Why Large Parts of North India Turn Dystopian Every Winter

Pic by Neil Palmer (CIAT). Burning of rice residues in SE Punjab, India, prior to the wheat season.
— Picture by Neil Palmer (CIAT). Burning of rice residues in Punjab, India, prior to the wheat season.

In the end, it’s all about incentives, perverse or otherwise.

My parents moved to Delhi in 2009, after my father retired from Coal India. Since then I have spent all Diwalis in Delhi, though this Diwali due to reasons beyond my control, I will most probably be in Mumbai.

The last few Diwalis in Delhi have been very difficult for me. In fact, last year, I could smell smoke inside the house even before the Diwali day (so, it was clearly not because of crackers). Delhi and many other parts of North India go totally dystopian during winters.

On some days when one gets up and looks out of the window, there is so much smog that one gets a feeling that Armageddon is here.

One of the primary reasons for this smog/pollution is the rice stubble burning that happens in Punjab, Haryana, parts of Uttarakhand and Western Uttar Pradesh. From the looks of it, the situation doesn’t seem to be very different this year.

Newsreports suggest that stubble burning is currently on and was responsible for 40% of Delhi’s pollution on November 1, the highest it has been so far this season. Last year on the same day, the stubble burning’s contribution to Delhi’s pollution had stood at 44% on November 1.

Let’s try and understand this issue in detail and why it happens every year.

This is a great story of how noble intentions on part of politicians and bureaucrats (yes, you read that right) along with incentives that seem right when they are introduced, can really screw up things in the years to come.

And once a system is in place, right or wrong, it is difficult to change it, given that many individuals benefit from the status quo.

Why do farmers burn rice paddy stubble?

They do it primarily because the time farmers have between harvesting rice paddy and sowing the wheat crop, is very short. That’s the short answer. But there is a lot more to it than just this.

Mechanical harvesters found their way into Punjab sometime in the early 1980s. Around four-fifths of the rice crop is harvested using combine harvesters and not human beings (if you still thought humans being carry out harvesting in Punjab, you haven’t moved beyond Hindi cinema of the 1960s).

These harvesters cut and clean rice from the rice paddy, but they leave behind straws on the field. These straws are six to eight inches long and for all practical purposes are useless.

The straws remaining after harvesting of wheat can be used as animal fodder. Rice straw cannot be used as animal fodder primarily because of its high silica content. If this straw is used as animal fodder, it impacts the quality of milk, with the quantity of calcium in the milk coming down. This is not true about straw left behind after harvesting basmati rice, which has low silica content.

But basmati is grown only in a limited area. Like this year, rice was planted on a total area of 27.36 lakh hectares. Of this, basmati was planted on around 6.5 lakh hectares or 24% of the total area under rice. This was primarily because the government does not buy basmati rice under the minimum support price (MSP) structure. (We shall look at this in detail later).

Farmers have a time of around 10-15 days for removing the rice straw and get the fields ready for planting wheat. The easiest thing in this situation is to burn the rice straw. All it takes is a single well-lit matchstick. The cost is close to zero.

This burning leads to higher pollution and deterioration of air quality even in places hundreds of kilometres away. The heat from burning the rice straw leads to an increase in soil temperature which kills beneficial soil organisms. The burning is also a potential source for greenhouse gases. Also, it is worth remembering that the burning of post-harvest rice stubble forms around 50% of the all the crop residue burning in the country.

Let’s take a look at stubble burning in incidences reported in Punjab and Haryana, where most of the burning takes place.

Source: Price Policy for Kharif Crops – The Marketing Season of 2020-2021, Commission for Agriculture Costs and Prices.

As can be seen from above table, the number of stubble burning incidents have come down over the years. The total number of incidents in Punjab and Haryana have come down by 52% between 2016 and 2019. In 2016, the total number of incidents had stood at 1,18,065. By 2019, this was down to 56,742.

So there has been some improvement on the number of fires front over the years. But there are other ways of looking at the situation; the total weight of the stubble burned and the total area of stubble burned. The Chief Secretary of Punjab Vini Mahajan said on October 31, that the total straw burning area in 2020 was 7.49 lakh hectares, which was 5.23% lower in comparison to 7.90 lakh hectares last year.

A Amarender Reddy, the principal scientist at the ICAR-Central Research Institute for Dryland Agriculture recently wrote in The Wire that last year the farmers burnt 11 million tonnes of rice stubble in Punjab and Haryana. This is a little over 40% of the total stubble of 27 million tonnes of rice stubble produced in both the states. Reddy expects the figure to be the same this year.

There has been some improvement on the paddy burning front. One reason has been the distribution of Happy Seeder, a machine which cuts rice stubble and plants wheat seeds at the same time. Reddy writes that the Punjab government has distributed around 24,000 Happy Seeder machines though the state needs nearly 50,000 seeder machines to remove all the rice stubble in the short period of time available before wheat seeds are planted.

Also, farmers have complained about low germination of wheat seeds when the Happy Seeder machine is used. The central government, like most central governments, has allocated more money to solve the problem. Using this money, machines to tackle the rice stubble can be bought at a subsidy.

While, all this is fine, it doesn’t answer the most basic question: why do semi-arid states like Punjab and Haryana, grow a water-intensive crop like rice paddy in the first place?

Why Punjab and Haryana grow rice?

Punjab has the highest yield of 4,132 kgs per hectare when it comes to rice, against the all India yield of 2,659 kgs per hectare. The rice productivity in Haryana is better than the all India average and is at 3,121 kgs per hectare. But this does not take into account the total amount of water used to produce this rice.

As the document titled The Price Policy for Kharif Crops: The Marketing Season for 2016-17, brought out by the Commission for Agriculture Costs and Prices, points out:

“If water consumption is measured in terms of per kilogram of rice, West Bengal becomes the most efficient state, which consumes 2,169 litres to produce one kg of rice, followed by Assam (2,432 litres) and Karnataka (2,635 litres). The water use is high in Punjab (4,118 litres), Tamil Nadu (4,557 litres) and Uttar Pradesh (4,384 litres). … [This] shows that the most efficient state in terms of land productivity is not necessarily the most efficient if irrigation water is factored into. This is because of high rainfall in the eastern region.”

Haryana also uses a lot of water to grow rice.

What this means is that Punjab and Haryana given that they are semi-arid water deficient areas, should not be growing rice in the first place. In the early sixties, Punjab used to grow crops which did not require a lot of water. These included maize, bajra, pulses, oilseeds etc. But over the years, the share of these crops in the overall cropped area has come down dramatically. Take a look at the following table.

Source: Economic Survey of Punjab, 2019-20.

Rice paddy was grown only on 4.8% of cropped area in 1960-61. In 2018-19 it was grown on around 39.6% of cropped area. What happened here? Sometime in the mid 1960s, the central government launched the Green Revolution in Punjab, in order to build food security in India and reduce our dependence on import of American wheat under the Public Law 480 (PL -480).

The farmers were encouraged to plant a high-yielding variety of wheat. In order to incentivise them, the government bought this wheat from them at a minimum support price (MSP) which was declared every year.

A look at the above table tells us that the cropped area under wheat jumped from 27.3% in 1960-61 to 40.5% in 1970-71. The fact that the government bought the wheat at the MSP, led to an increase in wheat plantation.

The government started buying rice at an MSP as well. This led to a jump in number of farmers planting rice in Punjab and Haryana because they had a readymade customer in the government willing to buy at a fixed price. They weren’t subject to the vagaries of price and India’s underdeveloped agricultural marketing system.

The farmers were first incentivised to grow wheat (rightly) and then incentivised to grow rice as well (right from the point of food security, but wrong from all other angles).

Take a look at the following chart which plots the total amount of area on which rice has been planted in Punjab, over the years.

Source: http://punenvis.nic.in/index3.aspx?sslid=5882&subsublinkid=4993&langid=1&mid=1 and Agricultural Statistics at a Glance 2019.

As can be seen there was a major jump in the area under rice production between 1970-71 and 1990-91, from 0.39 million hectare to 2.02 million hectare. This was primarily because of rice being bought by the government at a minimum support price announced every year. The next jump came in the mid 1990s.

In the year 1997, free electricity for farmers was introduced in Punjab. This encouraged farmers to grow rice even more. They could now pump groundwater for free. This could be used to grow rice. Take a look at the following table, which plots the number of tube wells in the state over the years.

Number of tubewells (in lakhs)

Source: Economic Survey of Punjab, 2019-20.

As can be seen from the above table, the number of electrically operated tube wells has gone up dramatically over the years. In 2018-19, the number is more than 13 lakhs. With free electricity, farmers were incentivised to buy electricity operated tube wells and pump as much ground water as required to grow rice.

This has led to the exploitation of groundwater. As the latest Economic Survey of Punjab points out:

“A state-wise assessment of the groundwater resources in the country showed that 80% of 138 blocks assessed were ‘Over-exploited’, 2 blocks were ‘Critical’, 5 were ‘Semi-Critical’, and 22 were ‘Safe’.”

In fact, 95% of groundwater is extracted for the purpose of irrigation.

Along with this, the Food Corporation of India (FCI) buys up a bulk of the rice produced in the state. It is worth remembering here that Punjab is not much of a rice eating state. Take a look at the following chart.

Procurement of rice in major producing states.


Source: Price Policy for Kharif Crops – The Marketing Season of 2020-21.

In 2018-19, Punjab produced around 12.82 million tonnes of rice. Of this, 11.4 million tonnes was procured by the government through FCI and other state procurement agencies. In Haryana, around 4.5 million tonnes of rice was grown. Of this, around 85% was procured. The major reason for this lies in the fact that given that the green revolution started here, FCI has the best infrastructure to procure and store foodgrains, in this area.

The government doesn’t procure basmati under MSP because there is a huge international demand, given its fragrant smell when cooked. Hence, farmers don’t plant much of it. While there is international demand, the farmers also need to suffer the vagaries of price.

This easy procurement along with free electricity encourages farmers to grow rice in what is largely a semi-arid area. But this still does not explain how the farmers came around to burning rice paddy stubble. I mean, I have been going to Delhi for more than 35 years now, but the city was never dystopian during winters earlier. This is clearly a phenomenon of the last decade. What changed?

What led to farmers burning rice stubble?

As we have seen, the government policies over the years, have incentivised farmers to grow rice. At the same time, these policies have led to the water table in Punjab falling dramatically. Given this, the government had to something about this and it did. (I am talking more about Punjab than Haryana here, simply because the number of fires in Punjab is many times more).

As the Economic Survey of Punjab points out:

“It requires 4,500 litres of water to grow one kg of sathi rice when it is sown in April-May. But if sowing is done around mid-June, water requirement reduces to 1,500-2,000 litres. Water requirement is high in April-May because the evaporation rate is high and there is no rain. As a result, all the water used in irrigation is groundwater. In June-July, rainfall supports water needs of the crop.”

This logic essentially led to the enactment of the Punjab Preservation of Subsoil Water Act in 2009. As per this law, farmers are not allowed to sow paddy seeds in nurseries before May 10. They are not allowed to transplant the saplings before June 10. The idea being that by the time farmers start transplanting the saplings in the fields, the Monsoon would have already arrived and hence, lesser groundwater will be used to grow rice. Haryana has a similar law.

The intention behind the law was noble, but the incentive it created for the farmer was again perverse. The end to end production of rice takes 120 days. The process of growing rice used to start in April earlier. But this was pushed back by a month due to the law to prevent the overexploitation of groundwater.

This led to a situation where farmers were left with a time of around 15 days to get their fields ready for the plantation of wheat. The quickest way to turnaround is to burn the rice stubble and that is precisely what has been happening for the last decade.

History plus perverse incentives are at the heart of this problem.

What’s the way out of this?

The central government recently told the Supreme Court that it was planning to bring a new law to tackle the stubble burning problem. This is a classic way of how any government tries to tackle a long-term problem. They either bring a new law or throw money at it, in the hope of solving the problem.

But the question is will this law or any law be of help? The Punjab government did bring in a law to solve one problem and ended up creating another one, without really solving the first one.

In the short-term, innovations like the Happy Seeder have clearly helped. But the problem can only be solved if the Punjabi and other farmers in the semi-arid areas of North India are incentivised to not grow rice and to grow other crops which do not require a lot of water.

But at the risk of repeating a cliché, it is easier said than done.

Let’s take a look at this pointwise.

1) Over the years, the government has bought much more rice and wheat than it needs to maintain the operational reserve and the strategic reserve. Like in September, the rice stock in the central pool of the FCI was at 22.2 million tonnes. As of October every year, FCI needs to maintain an operational reserve of 8.25 million tonnes and a strategic reserve of 2 million tonnes. Clearly, the FCI has much more rice than is required.

This reserve can be brought down by buying lesser rice in the time to come. If this policy is followed for a few years, the farmers will automatically be disincentivised to grow rice. If they are disincentivised to grow rice, there will be lesser rice stubble to burn.

Of course, this is a politically risky move and in the process a section of farmers is bound to face losses, until they move away from growing rice.

2) Another way is to buy more rice from states like West Bengal, which is best suited to be growing rice, given it uses less water to grow rice, in comparison to other states. In fact, West Bengal produced 16.05 million tonnes of rice in 2018-19. Of this, the government purchased just 1.9 million tonnes. The point to remember here is that West Bengal is a rice eating state.

So, unlike Punjab the government cannot buy almost all the rice that is produced. Hence, buying by the central government shouldn’t lead to a shortage of rice in the state, forcing it to buy rice from other states, in the process. The solution lies in helping increase the rice yield per hectare in the state. In 2018-19, West Bengal produced 2,906 kgs of rice per hectare. This was significantly lower than Punjab’s 4,132 kgs per hectare, but more than the national average of 2,659 kgs per hectare.

3) The most important way in weaning away farmers from rice is to change incentives. Let me offer an analogy here. Why does a wealth manager/insurance agent/personal banker/mutual fund agent mis-sell? Simply because their incentives are so aligned.

Along similar lines, if the farmer has an incentive to grow rice (and unlike financial salesmen, the incentive here is an honest one), he will grow rice. We can’t judge him for this.

One way out is to encourage farmers to grow maize, like they used to in the sixties. In 1960-61, 6.9% of the total cropped area in Punjab was used to grow maize. By 2018-19, this had fallen to 1.4%. As the document titled Price Policy for Kharif Crops—The Marketing Season of 2020-21 points out: “Maize cultivation is more water efficient than rice… [It has] a great potential for crop diversification in rice-wheat cropping system areas of north-western plains, where substantial groundwater depletion has occurred.”

The trouble is that maize has low profitability in comparison to rice “due to low and fluctuating prices and yield of maize.”

As the Price Policy document points out:

“There is a need to find alternative uses of maize in the country for industrial uses like feed, starch and ethanol as well as for direct consumption, mainly value-added products… Allowing maize as raw material for ethanol production would help in crop diversification and ensure remunerative prices to farmers.”

This will help increase the demand for maize and help increase its price.

Along similar lines, there is a need to encourage and incentivise the growing of pulses and oilseeds, which we don’t grow enough of. As the Price Policy document points out:

“Instead of promoting water-intensive crops like rice… it is important to promote production of pulses and oilseeds by encouraging farmers to grow these crops by providing better quality seeds, technology and appropriate price support to address gap between domestic production and consumption and maintain stability in the domestic market.”

The fact of the matter is that the private agriculture markets in the country don’t function well. At the same time, in order to encourage farmers to grow particular crops, the government cannot buy a large amount of it, like it buys rice and wheat, simply because it doesn’t have enough money to do so or the right infrastructure to store what it has bought. Pulses are an excellent example. The reason FCI cannot buy pulses is simply because it doesn’t have the right infrastructure to store them.

In this scenario, getting farmers to grow something other than rice is going to be very difficult and will take a lot of concentrated effort on part of the politicians as well as bureaucrats. Will that happen? On that your guess is as good as mine.

The moral of the story being, just because there is a problem, doesn’t mean it has an immediately implementable solution.

 

Why India should be growing dal and not sugarcane

Toor_Dal_Tur_dal

Dal prices, in particular tur dal (also known as arhar dal or pigeon pea) prices, have been on fire. The price of tur dal even crossed Rs 200 per kg sometime back. As I write this, the price of tur dal is still hovering around Rs 200 per kg.

This trend has prevailed over the last few years where dal prices have reached astonishingly high levels at various points of time. Why is that the case? The reasons are both from the demand as well as supply side.

As rural incomes have gone up over the last few years, the demand for dal as a source of protein has gone up. The supply hasn’t been able to keep pace. Over and above this, short term weather trends have led to massive spikes in dal prices.

In 2007-2008, India produced 3.08 million tonnes of tur dal. In 2014-2015, the total production was down to around 2.78 million tonnes, which was lower than the production in 2007-2008. The total production in 2013-2014 had stood at 3.34 million tonnes.

Hence, between 2013-2014 and 2014-2015, there was a significant fall in production of tur dal. Economists Ashok Gulati and Shweta Saini in a column in The Indian Express estimate that the “the consumption of tur hovers between 3.3 to four million tonnes.” Hence, there is a clear gap between the demand for and the supply of tur dal.

What has not helped is the fact that the yield has more or less remained flat. In 2007-2008, 826 kg of tur dal was produced per hectare. By 2013-2014, this number had risen to only 859 kg per hectare, at a rate of less than 1% per year (around 0.7% to be precise).

As Dharmakirti Joshi and Dipti Deshpande economists at Crisil Research point out in a recent research note titled Every third year, pulses catch price-fire: “Pulses account for about 20% of area under foodgrain production, but less than 10% of foodgrain output. Also, over time, production of pulses has failed to catch up with demand. Output has grown less than 2% average in the last 20 years, while acreage has grown even lesser at 0.8%. Not surprisingly, yield rose only 0.9%.”

There are fundamental reasons behind why tur dal prices in particular and dal prices in general have been on fire. Over and above this there is a more recent reason as well. The monsoon this year was at 86% of its long period average. And this did not help either. As Joshi and Deshpande point out: “Pulses are highly risk-prone crops because most of the production is rain-dependent. Barely 16% of total pulses area is covered by irrigation and hence the crop is highly vulnerable to monsoon shocks.”

Also, the current incentive structure of the government is in favour of growing rice, wheat and sugarcane. As Gulati and Saini point out: “The government needs to create a crop-neutral incentive structure for farmers, which is at present skewed in favour of rice, wheat and sugarcane. Much of the subsidies on fertilisers, power, and irrigation go to these crops. These subsidies amount to more than Rs 10,000/ hectare. If the same amount were given to pulse growers, they would be incentivised to produce more.”

The government declares a minimum support price for rice and wheat and actively procures grains through the Food Corporation of India and other agencies.

It declares a minimum support prices for dal as well, but doesn’t actively procure it. Given this, while the farmer is sure of the government buying the rice and wheat that he produces at a certain time, the same certainty doesn’t exist in case of dal. As Joshi and Deshpande point out: “Production is also risky because of inadequate post-harvest storage facilities, absence of assured marketing outlets (unlike wheat and rice) and lack of government assurance for purchase under public distribution.”

The irony is that with economic incentives like assured procurement by the government lead to the farmers producing water intensive crops in water-scarce areas. As TN Ninan writes in The Turn of the Tortoise—The Challenge and Promise of India’s Future: “Punjab and Haryana need to change their choice of crops and reduce growing water-hungry rice…Growing sugar cane, even more water hungry than paddy, in water-scarce Maharashtra is equally contraindicated—especially since the country happens to be surplus in sugar most of the time, and exporting sugar amounts to exporting water.”

As Ninan further points out: “The high cane prices make the crop attractive to farmers who otherwise might have grown less water-intensive crops, especially in stretches where water is not abundant. But one price distortion leads to another, and then another.”

With this entire structure in place enough dal doesn’t get grown. As Gulati and Saini point out in another column in The Financial Express: “Pulses need much less water, are nitrogen-fixing, and therefore do not need much chemical fertilisers either. They can thus save on large input subsidies (power, irrigation and fertilisers), much of which are normally cornered by rice, wheat and sugarcane as these crops have high irrigation cover and higher fertiliser consumption.”

So even though growing dal needs lesser water not enough dal is grown because the prevailing economic incentives go against it. And this anomaly is not going to go away anytime soon.

The column originally appeared on The Daily Reckoning on Nov 30, 2015

‘Dal’onomics 101: Why dal prices have been going up

Toor_Dal_Tur_dal

One of the first things that gets taught in any basic course on economics (or Economics 101) is the substitution effect. This is a scenario where high prices of one commodity pushes consumers into consuming another commodity. If lamb meat prices are too high, consumers move to eating chicken. If coffee prices go up, consumers may move towards drinking the more affordable tea.

In the rational world of theoretical economics this makes tremendous sense. But things are a little different in real life. Take the case of the recent rapid rise in the price of various pulses, tur dal in particular.  The prices recently crossed Rs 200 per kg. The annual increase in price has been more than 100%. In this scenario is the Indian consumer substituting tur dal for something else?

The most logical thing to do would be to consume other pulses like urad, moong, etc. But the prices of other pulses have also risen at a very rapid rate, though not as fast as tur dal. Further, it is also a matter of taste. If the consumer is used to a certain kind of food, it is not so easy to switch to something else overnight.

As economist Subir Gorkarn writes in a recent column in the Business Standard: “Unquestionably, there is some substitution going on between different pulses, but large parts of the country are predominantly tur consumers, while, in others, rising incomes create a long-term, superior-good shift towards tur.”

There have been several media reports talking about how chicken is now cheaper than dal.

It has been jocularly suggested on the social media that chicken being cheaper than dal will lead to regular dal eaters moving to regularly eating chicken. Only if it was as simple as that.

While chicken may be cheaper than dal, it still costs more than Rs 100 per kg and hence, cannot really replace dal as an everyday staple. Dal-chawal or dal-roti is an everyday staple for many Indians. And this cannot be replaced by chicken, unless it starts to cost what dal used to up until a few years back.

Also, it is worth remembering here that dal is a huge source of protein. Further, as incomes go up and people eat better, the demand for food high on protein tends to go up. Data from ministry of agriculture points out that the production of dal has gone up from 14.76 million tonnes in 2007-2008 to 19.77 million tonnes in 2013-2014. In 2014-2015, the total production fell to 17.2 million tonnes. The yield has gone up from 625 kg per hectare in 2007-2008 to 798 kg per hectare in 2013-2014.

Despite an increase in yield as well as production, the troubling point is that the per capita availability of pulses has come down over the long run. A 2014 research report titled India’s Pulses Scenario authored by the National Council of Applied Economics Research (NCAER) points out: “Pulse production has recorded less than one percent annual growth during the past 40 years, which is less than half of the growth rate in Indian human population. Consequently per capita production and availability of pulses in the country has witnessed sharp decline.”

“Per capita net pulse availability has declined from around 60 grams per day in the 1950s to 40 grams in the 1980s and further to around 35 grams per day in 2000s.  However, in the past four years, there has been significant increase in consumption averaging around 50 grams due to somewhat higher production,” the report further points out.

This largely explains why despite an increase in yields as well as overall production, dal prices have gone up over the last few years, with huge spurts in between. How can this be corrected?

A recent newsreport in the Mint points out that a part of the correction has automatically happened through the substitution effect. People are eating more eggs than they were in the past.

Between 1961 and 2013, the per capita availability of eggs has jumped from 7 to 58. At the same time consumption data provided by the National Sample Survey Office suggests “a declining trend in the consumption of pulses—from 11.8 kg per person per year in 1987-88 to 8.4 kg per person per year in 2009-10.”

During the same period “the consumption of eggs went up from 6 per year to 21 per year in rural India and from 17 to 32 in urban areas.”

This is something that the World Health Organisation also suggests when they say: “There is a strong positive relationship between the level of income and the consumption of animal protein, with the consumption of meat, milk and eggs increasing at the expense of staple foods.”

Nevertheless, what about the vegetarians? A significant proportion of Indians are vegetarians and that also needs to be taken into account. They need to eat dal for their protein needs.

The area under production of pulses over the decades has more or less been stagnant. In 1980-1981, the area under production had stood at 22.46 million hectares. This has increased marginally over the years to 24.79 million hectares in 2013-2014. In fact, the number was at 22.09 million hectares in 2008-2009.

The yield in 1980-81 was at 473 kg per hectare. It has since jumped to 798 per kg hectare in 2013-2014. This is an increase of around 1.6% per year. The Indian population has grown at a faster rate.

Further, as the NCAER research report referred to earlier points out: “Most of the increase in pulse production in recent years has been in gram. Low pulse yield in India compared to other counties is attributed to poor spread of improved varieties and technologies, abrupt climatic changes, vulnerability to pests and diseases, and generally declining growth rate of total factor productivity.”

Take the case of tur dal. Between 2007-2008 and 2013-2014, the total production increased from 3.08 million tonnes to 3.34 million tonnes. During the same period the production of gram jumped from 5.75 million tonnes to 9.79 million tonnes. So once one adjusts for the production of gram, the production of other pulses hasn’t gone up by much though their demand has.

A major reason for the area under production of pulses remaining stagnant can be explained the way economic incentives are have been structured for Indian farmers. The incentives are heavily skewed towards production of rice, wheat and sugarcane. And that explains why we have excess stock of these food products.

If prices of pulses are to come down in the years to come, the area under production needs to go up. For that to happen, the economic incentives the way they are currently structured, need to change. And that’s ‘dal’onomics 101 for you.

The column was originally published on Swarajyamag.com on Oct 28, 2015

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 “T
he 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 defacto 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)