Confronted with this situation, the government has over the last two months taken certain desperate decisions designed to increase the offtake from its stocks. These started with an announcement in June that 5 million tonnes of wheat would be auctioned at a reserve price below the Central Issue Price and, when this failed to evoke any trade response, the price in the Open Market Sales Scheme was reduced to Rs 700 per quintal for sales effected in Punjab, where most of the excess stocks lie. This too has yet to evoke much response from traders, but an anomalous situation has thus been created whereby sales to millers through the open market sales route are now at a lower price than sales to the APL population through fair price shops.
 
Moreover, the cabinet is reported to have also cleared a proposal whereby government-to-government and barter sales will be permitted at the going international prices. However, since the international price for both rice and wheat are at present much less than the economic cost and the Central Issue Price (charts 8 and 9), this would not only involve giving a large subsidy to foreigners which is being denied to domestic PDS consumers, it would also risk falling foul of the World Trade Organisation (WTO), which accepts as permissible subsidies in the public distribution system but to which India is committed not to give any subsidies on export of agricultural commodities.

Chart 8 >> Click to Enlarge

Chart 9 >> Click to Enlarge
 
These moves, none of which have yet to yield any result, were all responses to the emerging crisis of burgeoning stocks and falling offtake but in a manner so as to avoid a rollback in PDS prices, which the government had so strenuously resisted in the face of pressure from its allies and the opposition only a few months ago. But very recently, even this has been conceded. On receipt of a report from the Expenditure Commission, to which the government had referred the matter, estimates of the economic cost of wheat and rice have been revised down to Rs 830 and Rs 1130 per quintal from Rs 900 and Rs 1180 per quintal respectively. This has allowed the Central Issue Prices to be cut accordingly, while maintaining the principle declared in the budget that these prices will in future remain linked to the economic cost.
 
This latest revision is something of an accounting jugglery, involving moving certain items from the economic cost to the cost of holding buffer stocks, but it is at least a recognition that there was something seriously amiss with the Finance Ministry's view that all that was necessary to reduce the food subsidy was to raise PDS prices. Even more explicit was the Food Minister's defence when he had reduced the Open Market Sales Scheme price in Punjab to well below the economic cost. He had then argued that since the cost of carrying buffer stocks was around Rs 175 per quintal, a sales subsidy of up to this amount would actually reduce the overall food subsidy if this increased offtake and reduced stocks. By that logic, and on the basis of the Expenditure Commission's revised calculations which have since reduced the economic cost and upped the costs of holding buffer stocks, the APL prices for rice and wheat ought also to have been revised downwards to almost around where they were before the hikes in the budget.
 
This has not been done, and the final outcome in terms of offtake and the resulting situation regarding market prices of wheat and rice is still uncertain. However, a calculation suggests that, for both rice and wheat, the increase in procurement this year has been so much higher than last year that, even given the higher output, offtake would have to be almost the same as last year to match market availability to likely demand. Since offtake at present is running well below last year's levels, market prices would need to rise to at least the relevant administered price to make the higher offtake possible.
 
Currently, there is almost no offtake of either rice or wheat on the APL account, excepting those being lifted by states such as Andhra Pradesh to meet their larger than centrally sanctioned BPL commitments. Market prices are currently at just around APL prices in Hyderabad and Chennai, and more than 25 per cent lower than the APL prices in Delhi. North Indian prices are unusually low because trade is in panic after the government's recent desperate moves, expecting it to cut wheat prices further. But precisely because of this, supplies with private traders are likely to run out by October, after which the floor is likely to be set by whatever the government decides about its own administered prices.
 
One possibility is that the government holds firm and does not reduce its prices beyond what it has already done. In that case, open market wheat prices in North India will align themselves to the government's Open Market Sales Scheme (OMSS) price in Punjab, which is Rs 700 per quintal currently but set to be increased from September onwards. In almost the entire Northern region, this will work out to be cheaper, even after costs of transport and handling, than the APL price of Rs 830 per quintal. In more distant locations, the floor will, however, be set by the APL price, which is also currently the OMSS sales price outside Punjab. If so, wheat prices (inclusive of transport and profit margins) in Delhi and much of North India are likely to rise to around Rs 775-800 per quintal in the lean season, which is more than 25 per cent higher than the current price and almost 10 per cent higher than that in the lean season last year. Thus, there would then be double digit increase in wheat prices again this year, but, since the market price would still remain less than the APL price, the above poverty line households would continue to avoid PDS purchases. PDS wheat sales would, therefore, remain extremely sluggish in most of North India, and, consequently, the very viability of the network of fair price shops, which constitutes the backbone of the nation's food security system, would stand severely threatened in this region.