Burdened with 65 million
tonnes of foodgrain stock and expecting large arrivals at procurement
centres when the new harvest comes in, the government has cut the issue
price of foodgrains for the above-the-poverty line (APL) population by
30 per cent. This move, it is hoped, would reduce stocks substantially,
helping the government find godown space to accommodate newly procured
grain. It is also expected to reduce the budgetary burden resulting from
the additional subsidy bill incurred on carrying stocks far in excess of
the estimated buffer required for food security (24.3 million tonnes on
July 1).
The unprecedented level of
stock with the government has its roots in the decision to substantially
raise the issue prices of food and “target” food subsidies at the ‘really
poor' or those below the nutritionally defined poverty line (BPL). While
the notion that targeting, or the provision of subsidies only to those who
are assessed as truly needy, was ingrained in the marketist view
associated with liberalisation, it gained strength from the obsession with
reducing the fiscal deficit characteristic of IMF-style financial reform.
As a result, the budget for 2000-2001 chose to link the issue price of
food distributed through the public distribution to the (non-needy) APL
population with the economic cost of food procured and distributed by the
FCI. In keeping with that decision, the APL price of wheat was increased
from Rs. 682 a quintal to Rs. 900 a quintal (or by 32 per cent), and that
of rice from Rs. 905 to Rs. 1180 (30 per cent).
But that was not all. Based
on the notion that even subsidies provided to the below-the-poverty line
population should be contained, the BPL price was also linked to the
economic cost and fixed at 50 per cent of the same. This meant that BPL
prices which were prevailing at 37-38 per cent of the APL price prior to
Budget 2000, were now set at 50 per cent of APL prices, which themselves
were being substantially hiked. The presumption was that the subsidy bill
would be substantially contained as a result of these measures.
The folly involved in that
presumption was revealed rather quickly. In the wake of the issue price
increases, offtake from the public distribution system fell dramatically.
On the other hand, with foodgrain output at respectable levels, trader
expectations that open market prices would prevail above the floor set by
the procurement price were not realised. In areas where the public
distribution system could be easily accessed, the promise of better
quality grain alone proved inadequate to attract the APL consumer away
from the fair price shops. Hence, market prices had to rule below the open
market price in many centres. This in essence meant that many, if not
most, APL consumers forsook the distribution system.
At the other end of the
spectrum, was the BPL segment, which is known to be an extremely small
proportion of even the population that can easily access the PDS. There
were some at least among this limited set who would have been priced out
of food consumption because of the higher prices that had to be paid for
food. That this adverse response to the price increase had indeed occurred
is partly corroborated by the fact that when the government chose to
increase the quota of foodgrain that could be accessed by BPL consumers
from the fair price shops, there was little change in the volume of BPL
offtake. The net effect was a substantial fall in overall offtake of food
from the PDS.
India's publicly organised
food distribution system, we must recall, combines a policy of procurement
of food at a cost-plus minimum support price, with a policy of
distribution at pre-determined prices through an extremely unevenly
developed and as yet limited public distribution system. While efforts
were on at tinkering with the prices and quanta distributed through the PDS, there was little change on the procurement front. The strong farmer's
lobby, represented in the ruling BJP-led coalition, not only ensured that
procurement remained in place, but also that such procurement was
undertaken at prices that were often higher than the minimum support
prices recommended by the Commission for Agricultural Costs and Prices.
Combined with the series of good monsoon during the 1990s, which helped
keep marketable surpluses of food at relatively high levels, this ensured
that the procurement effort proved extremely successful.
High and even rising
procurement when combined with diminishing offtake implied rising
foodstocks. And with the cost of holding a tonne of stocks estimated at Rs.
2,300 a year, it was to be expected that the subsidy needed to fund the
FCI's operations would rise. The food subsidy for 2000-2001, which had
been budgeted at Rs. 8210 crore turned out to be Rs. 12125 crore or close
to 50 per cent higher.
The government's problems
did not end there. Over time the principal problem has turned out to be
the stock itself, which has completely occupied the available storage
space and necessitated storage of a kind that has rendered some of it
unfit for consumption. It is not that the government has not made attempts
to get rid of its stocks. It made available to traders specified
quantities for exports at prices equal to that at which grain was being
provided to the BPL population. This decision, which in distributional
terms was indefensible, was adopted because the prevailing international
price was well below the economic cost of the FCI. But even this move that
violated India's WTO commitments, including the commitment not to offer
subsidies on export, proved ineffective. Foreign demand for Indian grain
remained low and sluggish and India found that some consignments of even
the limited volume of food sent abroad were being returned because they
did not meet quality standards. To keep grain moving out of its godowns
the government attempted to increase the quota available to BPL families,
but there were not many takers at the prevailing BPL prices. Finally the
government sought to slow down or even stop procurement in certain
centres, only to earn the wrath of the farming community.
