India now faces its own version of Soviet Union’s scissors crisis

Mint newspaper and its website has done a makeover of sorts. Do take a look.

Anyways as long as columns from Niranjan of Cafe Economics continue in the paper, one is sure substance will continue as well.

In his recent piece, Niranjan compares the recent agri crisis to the one in Soviet Union 100 years ago:

Many who are interested in economic history may perhaps see the parallel between what is happening in India right now with what happened in a very different country around 100 years ago. This was the Soviet Union soon after the civil war that the communists eventually won. Political stability as well as the withdrawal of draconian controls over Russian agriculture led to a huge rise in food production. The weather also cooperated. Russia saw bumper harvests.

Food prices fell. The prices of industrial goods continued to rise. A graph of these two price trends resembled the two blades of a pair of scissors. Soviet commissars began to call it the scissors crisis. Farmers who were not getting enough for their output did not have money to buy what the factories were producing. Some farmers chose not to sell the crop at all. Soviet planners—in what Friedrich Hayek later described as a fatal conceit—tried to deal with this internal terms of trade problem with price controls on industrial goods.

The rest of the historical narrative is not important right now. What is important is the fact that India could now be facing its own variant of the scissors crisis—core inflation and food inflation are moving in different directions. Managing the relative price of food in terms of industrial goods will be one of the biggest policy challenges for the new government that will take charge of the country later this year.

One important response to the Indian scissors crisis will be to remove controls on Indian farmers—be it their ability to sell directly to consumers or the freedom to export. Modern rural supply chains could also help undermine the stranglehold of middlemen. Forward markets will reduce at least some of the price risk that farmers face. Data from recent years shows that Indian farmers facing high levels of uncertainty take cropping decisions based on past price trends rather than expectations of future prices, a pattern very similar to the cobweb model taught in introductory microeconomics courses.

However, the most potent solution to rural distress continues to be outside of agriculture. India needs to create jobs in productive enterprises so as to create opportunities for millions who seek to escape farming, where they are condemned to deal with the vagaries of the weather as well as wild fluctuations in prices.



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