The much applauded Asian success stories like Taiwan, Malaysia, Indonesia and China founded their growth performance on strong growth in their agricultural sectors. We might marvel at the miraculous transformation that China has brought about in the short spell of 28 years; but most of the poverty decline in China came about during the first six years of liberalisation (1979-85) when the manufacturing sector was yet to take off. The poverty decline was directly driven by the growth in the agricultural sector — the first sector to be liberalised in China. When farmers prosper, the whole rural economy prospers. The increased incomes create demand for local services, which, in turn, create jobs. Labourers, traders, repairmen, artisans, shopkeepers all benefit from a growth in farm incomes. Of course, it takes time for all this to work through the system. In the long run, there is no more effective policy to accelerate poverty decline than a boost to the agricultural sector.

Thus, allowing the foodgrain prices to rise seems to be a bad policy in the short run but a desirable policy in the long run. 

Is there a way to minimise the short-run effects? One could argue that our present public distribution system (PDS) could accomplish the task. The consumers below the poverty line are protected by a fixed price, while farmers can be offered the international price. Of course, this would mean that the government would have to bridge the difference from its own revenues. It is not something that the government would like to do but it does seem fairer that the burden of protecting the poor is borne by society as a whole rather than only by farmers as is the case during export bans.  Ideally, more flexible instruments should be used. If food prices go up suddenly, more flexible instruments will allow a quicker infusion of increased subsidy.  Short-run shocks will not deliver as mighty a blow to the poor as they might otherwise. If there is assurance that temporary shocks can be buffered, policy-makers will be free to think seriously of the long run. For that matter, they will then have no excuse for not tending to the long run. Poverty is a long-run problem and it is never going to disappear as long as we do not give up the habit of using the farmers to buffer every temporary shock. 

... contd.