That the food grains management policy of the Congress led United Progressive Alliance (UPA) government is in a mess, we all know. But the tragedy is that the mess is getting messier.
A new report titled Buffer Stocking Policy in Wake of NFSB (National Food Securities Bill) authored by Ashok Gulati and Surbhi Jain of the Commission for Agricultural Costs and Prices (CACP), Ministry of Agriculture, provides more information on the issue.
The Food Corporation of India (FCI) directly and through other state government affiliates procures rice and wheat from farmers at the minimum support price(MSP) set by the government. These food grains are then distributed by the government through the various programmes that it runs, using the public distribution system. As per the current norms FCI buys all the rice and wheat that farmers bring to it, as long as it meets a certain quality.
Over an above the grains required for distribution, the government also maintains a “strategic reserve”. This reserve is kept for bad times like a drought or any other unforeseen shock, when production of food grains tends to drop or their free movement is restricted. In such circumstances, the price of rice and wheat tends to shoot up. The government can utilise these strategic reserves, release them into the open market and ensure that the prices stabilise.
As per the prevailing norms the government needs to maintain a total food grain stock of 31.9 million tonnes as on July 1, of every year. But the actual amount of food grain stock is much higher than this number. As the CACP report points out “The country is currently loaded with large stocks. On July 1, 2012, e.g., it had 80.2 million tonnes, and is likely to have similar or even higher amount this year, despite emerging as the largest exporter of rice (around 10 million tonnes in calendar year 2012) and exporting about 5.6 million tonnes of wheat in FY 2012‐13.”
The situation seems to have continued this year as well. The food grain stock as on April 1, 2013, stood at 59.8 million tonnes against the norm of 21.2 million tonnes, that the government needs to maintain as on April1, of every year. The situation is expected to continue even after the current wheat procurement season ends. The government procures more than 90% of the wheat, during the months of April and May.
After the procurement of wheat ends CACP expects that the total food grain stock will touch around 82.2 million tonnes, as on July 1, 2013. This is way more than the total stock of 31.9 million tonnes that the government needs to maintain as on July 1, of every year.
What is interesting nonetheless is that the wheat procurement has been way less than what was originally projected. “In 2013‐14, the procurement of wheat was initially estimated to be 44 million tonnes by the government after due consultation with state governments, before the procurement season began in March‐April, 2013. Gradually, it was realised by the end of April that it may not touch 44 million tonnes, but stop at around 40 million tonnes. With each week passing in May 2013, the estimate is being reduced and by the middle of May, it was being realised that total procurement of wheat may not cross 32 million tonnes. Such a drop in procurement estimate from 44 million tonnes to 32 million tonnes within less than two months is a cause of concern, and indicates the challenges in honouring the commitments under NFSB,” the report points out.
But even with this lesser procurement the food grain stock is way more than the requirement of 31.9 million tonnes. One explanation for the excess stock is that the government is preparing to introduce the right to food security, which will lead to an increase in the total amount of rice and wheat being distributed by the government. And hence, the greater stock.
Even taking that into account, the total food grain stock is much more than required. As the report points out “Anywhere between 41 million tonnes to say 47 million tonnes, would be a comfortable level of buffer stocks, covering both the operational needs of the NFSB as well as strategic reserves to take care of any drought or other exigency.”
So around 41-47 million tonnes of food grain stock would work well. But as on July 1, 2013, the government of India is likely to have around 82.2 million tonnes of rice and wheat. This means that the government will have 30-40 million tonnes of excess stocks of food grains. This is food grain for which the government has paid the farmer but hasn’t released it into the market, leading to inflation.
As the CACP report points out “The value locked in these “excess stocks”, evaluated at their economic cost, ranges from Rs 70,000 crore to Rs 92,000 crore. This infusion of “excess” money into the economy without corresponding flow of goods is evident in the paradox of rising prices of rice & wheat amidst overflowing stocks in government godowns.”
What is ironical is that the government doesn’t even have enough space to stock all the food grain that it has been buying. The total storage capacity available is around 71.9 million tonnes. Now compare this to the total expected food grain stock of 82.2 million tonnes as on July 1, 2013. What this means is that more than 10 million tonnes of food grain will be rotting out there in the open. And while that happens, food grain prices will continue to go up. Cereal inflation in April 2013 was at 16.65%. In comparison it was at 4.62% in March 2012.
The government has been buying up more and more of rice and wheat being produced in the country over the years. In 2006-2007, the government bought 32% of the total rice paddy produced. In 2011-2012, this had shot up to a massive 54%. In case of wheat, in 2006-2007, the government bought 18% of the total wheat produced. By 2011-2012, this had nearly doubled to 35% This has led to the government stocking up much more food grain than it actually requires.
As a recent report brought out by the Comptroller and the Auditor (CAG) General of India pointed out “The total food grains stock in the Central Pool recorded an increase of 45.8 million tonnes between 2006-07 and 2011-12.”
This has meant that the amount of food grain available in the open market has gone down and leading to higher prices. It has also more or less killed the private trade in the sector. As the CACP report points out “In recent years, the government has procured more than one‐thirds of the total production and more than half of the marketed surplus of rice and wheat. Such large scale public procurement has strangulated the private trade (as has been the case in Punjab, Haryana and now Madhya Pradesh & Chhattisgarh). Of the total market arrivals of wheat and rice in these states, more than 80‐90 percent is bought by the government, indicating a de‐facto state take‐over of grain trade. This reminds one of the failed experiment of wheat trade take‐over in 1973‐74.”
And any monopsony (a market where one buyer faces many sellers) be it the government or the private sector, is not good. This takeover of the grain trade in the country, by the government has come at a huge cost. The government has excess stocks of around 30-40 million tonnes of food grain with an economic cost of Rs 70,000-92,000 crore or lets take the midpoint of around Rs 80,000 crore. More than 10 million tonnes of this grain is rotting in the open i.e. around Rs 20,000 crore of public money gone down the drain. And this is a government which is struggling to control its burgeoning expenditure. India currently has one of the highest fiscal deficits in the world. Fiscal deficit is the difference between what a government earns and what it spends.
As the CACP report points out “It is creditable that India is currently in a state of ‘plenty’ but holding excessive stocks in godowns, which serve no worthwhile purpose, begs the question of economic efficiency in public expenditure. It will be much rational policy choice to liquidate these “excessive” stocks. The money, i.e., around Rs 80,000 crore under the most likely scenario, would certainly come in handy in the current times of high fiscal deficit and the increased availability of wheat and rice in the markets would rein in high food inflation, especially cereal inflation.”
Now that’s something worth thinking about.
The article originally appeared on www.firstpost.com on May 28,2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)
Commission for Agricultural Costs and Prices
10 reasons why Amartya Sen is wrong about the food security bill
Amartya Sen, who won the Nobel Prize for economics, in 1998, has been a big votary of the Food Security Bill being passed. “The case for passing this Bill is overwhelming…I would prefer this Bill to not having a Bill at all,” Sen said at a press conference yesterday.
The bill envisages to distribute highly subsidised rice and wheat to almost two-thirds of India’s population of 1.2 billion. In terms of its sheer size, this would be perhaps the biggest ever programme to distribute subsidised food grain to citizens of any country. And given this it is more than likely to have consequences, which the government of the day is either not thinking about or is simply not bothered about.
Given these consequences, Sen’s support for the Bill seems more ideological than logical. This conclusion can be easily drawn after a quick reading of a report titled National Food Security Bill: Challenges and Options authored by Ashok Gulati, Jyoti Gujral and T.Nandakumar (with Surbhi Jain, Sourabh Anand, Siddharth Rath, and Piyush Joshi) belonging to the Commission for Agricultural Costs and Prices (CACP), which is a part of the Ministry of Agriculture. This report was released in December 2012.
The report highlights many reasons on why the Bill in its current form is a recipe for sheer disaster and is not desirable at all, and should be junked at the earliest opportunity.
1. The expenditure behind the food security bill is stated to be at Rs 1,20,000 crore. But this the CACP report feels is just the tip of the iceberg. This expenditure does not take into account “additional expenditure (that) is needed for the envisaged administrative set up, scaling up of operations, enhancement of production, investments for storage, movement, processing and market infrastructure etc.”
So what is the likely cost of the food security bill going to be? “The total financial expenditure entailed will be around Rs 682,163 crore over a three year period,” the report estimates. This is much higher than the Rs 1,20,000 crore per year estimate being made by the government. The question is where is this money going to come from? The government is already reeling under a very high fiscal deficit and is under pressure from international rating agencies to cut down on flab. A high fiscal deficit also means higher interest rates as the government will have to borrow more. It will also lead to higher inflation.
2. Estimates made by CACP suggest that over the next three years the cost of distributing rice and wheat at a subsidised price is going to come to Rs 5,12,428 crore. This calculation does not include other costs of creating the required infrastructure to run the scheme. Of this, the leakage is expected to be at 40.4%. So, nearly Rs 2,07,000 crore will be siphoned off by middlemen.
What is ironical is that the government wants to introduce the right to food security through its public distribution network rather than use a cash transfer system like Aadhar, which it has been creating parallely. The government’s public distribution system is perhaps the biggest distribution system of its kind in the world. But it has virtually collapsed in several states leading to huge leakages.
“It may be noted that this Bill is being brought in the Parliament to enact an Act when internationally, conditional cash transfers (CCTs), rather than physical distribution of subsidised food, have been found to be more efficient in achieving food and nutritional security,” the report points out.
3. The food security bill in its current forms works with the assumption that cereals like rice and wheat are central to the issue of food security. Rice and wheat will be made available at extremely subsidised prices as a part of right to food security. But the irony is that more and more Indians have moved away from cereals towards a protein based diet in the recent years.
As the report points out “As economic growth picks up, it is common to observe a change in dietary patterns wherein people substitute cereals with high-value food…Share of expenditure on cereals in total food expenditure has declined from 41% in 1987-88 to 29.1% in 2009-10 in rural areas and from 26.5% in 1987-88 to 22.4% in 2009-10 in urban areas. The Bill’s focus on rice and wheat goes against the trend for many Indians who are gradually diversifying their diet to protein-rich foods such as dairy, eggs and poultry, as well as fruit and vegetables. There is a need for a more nuanced food security strategy which is not obsessed with macro-level food-grain availability.”
4. A nuanced strategy is also needed because the right to food security also aims at improving the nutritional status of the population especially of women and children. But just ensuring that women and children have access to subsidised wheat and rice is not going to take care of this. As the report points out “Women’s education, access to clean drinking water, availability of hygienic sanitation facilities are the prime prerequisites for improved nutrition. It needs to be recognised that malnutrition is a multi-dimensional problem and needs a multi-pronged strategy.”
5. The right to food security creates a legal obligation for the government to distribute rice and wheat to those who are entitled. In order to fulfil this obligation the government will have to procure rice and wheat from the farmers. It currently does that through the Food Corporation of India(FCI) at a minimum support price(MSP). The MSP is declared in advance and the farmer knows what price he is going to get for the rice and wheat that he sells to the government.
The way the current system works is that FCI is obligated to buy all the rice or wheat that the farmer wants to sell as long as a certain quality standard is met. This has led to a situation where farmers find it favourable to produce rice and wheat because they have a ready buyer for all their produce, at a price they know in advance.
This has led to a severe imbalance in the production of oil seeds as well as pulses. As the report points out “India imported a whopping US$ 9.7 billion (Rs 46,242 crore) worth of edible oils in 2011-12 – a 47.5 percent jump from last year and pulses worth US$ 1.8 billion (Rs 8767 crore) during 2011-12- an increase of 16.4 percent as compared to last year.”
To distribute rice and wheat under the right to food security the government will continue using FCI and keep declaring a minimum support price. This means farmers will continue to get assured procurement when it comes to wheat and rice. And this will have several consequences. As the report points out “Assured procurement gives an incentive for farmers to produce cereals rather than diversify the production-basket…Vegetable production too may be affected – pushing food inflation further.”
6. Indian agriculture is still highly dependent on rainfall with 50% of area under cultivation still at the mercy of good monsoons. Irrigation wherever its available is also dependent on rainfall. So what happens in a situation of drought? As the report points out “A case in point is the drought year 2002-03 where the production of wheat and rice fell by 28.5 million tonnes over the previous year (overall food-grain production dropped by 38 million tonnes). It took 3 years to make up and it was only in 2006-07 that the production exceeded the 2001-02 level.”
If a drought situation crops up, will the government resort to imports? Is it a feasible option? Turns out it is not. “Rice is a very thinly traded commodity, with only about 7 per cent of world production being traded and five countries cornering three-fourths of the rice exports. The thinness and concentration of world rice markets imply that changes in production or consumption in major rice-trading countries have an amplified effect on world prices..This is especially true in the case of rice, as global markets are much smaller. India’s entry into the international market as a large buyer could exert significant upward pressure on prices,” the CACP report points out. Hence, any shortage of rice in India, is going to send world prices of rice through the roof. Also if the government continues procuring as much in a drought year as it has in previous years, it will leave very little of rice and wheat available for the open market, sending their prices through the roof.
7. The right to food security will mean that the government will use its public distribution system to distribute rice and wheat throughout the country. The trouble is that FCI, currently procures a major portion of rice and wheat from a few selective states. “70% of rice procurement is done from Punjab, AP, Chhattisgarh and UP while 80% of wheat procurement is done from Punjab, Haryana and MP alone,” the report points out. This will need infrastructure to be created and that will cost money.
As the report points out “From a logistics point of view it could be cheaper to procure food-grains from states like MP, Bihar, Gujarat etc and deliver the food-grains to neighbouring deficit states in central, eastern and western India rather than procure from a handful of surplus states in North and South and distribute food-grains across the deficit states in India. But such a system would need ramping up of procurement efforts in emerging surplus or self-sufficient states in cereals, such as Uttar Pradesh, Bihar, West Bengal, Assam, and Orissa.” And that is easier said than done.
8. In many such states where the operations of FCI are huge, the government has become the number one procurer of rice and wheat. With right to food security coming in, this procurement is only going to go up. And that will create its own share of problems. “In several states like Punjab, Haryana, Andhra Pradesh, Madhya Pradesh, and Chhattisgarh, one observes that the state is overwhelmingly dominant in procuring rice and/or wheat, leading to almost a situation of monopsony. Any further increase in procurement by the state would crowd out private sector operations with an adverse effect on overall efficiency of procurement and storage operations, as well as on magnitude of food subsidies and open market prices,” the CACP report points out.
9. What has also been observed that FCI does not have economies of scale. As it procures more, its cost of procurement goes up. As the CACP report points out “The economic cost of procurement to Food Corporation of India (FCI) has been increasing over time with rising procurement levels – demonstrating that it suffers from diseconomies of scale with increasing levels of procurement. Currently, the economic cost of FCI for acquiring, storing and distributing foodgrains is about 40 percent more than the procurement price.” If right to food security becomes an Act, FCI’s procurement of rice and wheat will go up, and so will its cost of procurement. This will mean a higher expenditure on part of the government.
10. The government will also have to keep increasing the MSP it offers on rice and wheat. This will have to be done to incentivise farmers to produce more rice and wheat to help the government distribute it to the entitled beneficiaries. The farm labour costs have been on their way up. As the report points out “There is an acute shortage of labour in agriculture that has suddenly cropped up in these three years. In some states, labour costs have gone up by more than 100% over the same period. Due to these rising costs, the margins of production for farmers have been declining both for paddy and wheat . Therefore, the government may have to raise procurement prices for rice and wheat to encourage farmers to increase production of these staples. As the cost of production of crops is rising, MSP can’t be kept frozen.” This means that the government expenditure on right to food subsidy will keep going up.
To conclude, its time Amartya Sen read this report and made himself aware of the problems the right to food security can create for India.
The article originally appeared on www.firstpost.com on May 7,2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)
Memo to Sonia: NREGA wasn’t game-changer, growth was
“Perception is reality,” goes the old saying. And the perception among the jhollawallas who belong to the Congress party led United Progressive Alliance (UPA)is that the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) has been a swashbuckling success, which has led to a tremendous increase in rural incomes. So free doles have led to higher income and that in turn has created economic growth, is a conclusion that is often drawn.
A new working paper titled Rising Farm Wages in India – The ‘Pull’ and ‘Push’ Factors written by Ashok Gulati, Surbhi Jain and Nidhi Satija of the Commission for Agricultural Costs and Prices(CACP), Ministry of Agriculture, goes a long way in busting this perception.
The real farm wages (i.e. rise in wages adjusted for inflation) grew by 3.7% during the 1990s. The growth fell to 2.1% in 2000s. “So, if real wages had followed the same trend of 1990s in 2000s, the current level of real farm wages would have been higher than what it is today with MGNREGA,” the authors point out.
What is interesting nonetheless is that the data in the 2000s can be divided into two very different parts. Between 2000-01 and 2006-2007, the farm wages declined by 1.8% per year whereas they grew by 6.8% between 2007-2008 and 2011-2012.
On February 2, 2006, MGNREGA was launched in 200 of the most backward districts of the country. The coverage of the scheme was
to all the rural districts from April 1, 2008. The scheme aims at providing at least 100 days of guaranteed employment in a financial year to every household whose adults are willing to do unskilled manual work.
Payments under MGNREGA vary from Rs 120 to Rs 179 per day, depending on the state. “At the national level, with the average nominal wage paid under the scheme increasing from Rs 65 in FY 2006‐07 to Rs 115 in FY 2011‐12… It has set a base price for labour in rural areas, improved the bargaining power of labourers and has led to a widespread increase in the cost of unskilled and temporary labour including agricultural labour,” write the authors of the CACP report.
Guaranteed wages under MGNREGA have increased the wage expectations, although the employment generated under MGNREGA has been less than 10% of the total rural employment in most of the states, during most of the years. And this has led to an increase in farm wages of 6.8% between 2007-2008 and 2011-2012. Or so goes the logic, at least among the jhollawallas.
But causation is not so easy to establish, even though prima facie that might seem to be the case. There are factors other than MGNREGA at work as well. Take the construction sector for example, which competes with agriculture for labour. The share of workforce that is engaged in construction has increased from 3.1% in 1993-94 to 9.6% in 2009-2010. During the same period the share of work force engaged in Indian agriculture declined from 65% to 53%.
As the CACP authors point out “According to 64thround of National Sample Survey (Migration in India), 2007‐08, nearly 57 per cent of urban migrant households migrated from rural areas and mostly for employment related reasons. For rural males, around 20 percent were employed as casual labour after migration…Thus, construction activity certainly competes for rural labour and would act as a pull on farm wages.”
So taking these arguments into account, the CACP authors constructed a statistical model to test what really impacts farm wages. And this throws up some interesting results. A growth of 10% in construction pushes up the farm wages by 2.8%. A 10% increase in overall economic growth (measured through growth in the Gross Domestic Product) pushes up farm wages by 2.4%.
And what about MGNREGA? “Impact of MGNREGA is also significant with 10 percent increase in employment generated leading to around 0.3 – 0.5% increase in farm wages,” write the authors. While, the impact of MGNREGA on farm wages is significant, it is nowhere near the impact that a rise in real economic activity, which is measured through an increase in construction GDP or overall GDP, has had on farm wages. As the authors point out “The impact of growth variables (GDP (overall) or GDP (agri) or GDP(construction)) is almost 4‐6 times higher than the MGNREGA impact.”
The impact that MGNREGA has varies across states. In states like Andhra Pradesh, Assam, Madhya Pradesh, Punjab, Tamil Nadu and West Bengal the impact of MGNREGA is better in comparison to other states. But even in this case the impact of real economic activity on farm wages is much greater. Also, the impact that MGNREGA is not significant in states like Bihar, Uttar Pradesh and Odisha, which are among the poorest states in India.
So what is the conclusion that one can draw from this? Simply put, real economic activity has a greater impact on real income than free doles given out by the government. And farm wage would have grown at a much faster rate if the government had taken steps to increase real economic activity.
As the authors point out “These results raise a pertinent policy issue: given fiscal constraints and high food inflation, if there was a trade‐off between allocating resources for welfare schemes and increasing investments with a view to raise farm wages, could the money spent on MGNREGA (more than Rs 2 lakh crore) not be better used if it was for investment in say rural‐urban construction, or for overall growth, or for agrigrowth? These investments would have raised the growth rates in these sectors, and thereby ‘pulled’ the real farm wages through a natural process of development, whereby wages increase broadly in line with rising labour productivity…making the whole process much more economically efficient and sustainable.”
There have been reports of gross irregularities in the NREGA scheme. As the authors write “with the current…Minister of Rural Development himself asking for a CAG probeand the former Minister of Rural Development also alleging lack of effective monitoring. This has serious implications on the overall investment/resource allocation strategy.”
But then who is bothered about leakages and sustainable economic growth. It is all about winning the next Lok Sabha election.
Read the full research paper here
The article originally appeared on www.firstpost.com on April 29, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)
How the govt itself stoked the fires of food inflation
Hindi film songs have words of wisdom for almost all facets of life. Even inflation.
As the lines from a song in the 1974 superhit Roti, Kapda aur Makan go “Baaki jo bacha mehangai maar gayi(Of whatever was left inflation killed us).”
Inflation or the rise in prices of goods and services has been killing Indians over the last few years. What has hurt the common man even more is food inflation. Food prices have risen at a much faster pace than overall prices.
A discussion paper titled Taming Food Inflation in India released by the Commission for Agricultural Costs and Prices(CACP), Ministry of Agriculture, on April 1, 2013, points out to the same. “Food inflation in India has been a major challenge to policy makers, more so during recent years when it has averaged 10% during 2008-09 to December 2012. Given that an average household in India still spends almost half of its expenditure on food, and poor around 60 percent (NSSO, 2011), and that poor cannot easily hedge against inflation, high food inflation inflicts a strong ‘hidden tax’ on the poor…In the last five years, post 2008, food inflation contributed to over 41% to the overall inflation in the country,” write the authors Ashok Gulati and Shweta Saini. Gulati is the Chairman of the Commission and Saini is an independent researcher.
During the period 2008-2009 to December 2012, the wholesale price inflation, a measure of the overall rise in prices, averaged at 7.4%. In the same period the food inflation averaged at 10.13% per year.
So who is responsible for food inflation, which is now close to 11%? The short answer is the government. As Gulati and Saini write “The Economist in its February 2013 issue highlights that it was the increased borrowings by the Indian government which fuelled inflation…It categorically puts the responsibility on the government for having launched a pre-election spending spree in 2008, which continued even thereafter.”
Gulati and Saini build an econometric model which helps them conclude that “fiscal Deficit, rising farm wages, and transmission of the global food inflation; together they explain 98 percent of the variations in Indian food inflation over the period 1995-96 to December, 2012…These empirical results clearly indicate that it would not be incorrect to blame the ballooning fiscal deficit of the country today to be the prime reason for the stickiness in food inflation.”
Fiscal deficit is the difference between what a government earns and what it spends. In the Indian context, it has been growing in the last few years as the government has been spending substantially more than what it has been earning.
The fiscal deficit of the Indian government in 2007-2008 (the period between April 1, 2007 and March 31, 2008) stood at Rs 1,26,912 crore. This jumped by 230% to Rs 4,18,482 crore, in 2009-2010 (the period between April 1, 2009 and March 31, 2010). This was primarily because the expenditure of the Congress led UPA government went up at a much faster pace than the income.
The government of India had a total expenditure of Rs 7,12,671 crore, during the course of 2007-2008. This grew by nearly 44% to Rs 10,24,487 crore in 2009-2010. The income of the government went up at a substantially slower pace. Between 2007-2008 and 2009-2010, the revenue receipts (the income that the government hopes to earn every year) of the government grew by a minuscule 5.7% to Rs 5,72,811 crore.
And it is this increased expenditure(reflected in the burgeoning fiscal deficit) of the government that has led to inflation. As Gulati and Saini point out “Indian fiscal package largely comprised of boosting consumption through outright doles (like farm loan waivers) or liberal increases in pay to organised workers under Sixth Pay Commission and expanded MGNREGA(Mahatma Gandhi National Rural Employment Guarantee Act expenditures for rural workers. All this resulted in quickly boosting demand.”
So the increased expenditure of the government was on giving out doles rather than building infrastructure.
This meant that the money that landed up in the pockets of citizens was ready to be spent and was spent, sooner rather than later. “But with several supply bottlenecks in place, particularly power, water, roads and railways, etc, very soon, ‘too much money was chasing too few goods’. And no wonder, higher inflation in general and food inflation in particular, was a natural outcome,” write the authors.
So increased expenditure of the government led to increasing demand for goods and services. This increase in demand was primarily responsible for the economy growing by 8.6% in 2009-2010 and 9.3% in 2010-2011(the period between April 1, 2010 and March 31, 2011). But the increase in demand wasn’t met by an increase in supply, simply because India did not have the infrastructure required for increasing the supply of goods and services. And this led to too much money chasing too few goods.
No wonder this sent food prices spiralling. Food prices have continued to rise as the government expenditure has continued to go up. Also food prices have risen at a much faster pace than overall prices. This is primarily because agricultural prices respond much more to an increase in money supply vis a vis manufactured goods where prices tend to be stickier due to some prevalence of long term contracts. As Gulati and Saini put it “In fact, our analysis for the studied period shows that one percent increase in fiscal deficit increases money supply by more than 0.9 percent.”
The other major reason for a rising food prices is the rising cost of food production due to rising farm wages. This pushes inflation at two levels. First is the fact that an increase in farm wages drives up farm costs and that in turn pushes up prices of agricultural products. As the authors point out “During 2007-08 to 2011-12, nominal wages increased at much faster rate, by close to 17.5% per annum…The immediate impact of these increased farm wages is to drive-up the farm costs and thus push-up the farm prices, be it through the channel of MSP(minimum support price) or market forces.”
Rising farm wages also lead to a section of population eating better and which in turn pushes up price of protein food. As Gulati and Saini point out “This study finds that the pressure on prices is more on protein foods (pulses, milk and milk products, eggs, fish and meat) as well as fruits and vegetables, than on cereals and edible oils, especially during 2004-05 to December 2012. This normally happens with rising incomes, when people switch from cereal based diets to more protein based diets.”
In the recent past price of cereals like rice and wheat has also gone up substantially. This is primarily because the government is hoarding onto much more rice and wheat than it requires to distribute under its various social programmes.
If food inflation has to come down, the government has to control expenditure. The authors Gulati and Saini suggest several ways of doing it. The government can hope to earn Rs 80,000-100,000 crore if it can get around to selling the excessive grain stocks that it has. Other than help control its fiscal deficit, the government can also hope to control the price of cereals like rice and wheat which have been going up at a very fast rate by increasing their supply in the open market.
As the authors write “By liquidating(i.e selling) excessive grain stocks in the domestic market or through exports, massive savings of non-productive expenditures can be realized. For example, as against a buffer stock norm of 32 million tonnes of grains, India had 80 million tonnes of grains on July 1, 2012, and this may cross 90 million tonnes in July 2013. Even if one wants to keep 40 million tonnes of reserves in July, liquidating the remaining 50 million tonnes can bring approximately Rs 80,000-100,000 crore back to the exchequer. And with this much grain in the market food inflation will certainly come down. Else, the very cost of carrying this “extra” grain stocks alone will be more than Rs 10,000 crore each year, counting only their interest and storage costs.”
Of course this has its own challenges. More than half of this inventory of grain in India is concentrated in the states of Punjab and Haryana. Moving this inventory from Punjab and Haryana to other parts of the country will not be easy, assuming that the government opts to work on this suggestion. At the same time the government will have to do it in a way so as to ensure that the market prices of rice and wheat don’t collapse. And that is easier said than done.
The authors also recommend that the government can cut down on food and fertiliser subsidy by directly distributing it. “By going through cash transfers route (using Aadhar), one can plug in leakages in PDS(public distribution system) which, as per CACP calculations are around 40%, and save on high costs of storage and movement too, saving in all about Rs 40,000 crore on food subsidy bill,” write Gulati and Saini.
Something similar can be done on the fertiliser front as well. “Fertiliser subsidy, if given directly to farmers on per hectare basis (Rs 4000/ha to all small and marginal farmers which account for about 85 percent of farmers; and somewhat less (Rs 3500 and Rs 3000/ha) as one goes to medium and large farmers, and deregulating the fertiliser sector can bring in large savings of about Rs 20,000 crore along with greater efficiency in production and consumption of fertilisers.”
Whether the government takes these recommendations of the Commission for Agricultural Costs and Prices seriously, remains to be seen. Meanwhile here is another brilliant Hindi film song from the 2010 hit Peepli Live: “Sakhi saiyan khoobai kaamat hain, mehangai dayan khaye jaat hai(O friend, my beloved earns a lot, but the inflation demon keeps eating us up).”
The article originally appeared on www.firstpost.com on April 2, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)