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What explains India’s farm distress? Demand or Supply?

Summary:
Hrish Damodaran had earlier written a piece on how India was suffering from an oversupply in case of food supplies leading to decline in prices. This was used to explain the current distress in farm not just by Harish but several others. Rosan Kishore in HT provides a rebuttal to the narrative. He says it is not a case of oversupply but of decline in demand. This is just like Keynes arguing his case for Great Depression as well!: In an article published in The Indian Express on 18 April, Harish Damodaran has argued that “production glut, not dearth of cold storage and processing infrastructure, is the real cause of farm distress (in India) today”. The argument, if true, has serious ramifications for Indian agriculture. This is because it suggests that the only way to deal with farm

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Hrish Damodaran had earlier written a piece on how India was suffering from an oversupply in case of food supplies leading to decline in prices. This was used to explain the current distress in farm not just by Harish but several others.

Rosan Kishore in HT provides a rebuttal to the narrative. He says it is not a case of oversupply but of decline in demand. This is just like Keynes arguing his case for Great Depression as well!:

In an article published in The Indian Express on 18 April, Harish Damodaran has argued that “production glut, not dearth of cold storage and processing infrastructure, is the real cause of farm distress (in India) today”. The argument, if true, has serious ramifications for Indian agriculture. This is because it suggests that the only way to deal with farm distress is to reduce agricultural production in the country.

This is an interesting argument, but does it have a macroeconomic justification? The article cites problems of potato and sugar cane farmers in some districts of Uttar Pradesh, but such anecdotal evidence may not warrant the radical inference. Indeed, such an argument focuses almost entirely on supply side factors without looking at demand side issues. And two, it does not recognise the fundamental asymmetry which characterizes global agricultural markets.

Whether or not a particular commodity is in excess supply in a market also depends on the level of demand for it, which is a function of many things including purchasing power and preferences. For example, if all billionaires were to vanish from the world tomorrow, we would suddenly have a glut of private jets. Similarly, if the number of billionaires suddenly doubled in six months, there would be a severe scarcity for these jets. Both of these situations can arise without any change in the supply of private jets in the world.

What many commentators do not realise is that demand for food also varies drastically among countries. This becomes clear by a comparison using the data published by the Food and Agricultural Organisation (FAO). The relevant category to look at in the FAO database is per capita supply of food items.

India is nowhere close to reaching peak food consumption levels in the world. This (price crash for food items) could have happened if mass purchasing powers have come under squeeze in the recent period. Unfortunately, there is no consumption expenditure data to accept or reject this claim. The recently leaked findings of the National Sample Survey Office (NSSO) employment survey did suggest that the Indian economy has fared badly on the employment front. If these findings are true, there is bound to have been a negative impact on mass purchasing powers. To be sure, farm incomes have also suffered in India due to the adverse turn in international food prices, which have brought down export opportunities and earnings and also created problems for crops such as sugar cane.

Also, agrarian distress is not something which has suddenly appeared in India in the past couple of years. Viability of the average Indian farmer has been in crisis for a long time now. What many people do not realise is that this is not a problem which is unique to India. Even in a country like the US, where farming is extremely mechanised and practiced on very large farms, prices cannot cover the cost of production for important crops such as wheat and cotton. Statistics from the United States Department of Agriculture show that the difference between value of output and total costs has been continuously negative in the US.

Hmm…

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Amol Agrawal
I am currently pursuing my PhD in economics. I have work-ex of nearly 10 years with most of those years spent figuring economic research in Mumbai’s financial sector.

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