Vivek Kaul
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)
Minimum Support Price
Food Security Act is another opportunity for Rahul to say I don't want to be PM
Vivek Kaul
The Congress led United Progressive Alliance (UPA) government is in a hurry to somehow introduce the right to food security during the course of this year. Media reports suggest that a special session of the Parliament may be convened to get the bill passed.
But there are several major questions that the Congress led UPA government hasn’t answered with regard to the right to food security. This has writer has discussed some of these questions in the past. (You can read them here, here, here and here).
Here are some more important questions that need to be answered before the right to food security can move from being just a Bill to an Act.
1. The current plan is to sell subsidised wheat and rice to nearly two thirds of India’s population through the public distribution system. This system comprises of around 5 lakh fair price shops. Estimates suggest that nearly 60% of the food that is supposed to be distributed through this system is either siphoned off or is simply wasted. Given that, the eventual plan is to move the right to food security to a cash transfer system.
In this those entitled to food subsidy will have to buy rice and wheat directly from the market, at the market price, and the subsidy will be directly paid into their bank accounts or will be given to them through business correspondents hired by banks.
So what happens to the public distribution system in this case? Will it be dismantled? And if that is done, imagine the kind of unemployment it will lead to. Are political parties (even those within the UPA) which are so opposed to foreign direct investment in retail, thinking about this? And these shops are largely located in rural areas.
2. If right to food security eventually does move to a cash transfer kind of system, where the subsidy is direct paid out to those entitled to it, what happens to the elaborate procurement system for rice and wheat that the government has put in place? Currently the government declares a minimum support price for wheat and rice. At this price the Food Corporation of India (FCI) and other state government agencies, operating on behalf of the government, buy wheat and rice from the farmer., which then stocked and distributed through the public distribution system. This system is expected to continue for implementing the right to food security as well.
But what happens once the right to food security moves onto the system of cash transfers? Those entitled to the right to food security will have to buy wheat and rice directly from the open market. And that being the case the government need not maintain the humongous stocks of food grains that it currently does. The government will have to just buy as much of rice and wheat as might be needed to maintain a buffer stock, which currently amounts to somewhere between 14 million tonnes to 22 million tonnes of rice and wheat.
In 2006-2007, 169.1 million tonnes of rice and wheat was produced in the country. Of this, 43.8 million tonnes or around 26% was procured by the government. In 2011-2012, 198.2 million tonnes of rice and wheat was produced. Of this 88.5 million tonnes or nearly 45% was procured by the government.
So procurement rice and wheat by the government directly from the farmers has gone up tremendously over the last few years. And this has happened primarily because of the fact that the minimum support price has been increased consistently over the years. Farmers have been encouraged to sell to the government. If right to food security moves onto a cash transfer based system, what happens to the farmers who have become now used to selling at a fixed price to the government,which they know off well in advance? How fair is it on them? Are these things even being thought about?
While the current system of procuring more and more rice and wheat directly from the farmer has led to severe distortions, but doing away with it suddenly, will have its own severe repercussions.
3. What happens in a drought like situation? In a situation where the production of rice and wheat will come down, how will the government procure the amount that will be needed to be distributed to those entitled to the right to food security? The easy answer is that rice and wheat will be imported. But as this writer has pointed out in the past “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.” (Source: National Food Security Bill Challenges and Options, Ashok Gulati, Jyoti Gujral, T.Nandakumar, Commission for Agricultural Costs and Prices (CACP), Ministry of Agriculture)
What is interesting is that there is a Force Majeure clause in the Right to Food Security Bill using which the government can shirk any responsibility to provide rice and wheat at a subsidised rate.
The Bill provides for a Force Majeure clause (Clause 52) that “the Central Government, or the State Governments, shall not be liable for any claim by persons belonging to the priority households or general households or other groups entitled under this Act for loss/damage/compensation, arising out of failure of supply of foodgrains or meals when such failure of supply is due to conditions such as, war, flood, drought, fire, cyclone, earthquake or any act of God.”
But it is precisely at this point of time that the right to food security, if there has to be one, should be working. As CACP report points out “It is worthwhile to note that precisely in these conditions a failure of market forces, volatility in prices and resultant distress is expected and at times like this the poor and vulnerable would depend on government to ensure their food security.”
4. Also, what is the basic goal of selling rice and wheat at subsidised prices. Who is it supposed to help? As a recent article in the Mint points out “Apart from the extremely poor, who form a small fraction of the population, nearly everyone else can afford the rice and wheat they require, as Bouis points out. A February report of the National Sample Survey Office (NSSO) shows the proportion of people not getting two square meals a day dropped to about 1% in rural India and 0.4% in urban India in 2009-10. Interestingly, the average cereal consumption of families who reported that they went hungry in some months of the year (in the month preceding the survey) was roughly equal to the average cereal consumption of those who reported receiving adequate meals throughout the year.”
So the point is that government’s own data clearly points out that the number of those who cannot even afford to buy rice and wheat for their daily meals is less than 1% of the total population. Doesn’t it make sense to target this section properly than doling out subsidised rice and wheat to all and sundry? But then targeting just them really won’t help the Congress party led UPA to get the votes in the 2014 Lok Sabha election. And if that does not happen how will Rahul Gandhi, get another opportunity to say, I do not want to be Prime Minister?
5. One of the goals of the right to food security is to improve nutrition. How does selling rice and wheat at a subsidised price help improve nutrition? The NSSO data quoted above clearly shows that most Indians can afford the rice and wheat they need to buy. To improve nutrition more consumption of vitamins and minerals is required. Howarth Bouis , director of HarvestPlus, International Food Policy Research Institute (IFPRI), made a very interesting point in an interview to the Mint a few months back. “ Food prices have been going up over time but we have to make a careful distinction in the Indian case between cereal and milk prices on the one hand, and all other foods on the other hand. After the green revolution, yields of rice and wheat shot up, and prices actually came down. Maybe prices have risen in the past couple of years but over the past 40 years, prices have fallen. The story is similar for milk. But if you look at all the other food groups such as fruits, vegetables, lentils, and animal products other than milk, you will find a steady increase in prices over the past 40 years. So it has become more difficult for the poor to afford food that is dense in minerals and vitamins.”
This explains the real reason behind poor nutrition in India. And no amount of selling of rice and wheat at subsidised prices can cure that. If nutrition needs to be improved food inflation which has gone through the roof needs to be controlled.
There are other factors as well. As the CACP report points out “studies have shown that the challenge of improving absorption lies in linking nutrition with health, education and agriculture interventions. Access to sanitation facilities and women’s literacy in particular are found to be strong factors affecting malnutrition.”
These are some more questions regarding the right to food security which need to be answered. In its current form the Right to Food Security Bill is nothing but a vote gathering ploy for Rahul Gandhi and nothing else, the bleeding hearts of jholawalas notwithstanding.
The article originally appeared on www.firstpost.com on May 16, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)
CAG report shows why food security will be a disaster
Vivek Kaul
On May 7, earlier this month, the Comptroller and Auditor General (CAG) of India presented to the Parliament a Performance Audit of Storage Management and Movement of Food Grains in Food Corporation of India.
This report has gone largely unreported in the media, given that it does not contain any big number running into lakhs of crore like a few previous reports of the CAG did. But it clearly explains why the government of India is in no position to introduce the right to food security. And if it does that, it will be a disaster.
Currently the government declares a minimum support price(MSP) for wheat and rice paddy, and buys them directly from the farmers using the services of the Food Corporation of India(FCI) as well as state government agencies. FCI and other agencies are expected to buy all the rice and wheat that lands up at the government mandis.
The data put out by CAG clearly shows that the procurement of wheat and rice by the government has gone up dramatically since 2006-2007 (i.e. the period between April 1, 2006 and March 31, 2007). In 2006-2007, 75.8 million tonnes of wheat was produced by the Indian farmers. Of this nearly 18% landed up with FCI and the state government agencies. In 2011-2012 (i.e. the period between April 1, 2011, and March 31, 2012), the wheat produce had shot up 93.9 million tonnes. Of this nearly 35% landed up with the FCI and state government agencies.
When it comes to rice the situation is even more pronounced. In 2006-2007, the total rice production was at 93.4 million tonnes. Of this 32% landed up with FCI and other state government agencies. In 2011-2012, the rice produce was at 104.3 million tonnes. Of this a whopping 54% landed up with FCI and other state government agencies.
What this tells us is that more and more rice and wheat is landing up with the government. This is primarily on account of the fact that minimum support price has consistently been raised over the last few years, encouraging the farmers to sell directly to the government.
And this has done in a totally random manner. As the report points out “ No specific norm was followed for fixing of the Minimum Support Price (MSP) over the cost of production. Resultantly, it was observed the margin of MSP fixed over the cost of production varied between 29 per cent and 66 per cent in case of wheat, and 14 per cent and 50 per cent in case of paddy during the period 2006-2007 to 2011-2012.”
Typically MSP needs to be fixed depending on the rates recommended by Commission for Agricultural Costs and Prices (CACP), which is a part of the Ministry of Agriculture. While determining the MSP, CACP takes into account, the cost of production, domestic and international market prices, stock position, prices fixed in previous years etc. So even though there is a robust method for determining the MSP at which the government of India should buy rice and wheat from farmers, that is not being followed.
Also as more and more rice and wheat lands up with the government, there is less of it available in the open market. In 2006-2007, 63.3 million tonnes of rice landed in the open market. By 2011-2012, this had fallen by a huge 23.6% to 48.3 million tonnes. The same is true about about wheat as well, though the drop is not as pronounced as it is in the case of rice. In 2006-2007, the total amount of wheat in the open market stood at 62.1 million tonnes. By 2011-2012, this had dropped to 61.4 million tonnes.
And that explains the high cereal inflation of 16.65% in April, 2013. If food security becomes a right, the government will need to buy more rice and wheat than it currently is, and that will mean lesser amount of rice and wheat available in the open market as has been the case over the last few years. This will push up their price further.
The conspiracy theory here is that if food security bill is passed (or even brought in through an ordinance) a lot more rice and wheat will land up in the open market and thus slowdown cereal inflation. The government plans to use its rotten public distribution system to distribute rice and wheat, and that means that a lot of it will be sold in black and end up in the open market. This is expected to drive down the price of rice and wheat. And this for all we know this might very well turn out to be true.
Once FCI and other state government agencies have procured the wheat and rice it needs to be stored. The CAG has also audited the total storage capacity of FCI (its own as well as hired) over the years.
As on March 31, 2007, the total storage capacity of FCI stood at 25.2 million tonnes. The total stock of food grains(i.e. both rice and wheat) stored in the central pool as on June 1, 2007, stood at 25.9 million tonnes. So storage capacity more or less matched the total amount of food grains stock. The total stock of food grains that is held by the FCI, state governments and their agencies, is referred to as the central pool.
But the situation has changed dramatically since then. As on June 1, 2012 (on June 1, the central pool stock is at its peak) the total amount of food grains in the central pool stood at 82.4 million tonnes. Some of this grain was distributed to the states which do not produce enough rice and wheat of their own. After this the total amount of food grains stock stood at 66.8 million tonnes.
In comparison the storage capacity was at 33.6 million tonnes. This meant that there was a gap of 33.2 million tonnes. So nearly 50% of the food grains remaining in stock did not have any storage space.
As the CAG report mildly puts it “the available storage space operated by FCI was largely inadequate”. Given this lack of storage space FCI could not take over the wheat that had been procured by various state government agencies on its behalf. This also explains to a large extent why newspapers regularly print photographs of rice and wheat rotting in the open after it has been procured by the government.
So what does this mean in terms of the right to food security? As more and more rice and wheat is bought by the government, a large amount of it will rot in the open given that FCI does not have enough storage space. Of course, the FCI can build/hire new storage space. But its past record of doing the same is simply abysmal.
As the CAG report points out “The total food grains stock in the Central Pool recorded an increase of 45.8 million tonnes between 2006-2007 and 2011-2012; FCI increased its storage space through hiring or owned space only to extent of 8.4 million tonnes (18 per cent) which was not commensurate with increase in food grains stock level. It owned storage capacity increased by mere 0.4 million tonnes during the period.”
What this means is that while FCI managed to create a storage capacity of 0.4 million tonnes on its own, the total food grains in stock went up by more than 100 times to 45.8 million tonnes. Even if we take total increase in storage capacity of FCI, the increase in food grains stock was almost 5 and a half times.
So what does this tell us? The FCI has not been able to create storage capacity. And it cannot create storage capacity in a hurry in the time to come. Given that, where will all the rice and wheat that will be bought by the government to fulfil the right to food security, be stored? Why don’t the jholawalas led by Amartya Sen give us an answer for that? Imagine the humongous amount of rice and wheat that will rot throughout the country after it has been acquired by the government. What will be the social and economic implications of that?
FCI procures most of the rice and wheat in the states of Punjab and Haryana. As the CAG report points out “During the period 2006-2007 to 2011-2012, about 75 per cent of stocks were moved by ex- North as procurement was largely concentrated in the North and the remaining 25 per cent was moved from other procuring states of Andhra Pradesh, Chattisgarh, Odisha, West Bengal and Madhya Pradesh. During the six year period, movement of stocks by rail constituted about 92 per cent and the remaining 8 per cent was moved by road.”
Hence, rice and wheat is moved from states which produce more than what is required for consumption and distribution within the state, to states which do not produce enough. This movement is largely carried through Railways. Every month FCI prepares a movement plan in terms of railway rakes to be dispatched to various destinations throughout the country. The trouble is that there is a shortage of railway rakes. In 2006-2007 this shortage was 10%. In 2009-2010 it increased to 12%. And by 2011-2012 this had shot up to 17%.
This shortage of rakes needs to be addressed immediately. If, right to food security comes in, this shortage is likely to go up, given that more food grains will have to be moved across the country.
These are some of the basic issues that the CAG report on FCI points out.
The jholawalas are not bothered about this. They just want the right to food security bill to be introduced and the rest of it will sort itself out as we go along is the argument that they are making.
But anyone who has some understanding of this country and the way it works, knows that nothing will sort itself out. Things will get bad, before they get worse.
Let me conclude this piece with one my favourite Urdu couplets:
Na Khuda hi mila, na visaal-e-sanam/Na udhar kay rahay, na idhar kay rahe
(I found neither faith, nor union with my lover/And now I belong neither there nor here).
That’s the way we seem to be headed when it comes to right to food security.
The article was originally published on www.firstpost.com on May 14, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)
10 reasons why Amartya Sen is wrong about the food security bill
Vivek Kaul
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)
UPA-nomics: How to hoard grain and let food prices soar
Vivek Kaul
Over the last few days my mother and her sister have been complaining about how the price of the 10 kg bag of rice that they buy has gone up by 17% in just over a couple of month’s time.
Now contrast this with what Akhilesh Tilotia of Kotak Institutional Equities Research writes in the GameChanger Perspectives report titled Putting the mountain of grains to use (Released on March 5, 2013). “India can raise more than Rs60,000 crore if it prunes its inventory of food grains: an excess 20 million tons of rice and 26 million tons of wheat (without accounting for procurements to be made this year),” writes Tilotia. (The table shows the numbers in detail).
As the above table shows the government currently has an excess rice stock worth around Rs 25,400 crore and an excess wheat stock worth Rs 36,300 crore, or more than Rs 60,000 crore in total. These numbers have been arrived at by taking into account the MSP of rice at Rs 12.5 per kg and the MSP of wheat at Rs 13.5 per kg and multiplying them with the excess stocks. What the table also tells us is that the government currently has an excess rice stock of nearly 2 times the buffer and an excess wheat stock of nearly 2.7 times the buffer.
The government sets a minimum support price(MSP) for wheat and rice. Every year the Food Corporation of India (FCI), or a state agency acting on its behalf, purchases rice and wheat at MSPs set by the government. The “supposed” idea behind setting the MSP much and that too much in advance is to give the farmer some idea of how much he should expect to earn when he sells his produce a few months later. FCI typically purchases around 15-20 percent of India’s wheat output and 12-15 percent of its rice output, estimates suggest.
At least this is how things are supposed to work in theory. But most government motives have unintended consequences. With an assured price more rice and wheat lands up with the government than it distributes through the public distribution system. Also with FCI obligated to purchase what the farmers bring in, its godowns overflow and at times the wheat and rice are dumped in the open, leading to rodents feasting on the crop.
On the other hand the way things currently are it helps the farmer as he has an assured buyer in the government for his produce. But what it also does is it pushes up prices of rice and wheat everywhere else, as more of it lands up in the godowns of FCI and not in the open market.
The procurement also adds to the food subsidy. The government pays for all the rice and wheat that the farmer brings to it and then lets a lot of it rot. The government currently has nearly 67 million tonnes of rice and wheat in stock. Of this nearly 47 million tonnes is excess.
Tilotia expects the rice and wheat stock of the government to go up to 100 million tonnes by the time this harvest season gets over. As he writes “After the current harvest season, Indian granaries will stock about 100 million tonnes of wheat and rice…A high inventory comes with a heavy carrying cost, which the FCI estimates at Rs6.12 per kg for year-end September 2014: At 100 million tons, this will cost India Rs 60,000 crore a year (forming most of its food subsidy bill).”
A higher food subsidy bill adds to the fiscal deficit and which as writers Firstpost regularly keeps discussing has huge consequences of its own. Fiscal deficit is the difference between what a government spends and what it earns.
In fact, the United States of America had a similar policy in place in the aftermath of The Great Depression which started in 1929, on a number of agri-commodities like wheat, tobacco, cotton etc. The government offered a support price to farmers. This support price had unintended consequences over the years, especially in case of wheat.
As Bruce Gardner writes in the research paper “The Political Economy of U.S.Export Subsidies for Wheat” (quoted by Tilotia) “The traditional means of price support is a governmental agreement, through its Commodity Credit Corporation (CCC), to buy wheat at the support price. This programme periodically led to governmental acquisition of large stocks which were costly to store and for which markets did not exist at the support price level.”
As is happening in India right now the American government ended up buying more and more wheat, of which it had no use for, especially at the price it was paying for it. The farmers had an assured buyer in the government and they went around producing more wheat than before.
This resulted in excess stocks with the American government. Over the years this excess wheat was exported at a subsidised rates. As Gardner writes “The subsidy ranged from 5 to 30 percent of the price of wheat, depending on world and U.S. market conditions in each year.” A lot of wheat was also donated under the Agricultural Trade and Development Act of 1954 ( better known as P.L. 480) of which India was a huge beneficiary in the late 50s and early 60s till Lal Bahadur Shastri initiated the agricultural revolution.
Gradually the wheat acreage, or the area over which wheat was planted, was also reduced in the United States. This meant that the farmers had to keep their land idle and not plant wheat on it. “Acreage allotments…were reintroduced in 1954 and reduced planted acreage by about 18 million acres (from 79 million in 1953 to an average of 61 million in 1954-56). Each producer had to stay under the farm’s allotment in order to be eligible for price support loans. In 1956 the Soil Bank program was introduced. It paid wheat growers about $20 per acre (roughly market rental rates) to idle an average of 12 million more acres (20 percent of preprogram acreage) in 1956-58,” writes Gardner.
India seems to be heading on the same path if the current policies don’t change. As Tilotia writes “India’s inventory is concentrated in the north-western states of Punjab and Haryana, which store 36 million tons of its 66 million tons of stock. Given the large procurement expected from these states again this year (though Madhya Pradesh may better Haryana in wheat procurement this year, especially given state elections), this imbalance can worsen.”
Interestingly, the government can use this excess inventory of rice and wheat to control inflation and at the same time bring down its fiscal deficit. The government currently has rice and wheat worth in excess of Rs 60,000 crore. On the other hand it also has a disinvestment target of Rs 54,000 crore for the next financial year (i.e. the period between April 1, 2013 and March 31, 2014). The government hopes to earn this amount by selling stakes it holds in public sector units to the public.
Along similar lines the government can try selling the excess rice and wheat that it currently holds in the open market. This will help control food inflation with the excess government stock hitting the market. Food forms around 43% of the consumer price inflation number and so if food inflation comes down, the consumer price inflation is also likely to come down.
The challenge of course in doing this is two fold. The first being moving grains from Punjab, Haryana where more than half the inventory lies. The second is to ensure that the market prices of rice and wheat don’t collapse.
Also the current MSP system is not working. If the idea is to pay the citizens of this country to improve their living standards, the government may be better off paying them in cash, rather than paying them in this roundabout manner that creates inflation. This is simply because the current system drives up the price of food for everyone else and it doesn’t necessarily always benefit the farmers. The middleman continue to make the most money.
As Tilotia puts it “If such a payment indeed needs to be made, there is no point in raising prices for all in the system by adding it to the price of the grain: Simply pay the farmer whatever support you want to pay him/her. India is reaching a situation where, by using UID it would be able to send payments to farmers directly. Maybe it is time to re-couple wheat and rice prices with global prices – that can meaningfully reduce inflation in India.”
The article originally appeared on www.firstpost.com on March 6,2013.
(Vivek Kaul is a writer. He tweets @kaul_vivek)