This year’s Economic Survey highlighted that farmers should be allowed to benefit from higher international prices, with export bans being used only under exceptional circumstances.
The Chief Economic Advisor (CEA) advised the Centre to allow substitution effects to play out before responding to domestic supply concerns. He provided an example: if sugar prices rise, consumers could consume less of it or switch to jaggery, which might even be beneficial for their health. This comment appears in the context of recent bans on the export of rice, wheat, onions, and sugar, implemented to soften domestic prices. The CEA emphasised that it is easier for consumers to substitute or reduce consumption than for farmers to endure significant losses due to ad hoc export bans or large imports.
In August 2023, India imposed a 40 per cent export duty on onions, followed by a complete ban from December 2023 to March 2024. Farmers claimed these measures further strained their financial resources.
Experts estimate that the export ban could have led to ₹10,000-crore losses for farmers and traders. When demand is high, consumers can’t switch to substitutes.
Export bans on rice, sugar and wheat had similar impact on farmers and traders.
According to an OECD assessment, price stabilisation measures such as export ban, duties or permits on commodities led to an indirect tax on farmers of $169 billion in 2022.
Elevation strategies
An example of substitution effect in agriculture is farmers adopting to greater mechanisation when labour costs rise. Mechanisation also enhances efficiency and labour productivity.
However, another study concluded that the current level of farm mechanization in India is insufficient to offset rising labour costs. It suggests that greater efforts are needed to develop suitable farm machinery and improve its economic accessibility for farmers, possibly through institutional innovations like custom hiring centres.
The substitution of conventional urea with nano urea is also gaining attention. In the past two years, the use of conventional urea has decreased in 344 districts, while 74 districts have started using more nano urea.
Consumers are willing to switch to jaggery from sugar due to its health benefits. However, the market for jaggery is unorganised with no proper marketing structure. At this point, the government could consider providing subsidies for jaggery producers and measures for greater market access.
In the context of tobacco cultivation, the Framework Convention on Tobacco Control (FCTC) of the World Health Organization (WHO) is committed to facilitating a phased reduction in tobacco farming.
However, this effort faces challenges due to the lack of economically viable alternatives to tobacco crops. Some farmers express a willingness to transition away from tobacco cultivation but the absence of suitable replacement crops leads to their uncertainty. This highlights the importance of developing viable alternatives before discussing the banning of existing tobacco crops.
Sri Lanka in 2021 had abruptly banned agrochemicals, pushing farmers toward organic farming without adequate substitutes or planning. This led to a significant drop in crop yields, particularly rice and tea, triggering a severe food crisis, soaring prices, and economic instability, highlighting the dangers of poorly executed agricultural policy shifts.
To facilitate smoother substitution, proper market linkages are essential. Consumer awareness about substitute products must be increased, possibly through media influencers. Substitution can only be successful when the alternative is more efficient than the existing option. Without an efficient substitute product, consumers or farmers cannot be compelled to switch.
The writer is Assistant Professor, NITTE School of Management, Bengaluru