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The Political Economy of Rice – Back to the Roots

February 27, 2019

By Riya Sinha

In South Asia, rice security is synonymous with food security. Particularly in Bangladesh, India, and Nepal (BIN), rice is a staple food, constituting approximately 50 percent of total cereal production and providing 30 percent of the total caloric requirements of the population. This requires that the market price of rice be kept low, and one way these countries have achieved this is by providing agricultural subsidies to farmers.

Over the years, the growth of these subsidies, particularly in India, has become a major point of contention, both at the WTO and domestically, where farm relief is often multilayered and inefficient. The debate has centered on the size of the subsidies: how much is enough? But this has raised another question: are subsidies really necessary at all, or are they, as some have argued, a political gimmick that distorts the farm economy and fails to help those most in need? A new study by the Indian research and consulting firm BRIEF and The Asia Foundation, The Political Economy of Rice Trade between Bangladesh, India, and Nepal, finds that the answer lies somewhere in the middle.

In the BIN economies, rice and its associated subsidies figure prominently in domestic policymaking, both for their economic importance and because they are a powerful political tool. Rice production and trade contributes roughly 6.2 percent of the BIN GDP. India is one of the largest exporters of rice to the world, exporting nearly 10 million metric tons every year. In 2018, 23 percent of this total went to Bangladesh and 7 percent to Nepal, due to their low self-sufficiency in domestic production. Milled rice is exported primarily through private enterprises, but some exports take the form of government-to-government food aid, like India’s rice aid to Nepal. BIN poverty rates are highly sensitive to food prices; it is India’s export of economical, non-basmati rice to Nepal and Bangladesh that has managed to contain prices and improve access to nutrition.

India has kept export prices low through government subsidies to farmers and exporters. Farmers receive two types of subsidies. The first is the input subsidy, which provides free or low-cost seeds and fertilizers, subsidized electricity, interest-free credit, and other inputs to farmers. The second is the food subsidy, embodied in the Public Distribution System for food grains, for which the government buys paddy (unmilled rice) from farmers at a Minimum Support Price (MSP). Between 2010 and 2015, the seed-disbursement subsidy grew 7.6 percent, from INR 693,400 to INR 746,100 per quintal (100 kilograms). In the same period, government-sponsored credit at below-market interest rates increased by 96 percent, while fertilizer subsidies increased by approximately 16 percent. In the 10 years from 2008 to 2018, the government’s MSP for paddy rose by 105 percent, from INR 850 to INR 1,750 per quintal. The MSP is important, because it creates awareness and sets a benchmark price for farmers. For exporters, the government provides export subsidies. For instance, in November 2018, the government provided a subsidy of 5 percent on the export of rice.

While these subsidies support India’s farmers in general, however, the rupees do not always trickle down equitably and transparently. The challenge here is twofold. First, in the paddy supply chain—from the farm, to the mill, to the storage center, and finally to the consumer—the agent or middleman plays a dominant role. A great majority of India’s rice growers are marginal and small farmers, with average holdings of just 0.39 hectares. These small farmers are heavily dependent on the input subsidies to produce a harvest with a marketable surplus. The informed farmer receives this subsidy from the government; but farmers who are not well informed about the subsidies often turn to middlemen for seeds, pesticides, and fertilizers, which they must then repay with a portion of their crop or in cash. A middleman typically works with a network of small farmers in a village, buys their crops at below-market prices, and then sells them at the government-run markets or directly to the millers. The main benefits, in such cases, are reaped by the middleman.

Second, for large farmers with access to greater resources, the subsidies have created perverse incentives, leading to their misuse. For instance, in Punjab, subsidies for electricity, water, and pesticides have led rice farmers to flood their fields and use excessive pesticides, affecting the quality of the crop. The rising MSP discourages crop rotation, because farmers want to plant the crop with the highest support price. The middlemen play a role here as well, offering farmers dubious advice about pesticide use and what to plant, uninformed by current best practices.

Doing away with subsides altogether, as some researchers have proposed, is not the best way to address farmers’ needs. Instead, a balance must be struck to correct the information deficit among small farmers and deliver subsidies that are appropriate for farms of different sizes. There are several ways to address the special challenges facing India’s farmers:

  • First, marginal and small farmers need better information about how agricultural subsidies and the MSP actually work in order to benefit from them as intended. The government, middlemen, and large exporters must adopt a proactive approach here.
  • Second, recognized techniques for the safe and efficient use of fertilizers, pesticides, and irrigation must become standard practices for small farmers across the country. A group of basmati rice exporters in Punjab has already launched an initiative to pursue this goal. This needs to be replicated nationwide.
  • Third, the domestic supply chain must be reformed to create a framework of accountability that is traceable and transparent. This is especially true at the procurement level, where small farmers must get more involved at important points in the supply chain such as crop auctions and marketing. It will require significant political will to make agricultural marketing, in particular, more transparent.
  • Fourth, substantial public and private investment in infrastructure such as cold storage and warehouses is needed, so that small farmers are not forced to sell their crops to middlemen because they lack storage facilities.

The farm is the root of the agricultural supply chain. Farmers must be compensated equitably for what they produce, so that they can build resources and escape their dependency on middlemen. Local stakeholders and government at every level must work together to ensure that farmers, the irreplaceable foundation of the agricultural economy, enjoy their fair share of the benefits, so that stakeholders throughout the agricultural chain can prosper.

Riya Sinha is a research associate at the Bureau of Research on Industry and Economic Fundamentals (BRIEF) and coauthor of The Political Economy of Rice Trade between Bangladesh, India, and Nepal. She can be reached at riya.sinha@briefindia.com. The views and opinions expressed here are those of the author, not those of The Asia Foundation.

Related locations: Bangladesh, India, Nepal
Related programs: Economic Opportunity

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