Tag: Right to Food Security

27 March, 2014

Wake up UPA. Central planning didn’t work for Soviet Union, it won’t work for you either

Vivek Kaul

In the last ten years that the Congress led United Progressive Alliance(UPA) government has run this country, its solution for almost every socio-economic problem facing this country, has been bigger government. This was a practice followed by the erstwhile Communist countries all over the world, particularly the Soviet Union. And there was a basic reason behind why the system did not work.
Diane Coyle explains this point in her new book GDP – A Brief But Affectionate History. As she writes “The communist countries had centrally planned economies, not market economies. Ministries in Moscow set the figures for the total number of all items to be produced in the economy and cascaded that down to specific production quotas for different industries and individual factories. With the benefit of hindsight we can see that the idea bureaucrats could possibly known enough about a large, complex economy to plan it from the center successfully is ludicrous.”
Coyle further explains why central planning did not work. “Individual factories were set output targets by the planning ministry. These were expressed in terms of volume—number of TV sets or pairs of shoes—or even weight. Targets of this kind are easy to meet. It doesn’t matter what the shoes are like, whether they are durable, comfortable, in the right sizes for the majority of wearers, or stylish. It doesn’t matter whether the TV sets work after six months or if the panel at the back constantly falls off.”
While India is no longer centrally planned to this extent, but our love for central planning has persisted. Take the case of the Right to Education which was introduced in 2009. At the heart of the Act is a noble idea of ensuring that education is a human right that should be free and compulsory for all children between the ages of 6 and 14.
But like is the case with all big bang centrally planned initiatives the Act tries to achieve too many things at once. It ordered schools to have infrastructure like playgrounds and toilets. Again noble ideas which easy to mandate by law, but difficult to implement immediately.
Many “bottom of the pyramid” kind of private schools have been providing education at a rock bottom fee. If they are asked to suddenly create adequate infrastructure which meets the criteria set under Right to Education, their cost of operation goes up. Their only option is to pass on this cost and increase the fee that they charge.
The trouble is that even though most parents want to educate their children, they may not be in a position to pay the higher fees.A recent article on www.bbc.com deals with precisely this issue. It quotes Gitanjali Krishnan, a teacher in a school in Panchsheel Enclave in New Delhi as saying that the school would have to triple student fees to meet the criteria set under the Right to Education. And this is something that parents of the children studying in the school won’t be able to afford. “Our parents are the poorest of the poor, labourers and migrant workers, they won’t be able to afford it,” she said.
This has led to a scenario where schools are simply shutting down. “Baladevan Rangaraju, director of think tank India Institute, who has been monitoring media reports, has counted 2,692 schools shut and 17,871 at risk,” the BBC article said.
State governments are also shutting down schools which don’t meet the criteria set under Right to Education. The thinking among bureaucrats seems to be that in private schools the quality of teaching is not guaranteed. This is a rather stupid argument given that if the teaching in government schools was good, then the government employees and bureaucrats would be sending their sons and daughters to these schools, which is not the case.
Also, shutting down schools is not a solution. Even if the education offered by private schools is not upto the mark, isn’t some education better than no education? As Parth J Shah, founder president of the Centre for Civil Society writes in a blog “Actually many government schools themselves would not be able to meet the rigid input norms((like playground, classroom size and teacher-student ratio) that the Right to Education has mandated.”
Further, what the Right to Education does like all centrally sponsored scheme is to set a target. And the target is to complete the syllabus. Economist Abhijit Banerjee talked about this sometime back. He conducted a small experiment in Bihar and the results were astonishing. “We did one experiment in Bihar which was with government school teachers. This was in summer around two years ago. The teachers were asked that instead of teaching like you usually teach, your job for the next six weeks is to get the children to learn some basic skills. If they can’t read, teach them to read. If they can’t do math, teach them to do math. At the end of six weeks, these teachers were given a small stipend. They had also been given a couple of days of training. At the end of six weeks, the children had closed half the gap between the best performing children and the worst performing children. They had really improved enormously,” said Banerjee.
So what was happening here? The teachers did not have to complete the syllabus in this case. They had to teach students what the students did not know. As Banerjee put it “The reason was they were asked to do a job that actually made sense. They were asked to teach the children what they don’t know. The usual jobs teachers are asked to do is teach the syllabus – which is very different. Under the Right to Education Act, every year you are supposed to cover the syllabus,” said Banerjee.
Central planning essentially tries to implement what should be the best outcome. But that is easier mandated by the law than implemented in reality. As Banerjee put it “One thing that we forget is that the perfect is the enemy of the good. We are trying to have an education system that is perfect and that every child should come out with wisdom at the end of it and as a result they learn nothing.”
Moving beyond the Right to Education, let’s take the case of the food security scheme, which aims at providing subsidised rice and wheat to nearly 82 crore Indians or 67% of the total population. Again, a big Act which tries to achieve the impossible.
Government data over the years has clearly shown that the percentage of hungry people is very low. An article in the Mint points out “A February[2013] 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.”
Hence, what people need is not subsidised rice and wheat, but food that is more nutritious. Howarth Bouis, director of HarvestPlus, International Food Policy Research Institute (IFPRI), made a very interesting point in an interview to the Mint in 2013. “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,” he said.
No steps have been taken to tackle this problem. Over and above this other factors also need to be taken into account. As a research paper titled National Food Security Bill: Challenges and Options authored by economists belonging to the belonging to the Commission for Agricultural Costs and Prices (CACP), which is a part of the Ministry of Agriculture 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.”
This means taking many small steps in the right direction, which necessarily don’t involve big government and more central planning.
To conclude, the Congress led UPA government is spending its last six weeks in power. And if there is one lesson it can draw from its last ten years in power is that Soviet style central planning doesn’t really work any more and perhaps it never did.
The article originally appeared on www.FirstBiz.com on March 27, 2014

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

28 May, 2013

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

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)

16 May, 2013

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)

7 May, 2013

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)

20 March, 2013

Right to food security will make things more difficult for salaried middle class

Vivek Kaul
There are no free lunches in life, though at times its not obvious who is footing the bill. Take the case of the right to food security bill which guarantees 80 crore Indians or two thirds of the population, subsidised rice, wheat and cereals.
The bill proposes to provide 5 kg of food grains to an individual every month at the rate of Rs 3 per kg of rice, Rs 2 per kg of wheat and Rs 1 per kg of cereals. The food minister KV Thomas expects that the extra burden on food subsidy will be about Rs 20,000 crore. Also 61.23 million tonnes of food grain would be needed.
Prima facie this is a very noble idea. But the question is who will be footing the bill for this? The answer is the tax paying salaried middle class. Allow me to explain.
In the financial year 2011-2012 (i.e. the period between April 1, 2011 and March 31,2012) the Indian government through the Food Corporation of India(FCI) and other agencies procured 63 million tonnes of grains (primarily rice and wheat).
If the right to food security bill is passed by the Parliament (as it is likely to be, why would any political party in their right sense oppose it?), the government will have to procure a greater amount of grains. The government estimates suggest that 61.23 million tonnes of food grain will be needed just to meet the requirements of the right to food security. There are other government food programmes running as well, and hence the 63 million tonnes of grain that the government currently procures may not be enough.
So the government will have to buy a greater amount of grain in the coming years. In order to do that it will have to keep offering a higher price. The government sets a minimum support price(MSP) for wheat and rice (and other agricultural commodities as well) every year and this has been going up over the last few years.
FCI and other state agencies acting on the government’s behalf buy grains produced by the farmer at the MSP. In the years to come the government is likely to buy more rice and wheat at a higher MSP. This means a lesser amount of rice and wheat will land up in the open market and thus push up prices. This argument does not work only if the amount of rice and wheat being produced goes up significantly and that cannot happen immediately in the short run.
Who does this hurt the most? The tax paying salaried middle class is the answer as they will have to pay more and more for the food that they buy.
There are other problems as well. The total storage capacity of FCI as on April 1, 2012, stood at 33.6 million tonnes. The Central Warehousing Corporation has 466 warehouses with a total capacity of 10.56 million tonnes. This brings the total storage capacity of the central government to a little over 44 million tonnes. Then there is the storage capacities of various state warehousing corporations which are also used to store grains. But even with that the government does not have enough storage capacity to store the amount of grain that it currently procures and will have to procure from the farmers in the years to come.
This means more grains will be dumped in the open and will rot as a result. As The Indian Express wrote in an editorial yesterday “The government will be required to procure more foodgrain at a huge cost, which would require pushing procurement prices even higher, creating storage facilities, and distributing the partly rotted foodgrain through a dysfunctional public distribution system.”
So more rotten food grain will be distributed in the years to come.
The major reasoning behind right to food security is that if subsidised food is offered to people, their nutrition will improve. This is not always the case. Abhijit Banerjee, professor of economics at the Massachusetts Institute of Technology explains this through an example. “We carried out a nice experiment in China. We gave some people a voucher to buy cheap rice. Instead of buying rice lets say for Rs 10, they could buy it for Rs 2, using the vouchers. The presumption was that this would improve nutrition. This was done as an experiment and hence some people were randomly given vouchers and others were not. When people went back and looked at it, they were astounded. People with vouchers had were worse off in nutrition. They felt that now that they have the vouchers, they are rich and no longer need to eat rice. They could eat pork, shrimps etc. They went and bought pork and shrimps and as a result their net calories went down. This is perfectly rational. These people were waiting for pleasure.”
A similar thing might play out in India as well. The money people will save on buying subsidised rice/wheat, might get channelised onto other unhealthy alternatives. But then that’s an individual decision that people might make and hence needs to be left at that.
The broader point is there hasn’t been enough discussion/debate/trials to figure out the unintended consequences of the right to food bill. One unintended consequence that is visible straight away is the rise in prices of non cereal food.
The money people save on buying rice/wheat can get channelised into buying fruit, vegetable, pulses, fish, meat, eggs etc. But the production for this may not go up at the same pace leading to higher price. As The Indian Express points out “The production of fruit, vegetable, pulses, fish, meat and eggs will continue to stagnate, however, as more resources will need to be allocated to push up the production of foodgrain. Instead of land, labour, capital, fertilisers and infrastructure being devoted towards meeting the needs of the population as determined by households that choose what they wish to eat, the country will be diverting resources to producing what the state decides the population must consume.”
As the government offers higher MSPs on rice and wheat, the farmers are more likely to produce that than non cereal food. This for the simple reason that the MSP is set in advance and it gives the farmer a good idea of how much he should expect to earn when he sells his produce a few months later. The same is not true for something like pulses where the government does set an MSP, but does not have the required infrastructure for procurement.
The “nutrition” problem will also continue. As Howarth Bouis , director of HarvestPlus, International Food Policy Research Institute (IFPRI), Washington, pointed out in a recent interview to Mint “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. That probably explains the poor nutritional outcomes .” The right to food security will ensure that the poor will find it even more difficult to buy non cereal food which is high on nutrition as it becomes more expensive.
The nutrient deficit of India will continue to remain unaddressed. The right to food security works with the assumption that most of India’s poor may not have access to even the most basic food. That is really not correct as the government’s own data shows. As The Mint points out in a recent news report “Apart from the extremely poor, who form a small fraction of the population, nearly everyone else can afford the rice and wheat they require… A February report of the National Sample Survey Office 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. The stark difference across income-classes lies in the level of spending on non-cereal food items, the survey points out.”
So what India needs to eat is more of eggs, vegetables and fruits, and not rice and wheat, as the government seems to have decided to. “Most of the poor can afford as much of rice, or wheat, as they can eat. And if you look at consumption patterns of these items across income groups, it does not change very much. The huge difference between low-income and high-income groups is in the consumption of non-staple foods—fruits, vegetables and pulses. I think that’s what is limiting better nutrition, not just in India but in much of the developing world,” Bouis told Mint.
What all this means is that the right to food security will drive up food prices higher than what they already are. Hence, food inflation will continue to remain high, which in turn will push up consumer price inflation as well. The right to food security will not only hurt those it is intended to benefit, but it will also hurt the tax paying salaried middle class, as they will continue to face higher prices on food.
The passing of right to food also signals that the Congress led UPA government remains committed to higher expenditure, without really figuring out where the revenue to finance that expenditure is going to come from. In simple English that means the government is going to continue to borrow more. Banks will thus have a lower pool of savings to borrow from, which means higher interest rates and higher EMIs will continue. Now who does this hurt the most? The tax paying middle class again.
Estimates made by Global Financial Integrity suggest that between 2001 and 2010, nearly $123 billion of illicit financial flows went out of India. This means around $12 billion per year on an average. At current conversion rate of one dollar being worth around Rs 54, this is around Rs 65,000 crore per year. So Rs 65,000 crore of black money is leaving the country every year. The black money being generated within the country would be many times over.
Of course people who have this black money are better placed to bear inflation because they don’t pay tax. That is clearly not the case with the salaried middle class, who pay tax and also have to bear higher food inflation. The government should be looking at ways of taxing this black money.
Over and above this agricultural income in this country continues to remain untaxed. This is totally bizarre. As Andy Mukherjee of Reuters Breaking Views writes in a slightly different context “No government today can muster the political courage to tax the incomes of even very large farmers. But to keep the section of the economy that accounts for 60 percent of employment out of tax undermines the system’s legitimacy…It’s ironic that villagers should have political representation without taxation, while the urban middle class finds itself heavily taxed but politically alienated.”
Taxing agricultural income remains out of question. Meanwhile, the salaried tax paying middle class will continue to be screwed.
The article originally appeared on www.firstpost.com on March 20, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)