Public Food Stocks : The Mess and the Wasted Opportunity

Aug 8th 2000

The paradox of poverty amidst plenty, which has been so characteristic of the Indian economy over the 1990s, seems especially marked with respect to the foodgrain sector at the moment. Last year had witnessed record foodgrain production, especially of wheat and rice. But, measures designed to reduce the budgeted food subsidy had led to substantial increases in the prices of foodgrain in the Public Distribution System (PDS) (chart 1a & 1b). This caused PDS offtake to fall (chart 2) and food stocks held by the public sector to grow (chart 3), at the cost of availability in the market. Also, as a result, foodgrain prices increased at double digit level for yet another year, despite the record production (chart 4).

Chart 1a >> Click to Enlarge

Chart 1b >> Click to Enlarge

Chart 2 >> Click to Enlarge

Chart 3 >> Click to Enlarge

Chart 4 >> Click to Enlarge

And, far from being reduced, food subsidies actually increased, precisely because higher administered prices led to much higher stocks, increasing the costs of holding these (chart 5). While the knock-on effect of higher PDS prices on market prices is well acknowledged, what is not equally understood is that under current circumstances this is also likely to increase, not decrease, the food subsidy. Such subsidy cuts are therefore totally counterproductive, hurting both consumers and the fisc, as had been pointed out in this column shortly after last year's PDS price hike (Macroscan, February, 9th 1999).

Chart 5 >> Click to Enlarge

However, such is the intellectual lethargy in North Block that, faced with a situation when food subsidies had increased when they had expected a reduction, the Finance Minister's advisors could offer no other solution than to increase PDS prices further, by linking these to the Food Corporation of India's economic cost of grain procured. Somehow, political antennae in government were also in sleep mode, so that this proposal got incorporated into Budget 2000-2001. At that point the NDA allies had called foul, but they could not go beyond their populist instincts and question the government on how a further hike in PDS prices this year would reduce the subsidy bill, given that these subsidies had actually increased following last year's price increases. Probably because of past humiliation on account of rollbacks, Finance Minister Yashwant Sinha also chose to make this an issue on which he stuck to his guns, to much kudos from the pink press, but of course with necessary political concessions elsewhere.
One of these concessions to allies was to increase the Minimum Support Price (MSP) for wheat from Rs 550 per quintal to Rs 580 per quintal, totally against the recommendation of the Commission for Agricultural Costs and Prices that there be no further increase in the MSP. This Commission, which has been overruled on the matter for three years in a row, appears now to have become totally irrelevant as far as wheat pricing is concerned. Indeed, again contrary to the Commission's repeated exhortation that MSPs be announced before sowing, the announcement this year was made only after the budget in February, by when the grain was near harvesting.
Thus, the populist announcement of an enhanced MSP did nothing towards encouraging farmers to produce more. But it did have two other effects. First, it encouraged larger diversion of harvest arrivals from private trade to government agencies, and, as a result, wheat procurement during April-June 2000-2001 reached a record, crossing 16 million tonnes (chart 6). Secondly, with the budget having linked PDS prices automatically to the economic cost, these increased with the higher MSP.

Chart 6 >> Click to Enlarge

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