries.  Absolutely.  This would both address the needs of consumers for more produce and of farmers for more people to purchase their crops.  We should remove government regulations there, too.

However, it was precisely because I so agreed with the beginning and end of his piece that I found the middle quite incomprehensible.  He talks about the high rates of spoilage because of poor storage and transportation facilities and he is right about the impact that this has on prices.  He is also right about the problems caused by floods, droughts, and pests, both for the supply of food and for the livelihoods of farmers.  These are indeed important issues that cause real difficulties.  However, the solutions he proposes are likely to perpetuate, rather than relieve the problems and for the same reasons that the APMC Act and trade restrictions make problems worse.

He proposes that nationalised banks provide cold storage and food treatment facilities that could be rented to farmers, which sounds great.  But doesn’t this have the same potential pitfalls as the APMC Act?  If farmers’ only options are to use the storage provided by the government through nationalised banks or to let their food spoil, they will probably go for the government storage.  But because the farmers will have little alternative, there is no incentive for those banks to ensure their quality is consistently high or their prices are low enough to offer good value to farmers.  And it also ignores the fact that there is already an extensive network of storage facilities for farmers operated by the state.  Indeed, there are at least three government agencies involved in this work – the Food Corporation of India (FCI), the Central Warehousing Corporation (CWC), and 17 State Warehousing Corporations (SWCs).  But this isn’t meeting the need.

Private companies providing storage and transportation without interference from the government need to compete for farmers’ business, so they have good reason to offer fair prices and reliable services.  Without undue regulation, and in the face of such great need, companies are only too happy to seize the opportunity to provide this service.  They benefit through the money they make by running the business, the farmers benefit by being able to sell more of their produce without losing it to spoilage, and consumers benefit from a greater supply of fresher food.  It is a win-win-win.

The same principle applies when it comes to insurance.  Mr Firodia argues that insurance companies should be required to offer insurance to cover farmers’ losses, but such interference by the government will do one of two things.  It will either drive the price of insurance up, or make companies leave the business altogether.  If companies are unable to operate in a way that makes sense for them financially, they’ll cease to offer insurance at all, which reduces the options for farmers.  That’s not good for anyone.  Alternatively, in order to sustain their businesses, insurance companies may raise prices substantially.  But this also causes problems.  Either the farmers have to pay the new, higher rates, which they can afford only by raising the prices charged to consumers, which means all of us will pay.  Or the government will pay for the insurance, which means that, again, all of us will pay through taxation.  And if there is any problem of which everyone in India is aware, it is the problem of corruption when you start mixing the government and money.  A wide-spread insurance scheme, mandated by the government and paid for by taxpayers, would be ripe for corruption and inefficiency.  Private markets definitely do a better job than the state at providing insurance.

So while Mr Firodia is right in much of what he says, the answer to both the problems of food storage and transportation as well as the need for insurance lies not in further government intervention, but less.  As he so clearly shows, government interference – in the form of the APMC Act and trade restrictions – is a major contributor to the problems we currently face.  More of it will make matters worse, not better.