1. Briefing Paper Number 10 | 2012
GDN Agriculture Policy Series
Agricultural pricing Parakrama Samaratunga
Meeta Punjabi Mehta
and public procurement Binod Karmacharya
policies in South Asia Uttara Balakrishnan
Many countries in South Asia have achieved remarkable rates Female agricultural workers
of growth, the result of decades of effective economic policies. cultivate a potato field in Chitwan,
Nepal. Poor smallholders in Nepal
In the agricultural sector, however, growth rates in many South Asian need better access to markets and
countries are either declining or stagnating. This briefing explores increased market efficiency.
the impact of pricing and public procurement policies on the g m b akash | panos pictures
huge number of people who are dependent on agriculture for
their livelihoods.
This briefing paper is one of the
Key messages 10-part Global Development
Network (GDN) Agriculture Policy
hree decades of subsidizing the farmers
pT ittle evidence exists to prove the link
pL Series for its project, ‘Supporting
of South Asia through the policies of public between South Asia’s impressive output Policy Research to Inform
growth in the past three decades and Agricultural Policy in Sub-Saharan
procurement and public food distribution Africa and South Asia’. It is
has helped to improve their welfare, any agricultural price and procurement based on a longer synthesis
but only marginally. Trade liberalization, policies. Technological improvements paper, Agricultural pricing
during these decades have certainly and procurement policies
which many would expect to put in South Asia, which draws
everything right, has not eliminated influenced this positive trend, but the on extensive published and
the need for intervention. role of price risk reduction remains unpublished research. The full
unclear and the costs of government paper can be downloaded at:
he aim of stabilizing the price of goods
pT www.agripolicyoutreach.org
intervention in agriculture are high
has been met with success, substantially It will be of value to policymakers,
and have increased over time. In spite experts and civil society working to
insulating both farmers and consumers
of this, current public procurement and improve agriculture in South Asia.
from the worst of the price fluctuations in
food distribution policies are likely to This project is supported by the
the world market, but the price slumps Bill & Melinda Gates Foundation.
continue in some countries due to the
induced domestically during harvest times
high political priority they receive.
have not been dealt with equally well.
hile there is a case for continued
pW
government intervention, there is
also a strong need for reform of the
private sector. Thus, there is a case
for forging a middle path that combines
the strengths of both the public and
the private sector.
Briefing Paper Number 10 Agricultural pricing and public procurement policies in South Asia 1
2. Overview
Laborers work at a rice
mill in Asuganj in Bangladesh’s
Brahmanbaria district. The
Bangladeshi government has
successfully reformed its food
policies by liberalizing trade
and supporting farmers through
irrigation and fertilizer provision.
g m b akash | panos pictures
Following the global food crisis of 2008, The review examines four main aspects
agriculture received renewed attention in relation to price and procurement
the world over, reigniting debate over policies in five countries: Bangladesh,
the need for continuing government India, Pakistan, Nepal and Sri Lanka:
intervention in South Asian agricultural 1
markets. At one end there are arguments Historical experiences relating to agricultural
that, since the economic conditions which price and procurement policies.
led to government intervention no longer
2
exist, governments should withdraw
Whether there has been a reversal of
from the food grain market. At the
the economic conditions that justified
other extreme, it is being argued that the
government intervention.
unfinished reform process in South Asia
and the current price volatility in the 3
international markets support a case Critical evaluation of the extent to which
for continued government intervention. government intervention in the agricultural
This briefing paper, based on a review sector has achieved its stated objectives.
of the existing literature and stakeholder 4
interviews, attempts to bring out the Documenting case studies that highlight
various contours of the debate and also the debate as to whether government
proposes possible ways forward. intervention should be continued.
It analyzes three strands of debate:
Is there a continuing need for government
p
intervention?
Are government policies putting a strain on
p
public resources without a real role to play?
Should existing agricultural systems be
p
reformed?
2 Briefing Paper Number 10 Agricultural pricing and public procurement policies in South Asia
3. Market failure Further, newer forms of global market
failure, such as climate change and
Most of the literature claims that
increased price volatility in international
government intervention in the agricultural
markets, may also call for newer
market was due to different forms of
interventions. For governments to respond
market failure.
to the rapidly changing global and local
Four commonly agreed justifications for economic conditions, policies will have
government intervention in food grain to change too. The policies of the 1970s
markets are: demonstrated the power that government
1 intervention has in helping agricultural
Weak infrastructure and limited flow markets grow at an impressive rate,
of price information. although some differences of opinion
in the literature still exist. Nevertheless,
2
there is now renewed clamor for a second
Risk mitigation for the diffusion
round of reforms, particularly in the wake
of technology.
of trade liberalization. Whether this implies
3 continued government intervention with
Thinness and volatility of the changes, complete government withdrawal
international market. or a public-private partnership, the most
4
important objectives of agricultural policy
The inability to participate in the are farmers’ welfare, agricultural price
international market. stability and general food security.
Infrastructural, technological and Price and procurement policy has
institutional developments in South Asian been a major instrument used by the
countries have helped to relieve these governments of South Asia to develop their
market failures over the past three decades. agricultural sectors, which were affected
But a total withdrawal of government by weak market infrastructure, the volatility
intervention in agriculture cannot be of domestic and international markets
justified as the conditions have not changed and poor adoption of new technology –
sufficiently and policies have not met all partly due to inadequate risk mitigation.
their main objectives. The stated objectives vary, but these
policies were primarily aimed at ensuring
a ‘reasonably high’ and stable price
Background to the research for farmers, thereby boosting production
and farmer income. But despite being
This briefing paper is based on a longer analysis of published and
in practice for the last few decades, there is
unpublished literature and websites on the subject, supplemented
not much consensus over the effectiveness
by interviews with a broad range of stakeholders.
of this policy approach.
The study reviewed existing literature and interviewed stakeholders
There is also concern about the trade-offs
relevant to the five focus countries. The bulk of the public funds
that agricultural subsidies engender by
allocated for public interventions in these countries have been spent
‘crowding-out’ resources from other
on rice and wheat. Consequently, the focus of the present study
productive uses, such as investment in
has been confined to these two commodities. Furthermore, the
education, infrastructure or health.
impact of price and procurement policies is often evaluated alongside
border protection and public food distribution policies. As such, In addition, public food distribution
it is impossible to assess these components individually. In this briefing schemes in South Asia have failed
paper, ‘price policy’ refers to all policies that create a price gap for to channel enough food to meet the
a particular product in a particular country. This might include tariffs demands of the food subsidy recipients.
at borders and price subsidies in domestic markets. Interventions such Yet such schemes continue to exist despite
as direct payments (which do not affect price) are also included in heavy fiscal costs, because food security
this study of agricultural market distortions. is such a politically sensitive issue. Poor
targeting and leakages appear to be the
major drawbacks of the schemes, while
general inefficiency and limited resource
availability also thwart their smooth
execution. This is further compounded by
the problem of poor and unplanned buffer
stock operations, in which commodities
are stored in a bid to stabilize prices.
Briefing Paper Number 10 Agricultural pricing and public procurement policies in South Asia 3
4. The challenges in more detail
Two main ideologies have prevailed in all Crop diversification could
South Asian economies. Following political help South Asian countries
independence, most South Asian countries
adopted an inward-oriented strategy of
in several ways, including
import substitution. Governments export expansion under
protected industries through import liberalization. Yet price
restrictions, export taxes and overvalued procurement policies have
exchange rates. Governments, however,
discriminated against agriculture.
had a negative impact on
crop diversification.
After a period of under-achieving polices,
and with continuing pressure from
Successful price stabilization
international donor agencies and the World
Trade Organization, South Asian countries The objective of price stabilization has been
adopted international trade reforms to met with substantial success. As a result,
varying degrees. In the 1990s, the neither farmers nor consumers have felt the
agricultural sector was liberalized. A full impact of price fluctuations in the world
reduction in net tax reduced the fiscal food grain market. Nevertheless, the
burden on the producer and consumer and domestic price slumps during harvest times
agricultural trade increased. Governments cannot always be adequately remedied due
do support the agriculture sector, but to inadequacies and inefficiencies in the
overall the contribution of domestic policies procurement systems. Consequently, the
to supporting agriculture is minimal. role played by price and procurement policy
Domestic policies have also been scaled in promoting technological improvements
down over the years in all the countries through the reduction of price risk is not
studied. clear.
Policymakers, and researchers’ interests The most pronounced objective of these
have moved towards trade liberalization policies is to subsidize the farmers.
policies. In the past, both domestic Governments provide substantial subsidies,
and border measures together had albeit with negligible per capita subsidy
discriminated against the agriculture sector levels (with the exception of India and
but this has now changed, particularly after Sri Lanka). This objective has been met, but
2000. Pricing and procurement policies not to an appreciable degree as of 2012.
are closely intertwined with public food The next most important objective of policy
distribution policies in all countries and this intervention is to stabilize prices and this
package appears to be providing positive, has been met with moderate success. For
or at least non-negative, support to example, prices have been set at farm and
farmers. In some cases, the procurement consumer levels to protect people from
levels of the price and procurement policies violent fluctuations. However, evidence
depend more on changes in public food indicates that while administered prices at
distribution policies than the procurement the consumers’ end can effectively impact
price itself. prices, placing restrictions on quantity is
more effective at the producers’ end.
There is little evidence to prove the link
between impressive output growth in the
past three decades and government pricing
and procurement policies. Technological
improvements during these decades have
certainly influenced this positive trend, but
the role of price risk reduction remains
unclear. However, domestic prices held
artificially high by price procurement
policies can safely be assumed to have
made the adoption of expensive modern
inputs possible.
4 Briefing Paper Number 10 Agricultural pricing and public procurement policies in South Asia
5. Reducing costs through information technology: e-Choupal
Farmers in many parts of India face weak infrastructural links, poor transport
and numerous intermediaries charging commission for their goods. e-Choupal
is the brainchild of the Indian Tobacco Company (ITC), an Indian agribusiness
conglomerate. It covers 1,300 choupals (village gathering places) and links almost
700 villages. A series of internet/information points give farmers access to online
market prices and information about the weather or soil quality. This also enables
farmers to negotiate directly with the end buyer (ITC in this case). A literate
farmer is elected from the village to act as the interface between illiterate farmers
and the internet/computer. ITC redefined the roles of the former intermediaries,
who now help to set up new e-choupals and conduct village surveys. Farmers
are now able to align their agricultural output with market demand, and they can
also choose to sell their produce to the highest bidder.
This model eliminates the huge leakages that are associated with government
pricing and procurement in India. It provides farmers with a viable alternative
to either travelling huge distances to government procurement centers or to making
Farmers harvest rice in distress sales.
Weweldigiliya, Sri Lanka. They
receive seasonal loans for the The e-Choupal initiative is now recognized as one of the widest internet-based
purchase of seeds, fertilizers
and pesticides. Three decades initiatives in India. Almost 1 million farmers participate. The value of agricultural
of subsidizing farmers in South commodities procured from these e-choupals is US$140 million.
Asia has helped to improve their
welfare, but only marginally.
g m b akash | panos pictures
Briefing Paper Number 10 Agricultural pricing and public procurement policies in South Asia 5
6. Debating government intervention A major determinant of procurement
volumes under price and procurement
It is clear that the initial conditions
programs is the procurement price. Prices
for government intervention have not
are intended to benefit the farmers as they
been completely altered. Nor have
are generally higher than the farm price
the interventions achieved their major
in a market isolated from the rest of the
objectives of improving farmer welfare, and
world. But they are lower than world prices,
achieving agricultural price stability and
and consequently the price policy appears
general food security to the desired extent.
to be a tax on farmers for the benefit
Therefore, the debate about the necessity
of consumers in trading economies. Thus,
of government intervention is still an
the studies conducted using free trade
open one, contrary to the arguments
as a benchmark reveal that overall food
of the neo-liberal school of economics.
policy has subsidized the farmers only
marginally and this had been overshadowed
by the impact of the protective border
Bangladesh: deregulation and productivity growth
policies in the past, making the net effect
Bangladesh is perhaps the only South Asian economy to have completely on farmers an implicit tax. However,
dismantled its food procurement and distribution system and still achieve following relatively free border policies
remarkable success in reducing poverty and increasing agricultural adopted after trade liberalization in the
productivity. Since 1994, the government proactively reformed its 2000s, the situation has become less
food policy. It privatized food grain distribution, lifted restrictions on restrictive. Presently, farmer subsidy is
international trade, and reduced its presence in food grain markets. non-negative, though not very effective.
This took place through substantial investment in agricultural research,
Increased domestic price stability should
and institutional developments in irrigation and fertilizer markets.
have contributed to the income stability
As a result, the cost of government subsidies reduced from taka 3,916 of farmers. The domestic prices of
million (US$120 million) in 1989 to taka 1,680 million (US$42 million) food grains kept artificially high by such
in 1994. More resources are now available for investment in new social policies could have made it possible for
welfare programs targeted towards poor people. Reduced intervention farmers to adopt expensive modern inputs.
by the Bangladeshi government has led to efficiency gains and market However the contribution of price risk
development. Competition in domestic markets has increased and reduction through price procurement
this has benefited customers. Prices and production are more stable policies to technological improvements
and there is more focus on enhancing social welfare. As a result of is not clear. There has also been a negative
increased private sector participation in international trade, government impact of crop diversification, diversification
costs have been reduced by US$190 million per year. which could help South Asian agriculture.
Youths working as day laborers
in Sindhuwa, Dhankuta district
in Nepal, carry vegetables to
a local market on behalf of a
rich landlord. New markets have
emerged in Asia for high-value
commodities such as fruits and
vegetables but poor infrastructure
makes it hard for smallholder
farmers to access markets.
michael ostergaard | panos pictures
6 Briefing Paper Number 10 Agricultural pricing and public procurement policies in South Asia
7. Recommendations
In view of the fact that price procurement Regionalize procurement prices
p
policy and national food distribution Instead of uniform prices, regional
programs are generally inefficient but differences in production costs and quality
receive high political priority in South Asian should be taken into account in setting
countries, the only logical way forward is procurement prices.
to modify them to suit the rapidly changing
global and local economic conditions, Minimize risk to farmers
p
particularly following trade liberalization. Procurement mechanisms should entail
minimum risk to the farmers. This should
The case studies presented bear evidence
be ensured by providing a network of
to the fact that reforms of this nature
procurement points adequately covering all
are possible, but that specific strategies
production areas and by improving general
need to be context-specific.
efficiency of the procurement system.
Avoid excessive buffer stocks
p
Chhattisgarh, India: people empowerment and Buffer stock maintenance should be
improved governance modified to eliminate conflicts between
From the 1960s, the Indian government ran the Public the twin objectives of stabilizing farm prices
Distribution Scheme (PDS), which was criticized for and ensuring consumers’ easy access to
widespread corruption. In Chhattisgarh state nearly food. The policy goal should be to acquire
50 per cent of the subsidized rice did not reach poor food grains when there is a surplus and
people. One reason for this was that private businessmen release it when there is a shortage.
owned the PDS shops and had little incentive to keep them Maintaining a minimum buffer stock at all
open for long hours. The businessmen were not accountable times is unnecessary and imports and/or
to the villagers and there was no way to control them. exports of food grain should be harmonized
with domestic procurement to avoid excess
In 2003, the newly elected state government decided stock build up. Further, the disbursement
to tackle the problem. Local community groups such of procured grains should be in small
as co-operatives, gram panchayats and women’s self-help quantities, to avoid price slumps in the retail
groups took over the running of the PDS shops. market. The management of procurement,
Previously, PDS shop owners cheated and sold the grain stocking and distribution of food grains
and rice to millers who sold it back to the government at should be done by a central body with
market rates. This was stopped. adequate information about private traders’
behavior, even though procurement and
Bogus identity cards that allowed people to claim the disbursement operations are decentralized.
grain were in circulation, so fresh cards were issued and
the security net was widened so that more families were Widen availability of subsidized food
p
allowed to claim. Subsidized food grain should be available
through a system of ration coupons granted
The Civil Supplies Corporation took charge of transporting
to the targeted households. Recipients
the subsidized grains and was held accountable. A web-based
should be able to use coupons to buy
application allowed real-time tracking of the amount procured,
food from any store, thereby eliminating
disbursed and transported. People received rations in the
any ‘intermediary’ ration shop owners.
presence of government and vigilance officials and locally
elected representatives. Research individual policies
p
Chhattisgarh is considered a model for successful intervention. Finally, to fill the information requirement
of a scheme of this nature, more research
should be undertaken at individual policy
level to complement the available studies
conducted at a highly aggregate level.
Briefing Paper Number 10 Agricultural pricing and public procurement policies in South Asia 7
