MacroScan (Printable Version) - Public Food Stocks : The Mess and the Wasted Opportunity

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).

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).

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.

The Central Issue Price (CIP) for wheat for the above poverty line (APL) families, which was Rs 450 per quintal in January 1999, had been increased in two steps to Rs 682 per quintal on April 1, 1999. The measures announced in Budget 2000-2001, along with the subsequent increase in the MSP for wheat, took this up further to Rs 900 per quintal on April 1, 2000. There was thus a doubling of the APL wheat price over a fifteen month period. The 52 per cent hike in PDS prices last year had already caused PDS wheat offtake to decline from almost 8 million tonnes in 1998-99 to less than 5 million tonnes during 1999-2000. With the further 32 per cent hike with effect from April 1, 2000, PDS wheat offtake during April-June 2000 has predictably plummeted again, to less than 7 lakh tonnes from over 12 lakh tonnes in the corresponding period last year, despite a doubling of PDS allocation at half APL prices for the below poverty line population ( chart 7).

Consequently, wheat stocks with the government, which had reached 13 million tonnes on April 1, 2000 from less than 10 million tonnes on April 1, 1999, are now over 27 million tonnes. Given the current trend in offtake, wheat stocks at the beginning of the next marketing season, on April 1, 2001, are likely to be at least 20 million tonnes, or fully five times the required norm of 4 million tonnes on that day.

The situation in the case of rice is only slightly better. The PDS issue price for Grade A rice for above poverty line families had been increased from Rs 700 per quintal to Rs 905 per quintal in February 1999, and this was increased further to Rs 1180 per quintal on April 1, 2000. Despite the price rise last year, PDS offtake during 1999-2000, at 10.9 million tonnes, was almost unchanged from the offtake of 10.7 million tonnes during 1998-99. This was because the 29 per cent increase in the rice issue price was almost half that in the case of wheat, and there was in fact no increase in prices for consumers in many rice consuming states which chose to absorb the higher central issue price through enhanced subsidies of their own.

However, rice stocks, which were slightly less than the required norm of 11.8 million tonnes on April 1, 1999, increased to 14.9 million tonnes on April 1, 2000 because procurement of rice this year has also been a record at more than 16 million tonnes. This was partly the result of a better output and because low world prices had reduced the demand from exporters, but, as in the case of wheat, the main reason was that the MSP for paddy was fixed 11 per cent above that recommended by the Commission on Agricultural Costs and Prices. Moreover, this year's hike of 30 per cent in the issue price of rice has already caused PDS offtake to decline by more than 30 per cent to 1.8 million tonnes during April-June 2000 from 2.6 million tonnes in the corresponding period of last year, despite the doubled allowance for below poverty line households. Rice stocks on October 1, 2000, when the next procurement season starts, are therefore expected to be at least 11.5 million tonnes, well over the required norm of 6.5 million tonnes on that date.

An obvious consequence of such high stocks is the risk that grains may rot, or be devoured by pests, simply because of a shortage in storage capacity. The total storage capacity (including cover and plinth storage which should ideally be used only temporarily) available at present with the Food Corporation of India, the Central Warehousing Corporation, and the various State Warehousing Corporations put together, add up to about 46 million tonnes. As against this, the publicly held stocks of wheat and rice are presently in excess of 41 million tonnes, so that the utilisation of available public sector storage capacity is already around 90 per cent at the national level. In Punjab and Haryana, stocks already exceed storage capacity and have to be stored in the open, awaiting transportation to other locations.

On top of this, paddy procurement is due to begin in October and, if last year is any indication, about 9 million tonnes of paddy are likely to be procured during the first six weeks in Punjab and Haryana alone. This influx, given that stocks on October 1, 2000 may be close to 38 million tonnes, means that all storage capacity could be exhausted before November-end when stocks peak before their normal seasonal decline to April. But even if the situation is managed in October-November, through temporary construction and recourse to hire of private storage, the problem would recur in an even more acute form from April 2001 onwards, when wheat procurement is due to begin. The exact quantum of the problem then will depend on the size of rice procurement during October-March of the coming season.

Even if rice procurement falls from over 14 million tonnes last year to 12 million tonnes, the total stocks at the beginning of the next wheat procurement season are likely to be over 40 million tonnes at current levels of offtake. Since the available storage capacity would then permit only a maximum wheat procurement of around 8 million tonnes, the stark choices at present are limited to either immediate steps to increase offtake or a crash programme for godown construction and, failing both these, to a decision to contain next year's wheat procurement to less than half of this year's actual.

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.

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.

The alternative possibility is that the government will bring down the APL wheat price to around Rs 700 per quintal all over the country. This would encourage sales through fair price shops, and also increase the overall offtake (through both PDS and OMSS) quite sharply, taking these to about 10-20 per cent above last year's level, as against a decline in the previous scenario. But, even in this scenario, wheat stocks on April 1, 2001 would be around 17 million tonnes, so that, although the pressure on storage capacity will be much reduced on that date, the available storage capacity is unlikely to allow for wheat procurement in excess of 11-12 million tonnes. On the other hand, since the cost of grain at the current MSP of Rs 580 per quintal is at least Rs 675 per quintal, inclusive of statutory charges and the cost of gunny, the private trade will stay away from purchases unless this is possible below MSP or can be effected without paying the statutory dues. As a result, the public agencies will be faced with having to buy almost the entire arrival in mandies, and since farmers turned away due to the shortage of storage space will almost certainly receive much less than the current MSP, the credibility of that system would be under severe threat,

Thus, the nation may now be at a brink where the very future of India's existing food security system may be at stake. This has so far depended on MSP purchases to stabilise producer prices and on PDS offtake to stabilise consumer prices, and, in this, it has been fairly successful since the variability of foodgrain prices in India have so far been less than a third of what it is in international markets. The problem has to do not only with the high MSP levels which have pushed up procurement, but also with the Targeted Public Distribution System (TPDS). This was adopted in 1997 in an effort to target the food subsidy towards the poor, and the subsequent increases in Central Issue Prices were made with a view to contain the overall food subsidy bill. It now appears that it has failed in both these objectives. The reduced allocations and higher APL prices under TPDS has pushed the food subsidy bill to an all-time high because of sharply increased stock holding costs. Simultaneously, these stocks have pushed up open market prices of cereals by almost 30 per cent in the three years that the TPDS has existed, hurting precisely the poor who were sought to be served but who still have to buy more than half their grain requirements from the open market.

Also, the main objective of the original PDS was to contain inter-temporal and inter-regional differentials in retail consumer prices arising either from high trade and transport costs or because of local monopolies. This aspect of price stabilisation, which is best served not through open market sales to millers but through sales actually effected at local fair price shops, depends vitally on the financial viability of the existing network of over 4 lakh fair price shops. This, too, is now under threat because their sales have shrunk sharply as a result of the effective exclusion of APL families under TPDS.

Most ominously, with procurement currently exceeding the reduced TPDS offtake by a large margin, there are already demands in the press, and from certain economists close to the World Bank and IMF who were incidentally instrumental in the adoption of the TPDS, that the system of Minimum Price Support itself be wound up. But the MSP system, which protects farmers from undue price fluctuation, has been a crucial part of the package of policies which has enabled Indian farmers to multiply cereal production by over two and a half times since the mid-sixties, and thus avert the possibility of growing hunger.

The demands to give up this system up are coming at a time when not only has the rate of growth of domestic foodgrain production dropped below the rate of population growth so that the long-term vulnerability to food security has increased, but also when, as a result of more open trade, all Indian farmers, not just rice and wheat producers, are faced with the prospect of much higher price volatility and increased unfair competition from their highly subsidised counterparts in the West.

Interestingly also, the very economists who today castigate politicians and farm interests most loudly for pushing up the MSP too high are precisely those who till recently had argued most strongly that Indian farm prices were too low in relation to the world price, and that accepting the WTO discipline would bring even greater benefits in the form of even higher world prices. It is another matter that these economists were proved totally wrong since world agricultural prices actually collapsed between 1997 and 1999 when this argument had reached its crescendo. But can these economists honestly absolve themselves of responsibility, since their misguided analysis may actually have been taken seriously by those who allowed the MSPs in India to ratchet upwards from peaks reached by the world prices just when these had begun to turn sharply downwards ?

Thus, whether the MSP levels are correct, whether targeting is consistent with stable stock levels, or whether higher issue prices will be successful in reducing the food subsidy in the face of increasing stocks, are all questions which appear to have failed most mainstream economists wedded to unthinking liberalisation. So what is the solution if one does not accept the view that the present food security system should be given up since a combination of free trade and futures markets will necessarily bring panacea for an Indian agriculture dominated by small and financially vulnerable farmers ? On this, the only sensible argument in government seems to have come from that organisation which is directly concerned with the matter but to which nobody seems to listen nowadays - the Commission on Agricultural Costs and Prices.

In the Commission's Reports for Rabi crops sown during 1999-2000 season, it had argued strongly that primacy be placed on balancing procurement and offtake in the medium run. It noted that such a balance could be reached with different combinations of procurement and issue prices but that if the former was high, and led to high procurement, the latter should be correspondingly low to ensure high enough offtake, even though this would involve a relatively high subsidy. Attempting to hike the issue prices without cutting the procurement price in this situation would be counterproductive since not only would the subsidy rise further in the short run, it would make the system unstable.

It noted further that the only viable way of reducing the subsidy was by choosing a lower ratio of the MSP to cost, and that once a decision was taken on this, reconciling the inherent conflict between a high MSP and a low subsidy level, the MSP itself should be defended against international price fluctuations through a system whereby tariffs on exports and imports were automatically varied with movements in world prices. The only way to get out of the present mess, according to this analysis, is to have a temporary moratorium on the MSP for wheat, keeping issue prices at the level required to maintain medium run balance between procurement and offtake. This would, however, still leave the problem of the existing large stocks built up over the last few years, but these should be treated as investible resources to build up infrastructure through food for work programmes.

To this very sensible analysis, which has of course been ignored until now, it may be added that in the short run it may now be necessary to use some of the food for work programmes to build godowns immediately, in order to ensure that rats do not get the first bite again.



Themes > Features	08.08.2000


Public Food Stocks : The Mess and the Wasted Opportunity

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). 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). 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. The Central Issue Price (CIP) for wheat for the above poverty line (APL) families, which was Rs 450 per quintal in January 1999, had been increased in two steps to Rs 682 per quintal on April 1, 1999. The measures announced in Budget 2000-2001, along with the subsequent increase in the MSP for wheat, took this up further to Rs 900 per quintal on April 1, 2000. There was thus a doubling of the APL wheat price over a fifteen month period. The 52 per cent hike in PDS prices last year had already caused PDS wheat offtake to decline from almost 8 million tonnes in 1998-99 to less than 5 million tonnes during 1999-2000. With the further 32 per cent hike with effect from April 1, 2000, PDS wheat offtake during April-June 2000 has predictably plummeted again, to less than 7 lakh tonnes from over 12 lakh tonnes in the corresponding period last year, despite a doubling of PDS allocation at half APL prices for the below poverty line population ( chart 7). Consequently, wheat stocks with the government, which had reached 13 million tonnes on April 1, 2000 from less than 10 million tonnes on April 1, 1999, are now over 27 million tonnes. Given the current trend in offtake, wheat stocks at the beginning of the next marketing season, on April 1, 2001, are likely to be at least 20 million tonnes, or fully five times the required norm of 4 million tonnes on that day. The situation in the case of rice is only slightly better. The PDS issue price for Grade A rice for above poverty line families had been increased from Rs 700 per quintal to Rs 905 per quintal in February 1999, and this was increased further to Rs 1180 per quintal on April 1, 2000. Despite the price rise last year, PDS offtake during 1999-2000, at 10.9 million tonnes, was almost unchanged from the offtake of 10.7 million tonnes during 1998-99. This was because the 29 per cent increase in the rice issue price was almost half that in the case of wheat, and there was in fact no increase in prices for consumers in many rice consuming states which chose to absorb the higher central issue price through enhanced subsidies of their own. However, rice stocks, which were slightly less than the required norm of 11.8 million tonnes on April 1, 1999, increased to 14.9 million tonnes on April 1, 2000 because procurement of rice this year has also been a record at more than 16 million tonnes. This was partly the result of a better output and because low world prices had reduced the demand from exporters, but, as in the case of wheat, the main reason was that the MSP for paddy was fixed 11 per cent above that recommended by the Commission on Agricultural Costs and Prices. Moreover, this year's hike of 30 per cent in the issue price of rice has already caused PDS offtake to decline by more than 30 per cent to 1.8 million tonnes during April-June 2000 from 2.6 million tonnes in the corresponding period of last year, despite the doubled allowance for below poverty line households. Rice stocks on October 1, 2000, when the next procurement season starts, are therefore expected to be at least 11.5 million tonnes, well over the required norm of 6.5 million tonnes on that date. An obvious consequence of such high stocks is the risk that grains may rot, or be devoured by pests, simply because of a shortage in storage capacity. The total storage capacity (including cover and plinth storage which should ideally be used only temporarily) available at present with the Food Corporation of India, the Central Warehousing Corporation, and the various State Warehousing Corporations put together, add up to about 46 million tonnes. As against this, the publicly held stocks of wheat and rice are presently in excess of 41 million tonnes, so that the utilisation of available public sector storage capacity is already around 90 per cent at the national level. In Punjab and Haryana, stocks already exceed storage capacity and have to be stored in the open, awaiting transportation to other locations. On top of this, paddy procurement is due to begin in October and, if last year is any indication, about 9 million tonnes of paddy are likely to be procured during the first six weeks in Punjab and Haryana alone. This influx, given that stocks on October 1, 2000 may be close to 38 million tonnes, means that all storage capacity could be exhausted before November-end when stocks peak before their normal seasonal decline to April. But even if the situation is managed in October-November, through temporary construction and recourse to hire of private storage, the problem would recur in an even more acute form from April 2001 onwards, when wheat procurement is due to begin. The exact quantum of the problem then will depend on the size of rice procurement during October-March of the coming season. Even if rice procurement falls from over 14 million tonnes last year to 12 million tonnes, the total stocks at the beginning of the next wheat procurement season are likely to be over 40 million tonnes at current levels of offtake. Since the available storage capacity would then permit only a maximum wheat procurement of around 8 million tonnes, the stark choices at present are limited to either immediate steps to increase offtake or a crash programme for godown construction and, failing both these, to a decision to contain next year's wheat procurement to less than half of this year's actual. 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. 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. The alternative possibility is that the government will bring down the APL wheat price to around Rs 700 per quintal all over the country. This would encourage sales through fair price shops, and also increase the overall offtake (through both PDS and OMSS) quite sharply, taking these to about 10-20 per cent above last year's level, as against a decline in the previous scenario. But, even in this scenario, wheat stocks on April 1, 2001 would be around 17 million tonnes, so that, although the pressure on storage capacity will be much reduced on that date, the available storage capacity is unlikely to allow for wheat procurement in excess of 11-12 million tonnes. On the other hand, since the cost of grain at the current MSP of Rs 580 per quintal is at least Rs 675 per quintal, inclusive of statutory charges and the cost of gunny, the private trade will stay away from purchases unless this is possible below MSP or can be effected without paying the statutory dues. As a result, the public agencies will be faced with having to buy almost the entire arrival in mandies, and since farmers turned away due to the shortage of storage space will almost certainly receive much less than the current MSP, the credibility of that system would be under severe threat, Thus, the nation may now be at a brink where the very future of India's existing food security system may be at stake. This has so far depended on MSP purchases to stabilise producer prices and on PDS offtake to stabilise consumer prices, and, in this, it has been fairly successful since the variability of foodgrain prices in India have so far been less than a third of what it is in international markets. The problem has to do not only with the high MSP levels which have pushed up procurement, but also with the Targeted Public Distribution System (TPDS). This was adopted in 1997 in an effort to target the food subsidy towards the poor, and the subsequent increases in Central Issue Prices were made with a view to contain the overall food subsidy bill. It now appears that it has failed in both these objectives. The reduced allocations and higher APL prices under TPDS has pushed the food subsidy bill to an all-time high because of sharply increased stock holding costs. Simultaneously, these stocks have pushed up open market prices of cereals by almost 30 per cent in the three years that the TPDS has existed, hurting precisely the poor who were sought to be served but who still have to buy more than half their grain requirements from the open market. Also, the main objective of the original PDS was to contain inter-temporal and inter-regional differentials in retail consumer prices arising either from high trade and transport costs or because of local monopolies. This aspect of price stabilisation, which is best served not through open market sales to millers but through sales actually effected at local fair price shops, depends vitally on the financial viability of the existing network of over 4 lakh fair price shops. This, too, is now under threat because their sales have shrunk sharply as a result of the effective exclusion of APL families under TPDS. Most ominously, with procurement currently exceeding the reduced TPDS offtake by a large margin, there are already demands in the press, and from certain economists close to the World Bank and IMF who were incidentally instrumental in the adoption of the TPDS, that the system of Minimum Price Support itself be wound up. But the MSP system, which protects farmers from undue price fluctuation, has been a crucial part of the package of policies which has enabled Indian farmers to multiply cereal production by over two and a half times since the mid-sixties, and thus avert the possibility of growing hunger. The demands to give up this system up are coming at a time when not only has the rate of growth of domestic foodgrain production dropped below the rate of population growth so that the long-term vulnerability to food security has increased, but also when, as a result of more open trade, all Indian farmers, not just rice and wheat producers, are faced with the prospect of much higher price volatility and increased unfair competition from their highly subsidised counterparts in the West. Interestingly also, the very economists who today castigate politicians and farm interests most loudly for pushing up the MSP too high are precisely those who till recently had argued most strongly that Indian farm prices were too low in relation to the world price, and that accepting the WTO discipline would bring even greater benefits in the form of even higher world prices. It is another matter that these economists were proved totally wrong since world agricultural prices actually collapsed between 1997 and 1999 when this argument had reached its crescendo. But can these economists honestly absolve themselves of responsibility, since their misguided analysis may actually have been taken seriously by those who allowed the MSPs in India to ratchet upwards from peaks reached by the world prices just when these had begun to turn sharply downwards ? Thus, whether the MSP levels are correct, whether targeting is consistent with stable stock levels, or whether higher issue prices will be successful in reducing the food subsidy in the face of increasing stocks, are all questions which appear to have failed most mainstream economists wedded to unthinking liberalisation. So what is the solution if one does not accept the view that the present food security system should be given up since a combination of free trade and futures markets will necessarily bring panacea for an Indian agriculture dominated by small and financially vulnerable farmers ? On this, the only sensible argument in government seems to have come from that organisation which is directly concerned with the matter but to which nobody seems to listen nowadays - the Commission on Agricultural Costs and Prices. In the Commission's Reports for Rabi crops sown during 1999-2000 season, it had argued strongly that primacy be placed on balancing procurement and offtake in the medium run. It noted that such a balance could be reached with different combinations of procurement and issue prices but that if the former was high, and led to high procurement, the latter should be correspondingly low to ensure high enough offtake, even though this would involve a relatively high subsidy. Attempting to hike the issue prices without cutting the procurement price in this situation would be counterproductive since not only would the subsidy rise further in the short run, it would make the system unstable. It noted further that the only viable way of reducing the subsidy was by choosing a lower ratio of the MSP to cost, and that once a decision was taken on this, reconciling the inherent conflict between a high MSP and a low subsidy level, the MSP itself should be defended against international price fluctuations through a system whereby tariffs on exports and imports were automatically varied with movements in world prices. The only way to get out of the present mess, according to this analysis, is to have a temporary moratorium on the MSP for wheat, keeping issue prices at the level required to maintain medium run balance between procurement and offtake. This would, however, still leave the problem of the existing large stocks built up over the last few years, but these should be treated as investible resources to build up infrastructure through food for work programmes. To this very sensible analysis, which has of course been ignored until now, it may be added that in the short run it may now be necessary to use some of the food for work programmes to build godowns immediately, in order to ensure that rats do not get the first bite again.



© MACROSCAN 2000