Food Policy: Lessons Half-Learnt

Jul 14th 2001, C.P. Chandrasekhar

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.

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