Rice

Monsoon starts weak: What will be its impact on agriculture?

monsoon
It has been widely reported that there is a possibility of a bad monsoon this year. Data released by the India Meteorological Department (IMD) suggests that “the rainfall activity was deficient/scanty over the country”. In fact, “for the country as a whole, cumulative rainfall during this year’s monsoon has so far upto 18 June been 45% below the Long Period Average (LPA)”, the IMD data suggests.
This has had an impact on the sowing of summer crops. Data released by the ministry of agriculture shows that the sowing of kharif crops,which are typically sown around this time of the year for harvesting after the rains (ie, September-October), has come down majorly in comparison to last year.
Last year the farmers had sowed rice over an area of 16.4 lakh hectares by June 21, 2013. This year it has dropped by more than half to 7.59 lakh hectares. The planting of oil seeds has dropped by a whopping 84.9% to 1.23 lakh hectares. Pulses have also fallen from 3.74 lakh hectares to 2.6 lakh hectares this year. The planting of sugarcane continues to remain more or less stable at 43.92 lakh hectares. Nearly 55% of the cropped area in India is dependant on rains.
It is still early days for the monsoon and the situation might improve in the days to come and that will lead to more sowing. A bad monsoon doesn’t necessarily mean that agricultural productivity will fall and will lead to a lower production of kharif crops. Why is that the case? As Chetan Ahya and Upasana Chachra of Morgan Stanley write in a recent report titled El Nino Impact on India’s Farm Output “In 2009, even with a 22% deficient rainfall trend, agriculture output did not decline on a year on year basis then.”
This means the agricultural output in 2009 was not lower than that in 2008, even though the monsoon was 22% lower than normal. The IMD expects the monsoon this year to be 7% lower than normal. Given this, the agricultural productivity should not be impacted much.
As Ahya and Chachra explain “while North Western India is likely to face the largest shortfall, it is also the most irrigated region and currently has full reservoir levels. Even in 2009, the impact on the region’s food production was minimal. Hence, North West India (comprising Punjab, Haryana and Western UP), which produces most of the Kharif season (summer crop) rice, should see a near normal crop.”
What this means is that rice production is unlikely to drop. What also helps is the fact that the Food Corporation of India(FCI) as on June 1, 2014,had a rice stock of 20.6 million tonnes. The government recently decided to unload around 5 million tonnes of this stock on to the open market in order to control inflation. Even after that a stock of 15.6 million tonnes of rice still remains.
Over and above this, the FCI will buy more rice in the coming months. Hence, unless the government ends up buying much more rice than it needs (as it has in the past) to run its various programmes, the price of rice should remain stable. By buying much more rice than it needs the government in the past ensured that a lesser amount of rice landed up in the open market and that led to a rapid rise in its price.
Further, the Modi government also needs to ensure that it does not raise the minimum support price of rice at the same rate as the Congress led UPA government had done in the past.Every year the government of India sets a minimum support price for rice and wheat. At this price, it buys rice and wheat from farmers, through the FCI and other state government agencies.
In 2005-2006, the MSP for common paddy(rice) was Rs 570 per quintal. By 2013-2014 this had shot up to Rs 1310 per quintal, an increase in price of around 11% per year. In comparison, between 1998-1999 and 2005-2006, the MSP of rice had increased at the rate of 3.8% per year.
If these steps are taken the price of rice will remain stable.
But what about the other kharif crops? Oil seeds and pulses are largely grown in south and central India. The irrigation facilities in this region are no so well developed as Punjab and Haryana. Also, the reservoir levels in these areas are a concern. “Consequently, price pressures for these items [i.e. pulses and oil seeds] may build up. India may potentially need to import pulses to meet the shortfall in production,” write Ahya and Chachra. The scenario on the oil seeds front is looking particularly weak given that sowing has fallen by 84.9% in comparison to last year. This after central India has received 52% lower rainfall than normal until now. The number in case of south India stands at 27%.
“The overall farm output growth is unlikely to contract”, feel the Morgan Stanley analysts, even though things could get difficult on the pulses and the oil seeds front. But the real worry is the drought psychology setting in. As T N Ninan writesin a column in the Business Standard “A drought does not reduce agricultural output with the frequency of an earlier age. In fact, the agricultural sector managed to show marginal growth in both the last two difficult years – helped by the spread of irrigation and other drought-proofing measures.”
Hence even with a bad monsoon, a water shortage is unlikely. “For all one knows, cereal production may increase yet again. The real danger is of drought psychology setting in and sending prices skyward, as has already happened with onions and potatoes,” writes Ninan.
And that is something that Modi government will have to tackle through better communication.

 The column originally appeared on www.firstbiz.com on June 23, 2014

(Vivek Kaul is a writer. He can be reached at [email protected]) 

Monsoon starts weak: What will be its impact on agriculture?

monsoon
It has been widely reported that there is a possibility of a bad monsoon this year. Data released by the India Meteorological Department (IMD) suggests that “the rainfall activity was deficient/scanty over the country”. In fact, “for the country as a whole, cumulative rainfall during this year’s monsoon has so far upto 18 June been 45% below the Long Period Average (LPA)”, the IMD data suggests.
This has had an impact on the sowing of summer crops. Data released by the ministry of agriculture shows that the sowing of kharif crops,which are typically sown around this time of the year for harvesting after the rains (ie, September-October), has come down majorly in comparison to last year.
Last year the farmers had sowed rice over an area of 16.4 lakh hectares by June 21, 2013. This year it has dropped by more than half to 7.59 lakh hectares. The planting of oil seeds has dropped by a whopping 84.9% to 1.23 lakh hectares. Pulses have also fallen from 3.74 lakh hectares to 2.6 lakh hectares this year. The planting of sugarcane continues to remain more or less stable at 43.92 lakh hectares. Nearly 55% of the cropped area in India is dependant on rains.
It is still early days for the monsoon and the situation might improve in the days to come and that will lead to more sowing. A bad monsoon doesn’t necessarily mean that agricultural productivity will fall and will lead to a lower production of kharif crops. Why is that the case? As Chetan Ahya and Upasana Chachra of Morgan Stanley write in a recent report titled El Nino Impact on India’s Farm Output “In 2009, even with a 22% deficient rainfall trend, agriculture output did not decline on a year on year basis then.”
This means the agricultural output in 2009 was not lower than that in 2008, even though the monsoon was 22% lower than normal. The IMD expects the monsoon this year to be 7% lower than normal. Given this, the agricultural productivity should not be impacted much.
As Ahya and Chachra explain “while North Western India is likely to face the largest shortfall, it is also the most irrigated region and currently has full reservoir levels. Even in 2009, the impact on the region’s food production was minimal. Hence, North West India (comprising Punjab, Haryana and Western UP), which produces most of the Kharif season (summer crop) rice, should see a near normal crop.”
What this means is that rice production is unlikely to drop. What also helps is the fact that the Food Corporation of India(FCI) as on June 1, 2014,had a rice stock of 20.6 million tonnes. The government recently decided to unload around 5 million tonnes of this stock on to the open market in order to control inflation. Even after that a stock of 15.6 million tonnes of rice still remains.
Over and above this, the FCI will buy more rice in the coming months. Hence, unless the government ends up buying much more rice than it needs (as it has in the past) to run its various programmes, the price of rice should remain stable. By buying much more rice than it needs the government in the past ensured that a lesser amount of rice landed up in the open market and that led to a rapid rise in its price.
Further, the Modi government also needs to ensure that it does not raise the minimum support price of rice at the same rate as the Congress led UPA government had done in the past.Every year the government of India sets a minimum support price for rice and wheat. At this price, it buys rice and wheat from farmers, through the FCI and other state government agencies.
In 2005-2006, the MSP for common paddy(rice) was Rs 570 per quintal. By 2013-2014 this had shot up to Rs 1310 per quintal, an increase in price of around 11% per year. In comparison, between 1998-1999 and 2005-2006, the MSP of rice had increased at the rate of 3.8% per year.
If these steps are taken the price of rice will remain stable.
But what about the other kharif crops? Oil seeds and pulses are largely grown in south and central India. The irrigation facilities in this region are no so well developed as Punjab and Haryana. Also, the reservoir levels in these areas are a concern. “Consequently, price pressures for these items [i.e. pulses and oil seeds] may build up. India may potentially need to import pulses to meet the shortfall in production,” write Ahya and Chachra. The scenario on the oil seeds front is looking particularly weak given that sowing has fallen by 84.9% in comparison to last year. This after central India has received 52% lower rainfall than normal until now. The number in case of south India stands at 27%.
“The overall farm output growth is unlikely to contract”, feel the Morgan Stanley analysts, even though things could get difficult on the pulses and the oil seeds front. But the real worry is the drought psychology setting in. As T N Ninan writesin a column in the Business Standard “A drought does not reduce agricultural output with the frequency of an earlier age. In fact, the agricultural sector managed to show marginal growth in both the last two difficult years – helped by the spread of irrigation and other drought-proofing measures.”
Hence even with a bad monsoon, a water shortage is unlikely. “For all one knows, cereal production may increase yet again. The real danger is of drought psychology setting in and sending prices skyward, as has already happened with onions and potatoes,” writes Ninan.
And that is something that Modi government will have to tackle through better communication.

 The column originally appeared on www.firstbiz.com on June 23, 2014

(Vivek Kaul is a writer. He can be reached at [email protected]) 

How the government makes you pay more for food

 food

Vivek Kaul


“God,” they say, “is in the details”. And so is the devil.
The wholesale price inflation(WPI), one of the ways to measure the rise in prices, touched 4.86% for June 2013. In May 2013, WPI had stood at 4.7%.
The worrying factor was that food inflation increased to 9.74%, due to an increase in price of onions, cereals and rice. During May 2013, food inflation was at 8.25%.
While an overall inflation of less than 5% sounds like a good situation to be in, it clearly is not, because of the high food inflation that prevails (I bought tomatoes at Rs 60 per kg yesterday evening and that hurts).
The point to remember here is that overall inflation is a theoretical construct where various goods and services have a certain weight attached to them. Food articles comprise of around 14.34% of the WPI basket. What this means in simple English is that if an individual were to spend Rs 100 on goods that comprise the WPI basket, he would spend Rs 14.34 on buying food.
But for most people the proportion of money they spend on food is higher than 14.34%. 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, makes the point. “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.
This means that rising food prices are a huge problem for most Indians. Vegetable prices went up by 16.47% in June vis a vis 4.85% in May. Onion prices went up by a whopping 114% against 97.4% in May. Price rise in cereals and rice was 17.2% and 19.1% respectively.
While each food product has its own reasons for the price rise, there are some broad generalisations that can be made. Take the case of rice and wheat. Their price rise can be directly attributed to hoarding by the government.
In a research paper titled Buffer Stocking Policy in Wake of NFSB (National Food Securities Bill) Ashok Gulati and Surbhi Jain of CACP point 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 April 1, of every year.
One explanation for the hoarding is that the government was building up stocks to implement the food security scheme. But even after taking that into account, the government is hoarding onto more rice and wheat it requires to sell at subsidised rates. The CACP report estimates that anywhere between 41-47 million tonnes, would be a comfortable level of buffer stocks. This would be enough to take care of the subsidised grain that needs to be distributed to implement the food security scheme. At the same time it would also take care of the strategic reserves that the government needs to maintain, to be ready for a drought or any other exigency.
As on July 1, 2013, the government is expected to have around 82 million tonnes of rice and wheat. What this means that the government has an excess stock of nearly 30-40 million tonnes. As Gulati and Jain point 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.”
The excess storage by the government causes inflation in two ways. There is lesser rice and wheat available in the open market, and this pushes up prices. In the last few years, the government has been buying and hoarding more and more of rice and wheat produced. In 2006-2007, the government bought 32% of the total rice paddy produced. In 2011-2012, this had shot up to a massive 54%. During the same period the procurement of wheat more or less doubled, from 18% to 35%. As a a report brought out by the Comptroller and the Auditor (CAG) General of India points out “The total food grains stock in the Central Pool recorded an increase of 45.8 million tonnes between 2006-07 and 2011-12.”
In some states the procurement of grains has more or less been quasi nationalised. In states like Punjab, Haryana and now Madhya Pradesh and Chhattisgarh, around 80‐90% of the rice and wheat produced is bought by the government. This means the amount of rice and wheat available in the open market has come down dramatically and which in turn has pushed up prices.
The second reason for inflation is the fact that the farmers have already been paid anywhere from Rs 70,000-92,000 crore for the excess stocks that the government chooses to maintain. When this money is spent it leads to more money chasing the same number of goods and products, and thus adds to inflation.
In fact, high food inflation isn’t a recent phenomenon. It has been a regular part of our lives since 2008, when the Congress led UPA government decided to get ready for the 2009 Lok Sabha elections and go on a spending spree. During the period 2008-2009 to December 2012, the food inflation averaged at 10.13% per year. It has more or less continued at same levels since then.
The rise in expenditure of the government hasn’t been met by a rise in revenues and has thus led to an increase in fiscal deficit. Fiscal deficit is the difference between what the government earns and what it spends. 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). It has since jumped to even higher levels and for the 2013-2014(i.e. The period between April 1, 2013 and March 31, 2014) it is projected to be at Rs 5,42,499 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.”
The sudden increase in government expenditure meant more money landing up in the pockets of citizens. And this money was spent leading to an increase in demand for goods and services. But this increase in demand could not be met with an increase in supply because of several infrastructure bottlenecks. As Gulati and Saini write “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…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. ”
Food inflation has now become a way of life for Indians, and is unlikely to go away any time soon. Even with that the government can look to at least control the rise in price of rice and wheat by trying to sell the excess stocks that it is hoarding onto. In fact, the irony is that the government doesn’t have enough space to store all the rice and wheat it is hoarding. The total storage capacity available is around 71.9 million tonnes. Now compare this to the total expected food grain stock of around 82 million tonnes as on July 1, 2013. What this means is that nearly 10 million tonnes of food grain is rotting in the open.
It is not rocket science to suggest that at least this stock can be sold off. It is always better if people eat rice and wheat, rather than the government letting it rot.
The article originally appeared on www.firstpost.com on July 16, 2013

(Vivek Kaul is a writer. He tweets @kaul_vivek)

 

 

The Rs 80,000 crore food grain scam no one is talking about

india-wheat-2011-5-5-8-51-9
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) 

CAG report shows why food security will be a disaster

india-wheat-2011-5-5-8-51-9Vivek 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)