By Hema Senanayake –

Hema Senanayake

It has been reported that Finance Minister Ravi Karunanayake told the Sunday Times that President Maithripala Sirisena had appointed a six-member cabinet sub-committee, comprising, among others, Agriculture Minister Duminda Dissanayake and Rural Economic Affairs Minister P. Harrison, to streamline the purchasing of paddy. Still, by the time of writing this article, I could not find out who the other members of the said cabinet sub-committee and what the committee’s terms of references are. However, in this article, I intend to discuss a possible solution in streamlining paddy purchase. Therefore, the ideas I discuss here might be useful to the above mentioned six member cabinet sub-committee appointed by the President and to the farmers.

First, no matter whether it is right or wrong, now the government has declared a guaranteed price for the purchase of paddy. The guaranteed price is Rs.50 per Kilo of paddy which has less than 4% of moisture. In general paddy farmers understand the quality requirements stipulated by the government or by the private buyers. In this regard paddy farmers are reasonably good people.

When the government declared a guaranteed price, the government intends that paddy stock would be purchased at the guaranteed price by the paddy buyers. Unfortunately, from past experiences, the government knew that private paddy buyers sometimes purchase paddy at half rate of the guaranteed price. In fact this was the case. Then, as a possible solution, the government had directed the Paddy Marketing Board (PMB) to purchase paddy at the guaranteed price. Unfortunately, the monetary allocation provided to PMB was just sufficient to buy 5% of the paddy stock. What happens to the balance 95%? Would that stock be purchased at guaranteed price by private buyers? You know the answer to this question. It is common sense that buying 5% of the paddy stock at guaranteed price by PMB cannot resolve this issue. Therefore, the real solution must be a total solution which solution can only be possible with inclusive of private sector buyers. Even paddy farmers understand it.

Hence, understanding from their own past experiences farmers organizing into a formal body or union known as All Ceylon Farmers Federation has put forward a recommendation to the Government. They recommend that “the government should gazette the purchasing price of paddy.” Even though I do not agree with this proposition, in fact what the farmers demand is that it should be made illegal to purchase paddy below Rs. 50 a Kilo, if paddy meets the stipulated quality requirements. So, if the government had done it what should be the outcome? Why the government is not doing it? If the government does that, would it violate the principles of “social market economy?”

Let us begin from the principles of market economy. For theoretical and practical reasons, the production of any product is efficient under the demand-and-supply basis. Also, under such a system, the allocation of social resources in producing various goods and services is highly efficient. Under such a system wasteful products or quantities would not be produced. This means that the production system is efficient.

However, when the government declares a guaranteed price for paddy, it effectively removes the efficiency mechanism which exists under the demand-and-supply basis up to the point of purchase or sale of paddy. I am not saying that guaranteed price system is bad. But it could lead to many inefficiencies in this sector from the production to sale of paddy. For example, the area under cultivation, cultivation practices, productivity and varietal blend of cultivation which have been previously determined under the demand-and-supply mechanism is no longer valid under the existing flat rate guaranteed price system. Therefore, it might be required to put in place certain non-market based efficiency mechanisms, if Sri Lanka wants to have a highly productive paddy cultivation sector. This is very important. Yet, we are discussing here, as to how the paddy purchase system under the guaranteed price system is made efficient.

Any paddy purchase system under guaranteed price system must be an inclusive system of all stake holders such as PMB, large private buyers, small private buyers, co-operatives etc. The important point is that they should not compete for the purchase price because they must purchase the paddy at guaranteed price. But they must be made to compete for the volume. This is advantageous for the buyers of paddy because from the point of purchase of paddy to the retail sale of rice, the market mechanism exists and so prevail the efficiency mechanism. After the paddy is purchased, the buyers can add value in numerous ways up to the point of retail sale and such products can carry different price tags according to demand-and-supply basis. This will not happen, if monopoly or cartels exist in this business.

Usually, through administrative and regulatory process, the advanced capitalist economies remove the existence of monopoly or cartels in any area of business with a view to ensure having competition so that efficiency and the improvement of productivity would take place in that particular business or product sector. This same thing is necessary for our paddy and rice processing business. This cannot be achieved by gazzeting the guaranteed price as proposed by All Ceylon Farmers Federation. Therefore, we have to look another mechanism in which all paddy buyers compete to increase their volume of purchase. If that happens there would be efficiency in paddy purchasing system from which farmers would benefit immensely and the problem would be resolved effectively. Is there any such mechanism?

I think that there are such mechanisms. But, in this case I particularly favor for one such mechanism. In short, it stipulates that, “large volumes of paddy could be purchased only by permit.” It means that all large scale paddy buyers could purchase paddy only under a permit issued by an uncorrupted high-level government institution. Permits will not be renewed if any permit holder had purchased paddy below the guaranteed price. The number of permits to be issued will be determined by the government on the basis as to how much competition and efficiency are expected to maintain in this sector. Also, we can allow small scale paddy purchasers to operate without a permit but in this regard the government needs to define who the small-scale-buyer is.

The above mentioned system is an inclusive system of all paddy purchasers. It creates the required completion among purchasers and ensure that the guaranteed price be paid to farmers. The government does not need to direct PMB to spearhead the paddy purchases with the money provided by the Treasury. The PMB must be allowed to be part of the business. It must be a one competitor in the business. Accordingly I conclude that, “purchase of paddy by permit only” could be the best solution as at now. Once the principle is accepted, the rest of the implementation procedures are just details.

Still this arrangement is good only up to the point of self-sufficiency. If the government needs to ensure abundance in rice, an additional macroeconomic adjustment will be needed because the abundance is something which cannot be achieved under normal market mechanism. As far as I know, still Sri Lanka has not reached to the point of self-sufficiency in rice production. Hence, let us leave it there as at now.