What is Agitating the Farmers?

Farmer agitation in Madhya Pradesh (MP) and Maharashtra has been in the news recently.[i] [ii] Tragically, there have been deaths in the current agitation[iii] and large number of suicides by farmers (especially in MP) in the months leading up to the agitation and since.[iv] Ironically, these suicides have taken place even as MP boasted of a 20% rate of growth in agriculture in recent years.[v] The situation is no better in Maharashtra where also a large number of farmer suicides have taken place.[vi]

The government of Maharashtra has announced loan waivers to farmers in order to end the agitation which had rocked the state.[vii] However, it has been pointed out that this cannot be a solution to the problem in other states since only Maharashtra has the fiscal capacity to bear the burden of loan waivers.[viii] In Madhya Pradesh there has been no loan waiver, reducing the Chief Minister to symbolic gestures such as fasting for peace.[ix] The Central government has distanced itself from loan waivers, with the Finance Minister leaving the states to fend for themselves.[x]

Causes for the Farmer Agitation

Agrarian crisis in India is a deep and complex problem and it is impossible to tackle it in a blogpost. Numerous studies on the issue are available and I draw the attention of the reader to this review of some of these books.[xi] See also State of Indian Agriculture 2015-16.[xii]

In this note, I want to examine one issue that has cropped in numerous discussions, namely, the steep decline in the prices of agricultural products. This has been implicated especially in the context of prices of pulses.[xiii] As far back as September 2016, a panel headed by the Chief Economic Advisor Arvind Subramanian had recommended higher Minimum Support Prices (MSP) for pulses. Specifically, it was recommended that the MSP of gram (Please see glossary at the end of this note for English names of pulses) should be raised to Rs 4,000 a quintal and Rs 6,000 a quintal for both urad and tur.[xiv] The committee also recommended subsidies to farmers for growing pulses and called for the elimination of ad hoc measures like export ban on pulses. 

However, the government disregarded the recommendations of the Subramanian committee and did not put in place an appropriate MSP mechanism. As it turned out, 2016-17 witnessed a bumper crop in pulses. It is well-known that agriculture production follows what is known as the cobweb model: high price for an agricultural product in a year is signal to farmers that demand is not being met and, hence, the next year they increase the supply of the product. Further, with adaptive expectations, farmers estimate prices in the current time period to be related to prices they estimated in the previous time period adjusted for any errors that they might have made in their predictions in the previous time period.[xv] The behavior of pulses farmers in MP followed the tenets of the cobweb model perfectly: “Higher prices of crops like pulses and wheat in the previous years led to higher plantings. Farmers planted a record area under pulses in 2016-17 responding to price signals from the previous year…”.[xvi] The consequence of this was a 37% increase in pulses production in 2016-17 leading to market prices dipping below the MSP.[xvii] It is important to note that the collapse of prices has not been confined to pulses but has spread to other products such as tomatoes, potatoes and onions.[xviii] In addition, it has been suggested that the shock of demonetisation in November 2016 also had a role to play.[xix] With 86% of cash being sucked out of the economy and remonetisation proceeding at glacial pace, there was a collapse of demand. Two reasons could be adduced for this fall in demand: one, demonetisation led to a slowdown of the informal economy with many losing their source of livelihood and hence without the ability to buy products in the market; two, much of the rural economy is cash economy and, with the absence of cash, buyers were unable to buy their requirements as per their usual demand.

What is the Evidence?

I now try to look at what the data tell us about the prices of pulses and some other products. The data that I use – monthly Wholesale Price Index (WPI) of a variety of products – is sourced from the Office of the Economic Advisor, Ministry of Commerce and Industry.[xx] The monthly data that is used ranges from April 2012 till April 2017. Usually, monthly data have a lot of seasonal variations which need to be eliminated so that meaningful changes in the data can be isolated. Seasonal variations recur year after year. For example, prices of agricultural products may be low immediately after harvesting and this pattern will repeat itself year after year. If we wish to find out if any other factors are affecting prices, we should remove the effect of seasonality on prices i.e. we should deseasonalise the data. This will allow us to identify and estimate the effect of other factors on prices. I have deseasonlised the data using the X12 method.[xxi] This method is used by many countries - USA, UK, countries in Europe - to deseasonalise quarterly or monthly data. As a final step, using the deseasonalised data, I have computed the annualized monthly rate of growth of prices of products that are included in this analysis. To compute such a rate of growth (or rate of inflation), one uses the percentage increase in the WPI value in, say, April 2017 over the WPI value in April 2016. I have done this for all the agricultural products analysed here.

Consider first the rate of inflation for all pulses (Fig. 1):

 Figure 1 and, indeed all other figures in this section, focus only on the months from October to April for the years 2013-14, 2014-15, 2015-16 and 2016-17. There are two reasons for these months only: one, this makes the diagrams less cluttered but, more importantly, I wanted to especially cover the time period that includes demonetisation and the months leading up to the farmer agitation.

In Figure 1, the year 2015-16 shows a very high rate of inflation of prices of pulses which moderated substantially from October to January of 2016-17. In fact, the rate turns negative from February to April 2017, which are the months leading up to the agitation of May 2017. The moderation of the rate of inflation of pulses  over October to January 2016-17 is not surprising given the high level of prices that prevailed in the corresponding months in the previous year. What is surprising, however, is the negative rate of inflation in the subsequent months.

Among all the pulses depicted in Figure 1, gram and rajma are the only pulses that do not show any collapse of prices in 2016-17. Figure 2 shows the situation for gram. We do not show the rate of inflation for rajma, though it looks similar to Figure 2.

 However, the next few figures show a dramatic collapse of prices of other pulses.

Prices of arhar have fallen dramatically in 2016-17. It is one thing for the rate of inflation to be moderated on the back of high price rise the previous year but it is shocking to see the massive negative rate of inflation in 2016-17. Is it only the base effect of 2015-16 at work or is there something else that has driven prices down?

The story of arhar is repeated for moong (Fig. 4), masur (Fig. 5) and urad (Fig.6).

There has also been mention of the collapse of prices of vegetables in some of the analyses that are available.[xxii] Figures 7, 8 and 9 show the rates of inflation for onions, potatoes and tomatoes.

All the three vegetables show negative rates of inflation as in the case of some of the pulses.

Additional Effect of Demonetisation

The various figures presented in the previous section show substantial negative rates of inflation for some pulses and the three vegetables, onion, potatoes and tomatoes. Was that negative rate of inflation due to the base effect, i.e. exceptionally high price rise, in 2015-16 or was there an additional effect of demonetisation? It is very likely demonetisation reduced demand for these agricultural products which, combined with high levels of production, led to the huge negative rate of inflation in the prices of pulses and vegetables.

I try to examine this effect of demonetisation by first proposing a model which relates price inflation in a particular month to price inflation in the same month, one year (i.e. 12 months) earlier. That is,

INFLATION(%)_t = f(INFLATION(%)_t-12)                                                                      …(1)

I estimate the simple model depicted in equation (1) (with a slight modification discussed below) for price inflation data for gram, arhar, moong, masur, urad, chawli, rajma, onions, potatoes and tomatoes for the years 2013-14 to 2016-17. The data used to estimate model (1) above looks like the scatter diagram in Figure 10.

Figure 10 shows that current rate of inflation (i.e. INFLATION_t), measured on the horizontal axis, is high if past rate of inflation (i.e. INFLATION_t-12), measured on the vertical axis, was low and vice versa. The general shape of the scatter diagram shows that values are high towards the left of the diagram and low towards the right. This is depicted in Figure 10 by a free-hand black line drawn through the scatter diagram. This line shows the directionality of the scatter of points and has a negative slope. A negative slope is exactly what would be expected: if the rate of inflation of, say, gram was high last year, then famers see that as a signal that supply was unable to keep pace with demand; hence, for the current year, they seek to expand the area for the cultivation of gram which results in much greater production leading to softening of prices in the current year (i.e. a lower rate of inflation) or even an actual fall in prices (i.e. negative rate of inflation). This behavior of farmers has reference to the cobweb model discussed earlier in this note.

The task before me was to use the data to estimate the black line in Figure 10. However, a modification is necessary in order to also study the effect of demonetisation. This is done by employing a dummy variable (Note: a dummy variable takes on only two values: 1 if some condition is satisfied; 0, if the condition is not satisfied) to introduce demonetisation into model (1) shown above. This dummy variable takes a value of zero for every month before November 2016 (i.e. the pre-demonetisation time period) and value of 1 from November 2016 till April 2017 to identify the post-demonetisation time period. In Figure 10, this effect of demonetisation will be seen as leftward movement of the black line. This displacement of the black line is shown by the red line.

The estimated model that is used in the analysis is available in the appendix for those who are interested. In Figure 11, I depict the estimated black and red lines of Figure 10.

  

 It may be noted that the points that lie along the two straight lines in Figure 11 are not the same as the free-hand drawn straight lines in Figure 10. The points along the two lines in Figure 11 emerge from estimating, on the basis of data,  the black and red lines of Figure 10. The upper sequence of points in Figure 11 corresponds to the black line in Figure 10 while the lower sequence of points corresponds to the red line in Figure 10. To illustrate the effect of demonetization, consider the following: a 50% rate of inflation twelve months ago (measured on the vertical axis), and shown by the horizontal black line in Figure 11, would have led to a value of -20% for the current year’s rate of inflation i.e. where the vertical black line meets the horizontal axis However, during the period of demonetisation this would have led to a further fall i.e. -40%, as shown by the red lines. This additional fall of 20 percentage points is the effect of demonetisation over and above the fall in prices due to much higher production in the current year.

Summing up

Instability in agricultural prices is a well-studied phenomenon and, hence, it is not surprising that farmers in Madhya Pradesh and other states have faced problems with fluctuating prices. It was precisely for this reason that the Chief Economic Advisor had cautioned the government in September 2016 that the MSP  for pulses would have to be raised. Of course, at that time, CEA would not have anticipated the nasty shock of demonetisation that awaited the economy just a couple of month down the line. That shock has made worse the usual instability in agricultural prices that farmers face. What does this portend for this year? If the models of agricultural prices have validity, it is very likely that, given the experience of November 2016 to April 2017, farmers might move away from production of pulses which would reduce supply substantially in the months ahead. This is likely to create shortages and push up prices substantially. The government would need to stand ready to meet this eventuality.

Technical Appendix

We report below the estimated fixed effects model that underlies Figure 11. Numbers in brackets below the coefficients are p-values.

Number of observations: 370

R-squared (within) = 0.3646

F-stat = 102.71 (0.00)

where,

INFLATION(%)_it = Rate of inflation of agricultural product i in month t

INFLATION(%)_i,t-12 = Rate of inflation of agricultural product i in month t-12

DEMON = Dummy variable for demonetisation defined as:

                  = 1 for months November 2016 onwards

                  = 0 for months prior to November 2016  

It may be noted that the above equation was also estimated as random effects model which yielded coefficient values very similar to those reported above. The Hausman test indicated that either model could be used. See below:

Hausman test for Fixed Effects versus Random Effects model: 1.56 (0.21)

Glossary

Arhar: also called tur or toovar, refers to Pigeon Pea or Red Gram

Chawli: black-eyed beans

Gram: Generally refers to chana dal which is Split Bengal gram

Masur: Red lentils

Moong: Green gram

Rajma: Kidney beans

Urad: Black gram (whole) or white gram (when de-husked)

Source: http://www.shreyasbharadwaj.com/my-life/indian-names-for-food-products

ENDNOTES:

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[i] http://www.hindustantimes.com/india-news/why-farmers-in-madhya-pradesh-are-on-warpath-against-shivraj-singh-chouhan-govt/story-7bCbncNPio1fPbxGTZ7n4M.html

[ii] http://www.hindustantimes.com/mumbai-news/farmers-agitation-across-maharashtra-and-the-politics-of-it/story-rL6SZDzZoI1bDtyuT7o0VP.html

[iii] http://indianexpress.com/article/india/why-farmers-in-madhya-pradesh-and-maharashtra-are-protesting-4691485/

[iv] http://www.hindustantimes.com/bhopal/three-farmers-ended-life-every-day-in-mp-ncrb/story-wyP4FZHJHqMpbXMeZlInHM.html

[v] http://timesofindia.indiatimes.com/city/bhopal/madhya-pradesh-11000-farmer-suicides-reported-in-9-years/articleshow/59109031.cms

[vi] http://timesofindia.indiatimes.com/city/mumbai/maharashtra-farmer-suicides-rise-15-per-cent-to-235-in-march/articleshow/58251835.cms

[vii] http://www.livemint.com/Politics/1bfn7TaLTIVbvKOqdkhCzM/Maharashtra-govt-announces-farm-loan-waiver.html

[viii] http://www.livemint.com/Politics/3xGYAPQjK0RQKfBGrRuOjJ/Only-Maharashtra-has-fiscal-capacity-to-pay-for-farm-loan-wa.html

[ix] http://www.hindustantimes.com/india-news/mp-farmers-agitation-cm-shivraj-chouhan-to-sit-on-indefinite-fast-till-peace-is-restored/story-0C1HwEV1iT6lcL1LsjIbEO.html

[x] http://indianexpress.com/article/business/economy/states-keen-on-farm-loan-waiver-must-generate-funds-from-own-resources-fm-arun-jaitley-4699965/

[xi] http://s3.amazonaws.com/academia.edu.documents/36854521/Agrarian_Crisis_and_Agrarian_Questions_in_India.pdf?AWSAccessKeyId=AKIAIWOWYYGZ2Y53UL3A&Expires=1497774668&Signature=IR43LNtXOLsXKlPKSXCQ2JOwBiU%3D&response-content-disposition=inline%3B%20filename%3DAgrarian_Crisis_and_Agrarian_Questions_i.pdf

[xii] http://eands.dacnet.nic.in/PDF/State_of_Indian_Agriculture,2015-16.pdf

[xiii] http://economictimes.indiatimes.com/news/politics-and-nation/why-loan-waivers-wont-fix-indias-agriculture-woes/articleshow/59086914.cms

[xiv] http://economictimes.indiatimes.com/news/economy/policy/announce-higher-msp-for-pulses-speed-up-procurement-cea-panel/articleshow/54365763.cms

[xv] See Christophe Gouel (2012) Agricultural Price Instability: A Survey of Competing Explanations and Remedies, Journal of Economic Surveys, Vol. 26, No. 1, pp. 129–156

[xvi] http://www.livemint.com/Politics/2B9xur0n85S5Nl2HRnSzuM/The-story-behind-Indias-bumper-crop-year.html

[xvii] http://www.livemint.com/Politics/2B9xur0n85S5Nl2HRnSzuM/The-story-behind-Indias-bumper-crop-year.html

[xviii] http://indianexpress.com/article/opinion/columns/the-crops-of-wrath-demonetisation-4699598/

[xix] http://www.hindustantimes.com/india-news/mandsaur-agitation-how-demonetisation-brought-mp-farmers-onto-streets/story-fD9hc9HkXhHEmFPgZqXduK.html

[xx] http://eaindustry.nic.in/download_data_0405.asp

[xxi] https://www.ons.gov.uk/ons/guide-method/method-quality/general-methodology/time-series-analysis/guide-to-seasonal-adjustment.pdf

[xxii] http://timesofindia.indiatimes.com/business/india-business/price-fall-centre-to-procure-2-lt-onions-from-mp/articleshow/59201733.cms