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Thu 29 Dec 2011 04:59 PM

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Farm anger adds to India's economic worries

Price, rather than trade policies are the unique spur to recent protests in Asia's third-largest economy

Farm anger adds to India's economic worries
An Indian farmer works on a sunflower field in Bangalore
Farm anger adds to India's economic worries

Usually around this time of the year, Jalgaon city in western India is abuzz with trucks ferrying mountains of fluffy white cotton to its markets.

But this year, farmers have been blocking roads with burning tyres and refusing to sell their produce in a bid to force the government to prop up crop prices which they say barely cover costs.

"Look at input costs. You are raising the price of fertilisers, electricity, seeds and not raising the price of cotton," farmer Yuvraj Vaman Patil, who has been holding on to most of his 1.9 tonne harvest, said at a recent rally.

Patil is not alone.

In recent weeks, thousands in farm belts from the state of Maharashtra in the west to Andhra Pradesh in the south have been out on the streets, demanding the government hike support prices of farm commodities to match rising costs.

Price is the unique spur to these protests in Asia's third-largest economy, a change from opposition largely focused on global trade policies and driven by local leaders to tap the weighty farm vote.

Farmers in the cotton-growing district of Jalgaon, for example, want the government to pay 6,000 rupees ($112.8) for 100 kg of cotton, nearly double the support price of 3,300 rupees.

"Support prices do not reflect the rise in production costs," said Raju Shetty, a farmers' leader and member of parliament.

"We are demanding a rise in support prices of almost all commodities considering the higher cost of fertiliser, electricity and labour wages," says Shetty, who last month led a cane farmers' protest in Maharashtra.

With about half of India's 1.2 billion people making a living from farming-related activities, the farmers' protests are piling pressure on the economy which is already struggling with high inflation and slowing growth.

With farmers clamping down on deliveries, prices of commodities such as sugarcane, cotton and onions have jumped and traders are feeling the squeeze.

Ramesh Patil, a trader in Jalgaon, had committed to sell cotton to a Mumbai-based exporter in the first week of December, expecting peak crop arrivals at local markets in November.

But Patil was forced to trek out to local villages to deal directly with sellers -- who asked a higher price.

"I didn't have any choice but to pay farmers high prices and buy cotton. I could see prices in the world market were falling, exports prices were falling, but since I had this commitment I had to buy at the higher price. I can't default," Patil said.

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Cotton arrivals at markets in Maharashtra from the beginning of the cotton year on Oct. 1 until Dec. 25 stood at 1.4 million bales of 170 kg each, nearly half of the 2.77 million bales during the same period a year ago.

New Delhi is also feeling the heat as higher prices secured by sugar cane farmers in Maharashtra and Uttar Pradesh have prompted millers to call for an increase in exports.

Exports will trim local sugar supplies and harden prices, putting further pressure on food inflation.

In the top sugar-producing state of Maharashtra, millers finally agreed to pay higher prices after farmers refused to sell produce at lower levels.

But the millers are now calling on the government to allow more sugar exports over and above the one million tonnes agreed in November to ensure they can offset that outlay with higher prices in the world market.

India's second-biggest sugar producing state, Uttar Pradesh, raised the price sugar mills must pay for the new season crop by as much as 19 percent this year to 235-250 rupees per 100 kg.

That has hurt loss-making sugar companies like Balrampur Chini Mills Ltd, Simbhaoli Sugars Ltd and Shree Renuka Sugars, whose share prices have fallen 41 to 72 percent since the start of 2011.

"Millers can't pay farmers a higher price by just selling sugar in the local market," said Kamal Jain, managing director of Kamal Jain Trading Services, a sugar brokerage.

"The government needs to allow exports as in the local market prices are low."

Cash-strapped state and central governments can't always afford to jack up support prices as New Delhi is already saddled with a big fiscal deficit and higher support prices will only push up the food subsidy bill.

Food subsidies in 2011/12 are likely to touch 800 billion rupees to 1 trillion rupees ($15-$18.8 billion), much higher than 605.7 billion estimated in the budget, Finance Minister Pranab Mukherjee informed lawmakers this month.

India increased the purchase price for common rice by eight percent and decided it will pay nearly 10 percent more to local farmers for buying wheat in 2012 over this year.

"Pressure from the farmers' side is very high ... Now procurement prices of wheat, rice are needed to rise almost every year by a substantial amount," said an official at Food Corporation of India, the government procurement agency.

"This will add to the food subsidy."

The government's plans to expand a multi-billion dollar food subsidy programme may make it tougher to meet its target to cut the fiscal deficit to 4.6 percent of GDP in the fiscal year that ends in March.

The Food Security Bill, introduced in parliament this month and expected to win easy approval, would guarantee cut-price grains to 63.5 percent of the population, adding as much as $7.5 billion to New Delhi's subsidy burden.

Analysts and traders say raising support prices will also make it difficult to arrest food inflation.

"Government buys from farmers paying support price. If private players want to buy, obviously they need to pay higher than the support price," said Vedika Narvekar, senior analyst with Angel Commodities Broking.

Analysts like Tarun Surana of Sunidhi Securities believe freeing up prices of nitrogenous fertiliser urea is key to cutting the subsidy bill, but that is unlikely as the government cannot afford to alienate farmers ahead of state elections.

"The government can't take any bold steps due to state elections in five states, including Uttar Pradesh and Punjab, which are agrarian states. They use a lot of urea. These states are too big to lose," Surana said.

Mukherjee said this month the fertiliser subsidy bill for 2011/12 will hit 900 billion rupees, more than double the budget estimate, despite decontrolling prices of a few fertilisers.

Protesters say government policies like decontrol of phosphatic and potash fertilisers to trim its subsidy bill led to an almost 100 percent rise in their prices in a year.

Avinash Lotan Patil, a 43-year-old cotton farmer from Jalgaon, puts it simply.

"If the government can raise electricity and fertiliser prices, why can't they raise cotton prices?" he asks.