Mostly Economics

I read this interesting article in Business Line by Subramani Ra Mancombu.

The article informs us about how farmers could use put options to get minimum prices. Instead of asking for Minimum Support Prices, they should ask the governemnt to pay option premiums. The article also discusses that NCDEX has been running pilot projects with farmer producer organisations (FPOs) on put options.

Arun Raste, MD of NCDEX in a 2022 article dicusses about farmers using put options:

Realising constraints of farmers, the government promoted Farmer Producer Organizations (FPOs) that can integrate farmers into groups to bring know-how and scale to access input services as also markets. FPOs have been successfully using futures contract to hedge price risk.

Since 2016, over 400 FPOs, representing over 10 lakh farmers used futures contracts to hedge price risk in 18 commodities. However, futures contracts require upfront margins and daily mark-to-market (MTM) margin maintenance. Moreover, when FPOs (sell) hedge price risk through futures contract, their sell-price gets capped. Hence, they miss the gains in case the price moves up.

Being a progressive marketregulator, Sebi has allowed stock exchanges to launch ‘options in goods’ in the derivatives that provide a settlement mechanism based on the spot price of the underlying commodity and open positions convert into physical delivery at expiry.

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The Put options will likely cost much less to the government as compared to MSP. From the government’s perspective, other major benefit of the Put options intervention is that price risk is transferred from the FPOs to the market participants who are willing to assume the risk for a premium. The government will save further on the cost of procurement, carry cost, wastages and investment in warehouse and related infrastructure.

Put options for FPOs can serve as a tool for the government to explore how marketbased instruments can be adopted at national level to make farmers Atmanirbhar. It would be ideal for the government to earnestly begin use of Put options for oilseed and pulses.

NCDEX also has interesting reports/papers on importance of commodity derivatives for Indian agriculture.

Aditya Balasubramanian in this article in TheIndiaForum discuss how famine led to rise of communism in Kerala:

In the midst of the Second World War, after Burma fell to Japan in 1942, the princely state of Travancore in south India lost access to its key source of rice. In comparison to the neighbouring state of Cochin, Travancore acted belatedly and without adequate urgency to secure food from other areas. 

The consequences of this shortage and its subsequent mismanagement were profound. They contributed to an estimated 90,000 deaths and the loss of legitimacy of an already unstable and unpopular regime. 

This event, contemporaneous with the more ruinous Bengal Famine, took place in one of India’s richest princely states, often seen as a model of governance. It has been largely forgotten. Yet, the food scarcity of the period became a rallying point and material condition that the communists were able to use both to legitimise their cause and win converts. It enabled them to launch a major uprising and helped lay the foundations for their enduring presence in Kerala. 

Kashyap Gupta, Sunil Kumar and Sarthak Gulati in this RBI Bulletin article:

This study aims at investigating empirically the significance of the South-west monsoon (SWM) for agricultural production especially during the kharif season.

Highlights:

• • While the impact of SWM rainfall on agricultural production is found to be statistically significant, it has moderated over time, suggesting an increased resilience of agriculture to monsoon shocks.
  • Irrigation mitigates the adverse consequences of monsoon deficiency, suggesting the need for enhanced public spending on irrigation.

Saurabh Ghosh and Kaustubh in the RBI Bulletin (June-23 ) article:

This study aims at investigating the impact of weather events like El Niño, La Niña and the Indian Ocean Dipole (IOD) on rainfall, and, consequently on India’s growth and inflation dynamics.

• • Regardless of El Niño Southern Oscillation (ENSO), positive IOD years could have higher average rainfall. In general, El Niño years have lower growth in agriculture, while La Niña years have better growth in agriculture.
  • Food inflation variations correspond more with IOD than ENSO. Negative IOD years exhibited higher median food inflation than neutral or positive IOD years, while contrary to expectations, median food inflation was lower in El Niño years except in 2009 (drought year). Therefore, El Niño may not always result in higher food inflation.
  • Empirical findings indicate that the relationship between rainfall and inflation is non-linear, as the latter also depends on agricultural growth and international commodity prices besides rainfall.

Rishabh Kumar, Jobin Sebastian and Arun Vishnu Kumar in RBI’s May-22 Bulletin analyse irrigation in 19 States:

In the backdrop of recurrent episodes of drought and declining ground water table, ensuring irrigation efficiency is of paramount importance for sustainable agriculture. This article analyses the trends in the area-weighted cost and efficiency of irrigation across 19 agriculturally important Indian states using the Comprehensive Cost of Cultivation data published by the Ministry of Agriculture and Farmers’ Welfare, Government of India for the period from 2002-03 to 2017-18.

Highlights:

• • The area-weighted cost of irrigation declined during the study period perhaps reflecting the impact of increased access to subsidised power in most of the states. However, the costs are still high in some states.
  • The estimated technical efficiency of irrigation suggests that majority of the states lie far from the efficiency frontier and have also recorded declining trends over the study period.
  • The inefficiency appears to be driven by the energy consumption in the farm sector and ground water accessibility.
  • The findings call for policy focus on energy and water efficient irrigation technologies, particularly in states where irrigation efficiency is declining.

Ashok Gulati, Ritika Juneja and  Ranjana Roy of ICRIER in this IPPR paper analyse Indian agriculture over 75 years and way forward:

Rudrani Bhattacharya and Sabarni Chowdhury in this NIPFP paper:

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Ashok Gulati, Ranjana Roy and Shweta Saini have written a book on Indian Agriculture which one can download for free.  

The authors summarise the book findin

In a recent publication from Springer Nature, Revitalising Indian Agriculture and Boosting Farmer Incomes, which we have co-edited with Ranjana Roy, strategies for six Indian states — Punjab, Madhya Pradesh, Gujarat, Uttar Pradesh, Bihar and Odisha —have been proposed. We studied each of these states to identify factors that contributed to their growth and issues which constrained it. In addition to suggesting customised solutions, we also identify best-practices for replication in other Indian states.

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As a part of the roadmap, the book makes a case for states to move beyond production-centric approach to a value-chain approach with FPOs at its centre. It highlights importance and requirement of growing public investments in basic infrastructure, like roads, markets, power supplies, and agri-R&D. And finally, in the longer run, rationalising subsidies (both input and output) via direct income transfer is suggested, as that will not only empower farmer but will also give them right signals for efficient use of these resources (fertilisers, power, water). This will help put agriculture on a higher growth trajectory, augment farmers’ incomes, and promote sustainable development of agriculture.

If the Narendra Modi government follows this path of investing in infrastructure, ensuring a more diversified agriculture and linking small-holder FPOs with markets, it will pay rich dividends not only to the farming community but also the entire economy.