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)
On May 7, earlier this month, the Comptroller and Auditor General (CAG) of India presented to the Parliament a Performance Audit of Storage Management and Movement of Food Grains in Food Corporation of India.
This report has gone largely unreported in the media, given that it does not contain any big number running into lakhs of crore like a few previous reports of the CAG did. But it clearly explains why the government of India is in no position to introduce the right to food security. And if it does that, it will be a disaster.
Currently the government declares a minimum support price(MSP) for wheat and rice paddy, and buys them directly from the farmers using the services of the Food Corporation of India(FCI) as well as state government agencies. FCI and other agencies are expected to buy all the rice and wheat that lands up at the government mandis.
The data put out by CAG clearly shows that the procurement of wheat and rice by the government has gone up dramatically since 2006-2007 (i.e. the period between April 1, 2006 and March 31, 2007). In 2006-2007, 75.8 million tonnes of wheat was produced by the Indian farmers. Of this nearly 18% landed up with FCI and the state government agencies. In 2011-2012 (i.e. the period between April 1, 2011, and March 31, 2012), the wheat produce had shot up 93.9 million tonnes. Of this nearly 35% landed up with the FCI and state government agencies.
When it comes to rice the situation is even more pronounced. In 2006-2007, the total rice production was at 93.4 million tonnes. Of this 32% landed up with FCI and other state government agencies. In 2011-2012, the rice produce was at 104.3 million tonnes. Of this a whopping 54% landed up with FCI and other state government agencies.
What this tells us is that more and more rice and wheat is landing up with the government. This is primarily on account of the fact that minimum support price has consistently been raised over the last few years, encouraging the farmers to sell directly to the government.
And this has done in a totally random manner. As the report points out “ No specific norm was followed for fixing of the Minimum Support Price (MSP) over the cost of production. Resultantly, it was observed the margin of MSP fixed over the cost of production varied between 29 per cent and 66 per cent in case of wheat, and 14 per cent and 50 per cent in case of paddy during the period 2006-2007 to 2011-2012.”
Typically MSP needs to be fixed depending on the rates recommended by Commission for Agricultural Costs and Prices (CACP), which is a part of the Ministry of Agriculture. While determining the MSP, CACP takes into account, the cost of production, domestic and international market prices, stock position, prices fixed in previous years etc. So even though there is a robust method for determining the MSP at which the government of India should buy rice and wheat from farmers, that is not being followed.
Also as more and more rice and wheat lands up with the government, there is less of it available in the open market. In 2006-2007, 63.3 million tonnes of rice landed in the open market. By 2011-2012, this had fallen by a huge 23.6% to 48.3 million tonnes. The same is true about about wheat as well, though the drop is not as pronounced as it is in the case of rice. In 2006-2007, the total amount of wheat in the open market stood at 62.1 million tonnes. By 2011-2012, this had dropped to 61.4 million tonnes.
And that explains the high cereal inflation of 16.65% in April, 2013. If food security becomes a right, the government will need to buy more rice and wheat than it currently is, and that will mean lesser amount of rice and wheat available in the open market as has been the case over the last few years. This will push up their price further.
The conspiracy theory here is that if food security bill is passed (or even brought in through an ordinance) a lot more rice and wheat will land up in the open market and thus slowdown cereal inflation. The government plans to use its rotten public distribution system to distribute rice and wheat, and that means that a lot of it will be sold in black and end up in the open market. This is expected to drive down the price of rice and wheat. And this for all we know this might very well turn out to be true.
Once FCI and other state government agencies have procured the wheat and rice it needs to be stored. The CAG has also audited the total storage capacity of FCI (its own as well as hired) over the years.
As on March 31, 2007, the total storage capacity of FCI stood at 25.2 million tonnes. The total stock of food grains(i.e. both rice and wheat) stored in the central pool as on June 1, 2007, stood at 25.9 million tonnes. So storage capacity more or less matched the total amount of food grains stock. The total stock of food grains that is held by the FCI, state governments and their agencies, is referred to as the central pool.
But the situation has changed dramatically since then. As on June 1, 2012 (on June 1, the central pool stock is at its peak) the total amount of food grains in the central pool stood at 82.4 million tonnes. Some of this grain was distributed to the states which do not produce enough rice and wheat of their own. After this the total amount of food grains stock stood at 66.8 million tonnes.
In comparison the storage capacity was at 33.6 million tonnes. This meant that there was a gap of 33.2 million tonnes. So nearly 50% of the food grains remaining in stock did not have any storage space.
As the CAG report mildly puts it “the available storage space operated by FCI was largely inadequate”. Given this lack of storage space FCI could not take over the wheat that had been procured by various state government agencies on its behalf. This also explains to a large extent why newspapers regularly print photographs of rice and wheat rotting in the open after it has been procured by the government.
So what does this mean in terms of the right to food security? As more and more rice and wheat is bought by the government, a large amount of it will rot in the open given that FCI does not have enough storage space. Of course, the FCI can build/hire new storage space. But its past record of doing the same is simply abysmal.
As the CAG report points out “The total food grains stock in the Central Pool recorded an increase of 45.8 million tonnes between 2006-2007 and 2011-2012; FCI increased its storage space through hiring or owned space only to extent of 8.4 million tonnes (18 per cent) which was not commensurate with increase in food grains stock level. It owned storage capacity increased by mere 0.4 million tonnes during the period.”
What this means is that while FCI managed to create a storage capacity of 0.4 million tonnes on its own, the total food grains in stock went up by more than 100 times to 45.8 million tonnes. Even if we take total increase in storage capacity of FCI, the increase in food grains stock was almost 5 and a half times.
So what does this tell us? The FCI has not been able to create storage capacity. And it cannot create storage capacity in a hurry in the time to come. Given that, where will all the rice and wheat that will be bought by the government to fulfil the right to food security, be stored? Why don’t the jholawalas led by Amartya Sen give us an answer for that? Imagine the humongous amount of rice and wheat that will rot throughout the country after it has been acquired by the government. What will be the social and economic implications of that?
FCI procures most of the rice and wheat in the states of Punjab and Haryana. As the CAG report points out “During the period 2006-2007 to 2011-2012, about 75 per cent of stocks were moved by ex- North as procurement was largely concentrated in the North and the remaining 25 per cent was moved from other procuring states of Andhra Pradesh, Chattisgarh, Odisha, West Bengal and Madhya Pradesh. During the six year period, movement of stocks by rail constituted about 92 per cent and the remaining 8 per cent was moved by road.”
Hence, rice and wheat is moved from states which produce more than what is required for consumption and distribution within the state, to states which do not produce enough. This movement is largely carried through Railways. Every month FCI prepares a movement plan in terms of railway rakes to be dispatched to various destinations throughout the country. The trouble is that there is a shortage of railway rakes. In 2006-2007 this shortage was 10%. In 2009-2010 it increased to 12%. And by 2011-2012 this had shot up to 17%.
This shortage of rakes needs to be addressed immediately. If, right to food security comes in, this shortage is likely to go up, given that more food grains will have to be moved across the country.
These are some of the basic issues that the CAG report on FCI points out.
The jholawalas are not bothered about this. They just want the right to food security bill to be introduced and the rest of it will sort itself out as we go along is the argument that they are making.
But anyone who has some understanding of this country and the way it works, knows that nothing will sort itself out. Things will get bad, before they get worse.
Let me conclude this piece with one my favourite Urdu couplets:
Na Khuda hi mila, na visaal-e-sanam/Na udhar kay rahay, na idhar kay rahe
(I found neither faith, nor union with my lover/And now I belong neither there nor here).
That’s the way we seem to be headed when it comes to right to food security.
The article was originally published on www.firstpost.com on May 14, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)
When the production of any commodity goes up, its price falls.
That’s Economics 101.
But economics is not physics. And what sounds true, may not be true at all.
Take the case of the report in The Times of India edition dated May 12, 2013 which points out “US agricultural department and…the Food and Agriculture Organisation(FAO) have predicted record global output of cereals…raising hopes of snapping the trend of worryingly rising food prices.”
The US department of agriculture expects the global production of wheat to rise by 6.9% to 701 million tonnes in 2013-2014 (i.e. the period between April 1, 2013 and March 31, 2014) from the previous year. The production of rice is expected to rise by 1.9% to 479 million tonnes.
This rise in production The Times of India feels will bring down cereal prices in particular and food prices in general. The cereal inflation was 4.62% in March 2012. But it had shot up to 18.36% in March 2013.
Will this inflation come down? Another reason in favour of increased production is the fact that the India Meteorological Department has said that the South West Monsoon will be normal this year. The South West Monsoon is very important for the production of rice given that half of India’s area under cultivation is still at the mercy of monsoons. Irrigation wherever its available is also dependent on rainfall.
While increase in production of a commodity does have an impact on its price, but there are other bigger factors at play in the Indian case. Every year the government of India sets a minimum support price for rice and wheat. At this price, it buys rice and wheat from farmers, through the Food Corporation of India(FCI) and other state government agencies.
This price is declared in advance in order to give the farmer an idea of what he is likely to get for his produce. While the idea behind MSP is noble but it has essentially become a tool of give-aways in the hands of politicians. The MSPs for both wheat and rice have been raised dramatically over the last few years.
In 2009-2010 (i.e. the period between April 1, 2009 and March 31, 2010), the MSP for rice paddy was Rs 1000 per quintal (i.e. 100 kilograms). This was increased to Rs 1250 per quintal in 2012-2013. For wheat this went up from Rs 1080 per quintal to Rs 1350 per quintal.
So MSPs have gone up dramatically over the last few years. This has resulted in more and more rice and wheat being produced and landing up with the FCI and other agencies which operate on its behalf. 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.
Hence the stocks with the stock of rice and wheat with the government has gone up dramatically. At the beginning of March 1, 2013, the total rice and wheat stock stood at 62.8 million tonnes. Now compare this with the minimum buffer of 25 million tonnes that needs to be maintained. So the government is buying much more rice and wheat than it actually needs to maintain a buffer and distribute through its various social security programmes. As an article in the May 26, 2013, edition of Business Today points out “A few years of high minimum support price (MSP) – floor price at which government buys all the wheat and rice offered by farmers – has led to the massive procurements. This, however, has not been followed through with regular releases into the market.” So the prices of rice and wheat has gone up, as more of it lands up in the godowns of FCI and not in the open market. Or as Madan Sabnavis, Chief Economist at credit rating agency Credit Analysis & Research Ltd told Business Today “Excess procurement is leading to an artificial scarcity.”
This is something even the government agrees with. A December 2012, report brought out by the Commission for Agricultural Costs and Prices, which comes under the Ministry of Agriculture points out “Since 2006-07, the procurement levels for rice and wheat have increased manifold…Currently, piling stocks of wheat with FCI has led to an artificial shortage of wheat in the market in the face of a bumper crop. Wheat prices have gone up in domestic markets by almost 20 percent in the last three months alone (in the three months upto December 2012, when the CACP report was released), because of these huge stocks with the government that has left very little surplus in markets.”
The procurement of food grains increased from 34.3 million tonnes in 2006-2007 to 63.4 million tonnes in 2011-2012. Due to this the total stock of food grains in the central pool went up from 25.9 million tonnes as on June 1, 2007 to 82.4 million tonnes on June 1, 2012. The total stock of food grains that is held by the FCI, state governments and their agencies, is referred to as the central pool.
As on March 1, 2013, this number stood at 62.8 million tonnes. Analysts expect this to touch 100 million tonnes after the current procurement season gets over. FCI estimates put the carrying cost for this inventory comes at Rs 6.12 per kg. At 100 million tonnes, the cost works out to over Rs 60,000 crore.
And all this has happened because of high MSPs being set by the government. What is interesting is that the Comptroller and Auditor General (CAG) of India in a recent report titled “Performance Audit of Storage Management and Movement of Food Grains in Food Corporation of India (FCI)” questions the logic behind how the MSPs are being set.
The report was presented to the Parliament on May 7 ,2013. As the report points out “No specific norm was followed for fixing of the Minimum Support Price (MSP) over the cost of production. Resultantly, it was observed the margin of MSP fixed over the cost of production varied between 29 per cent and 66 per cent in case of wheat, and 14 per cent and 50 per cent in case of paddy during the period 2006-2007 to 2011-2012. Increase in MSP had a direct bearing on statutory charges levied on purchase of food grains by different State Government… All this resulted in rising of the acquisition cost of food grains.”
The high MSPs have led to another distortion. FCI majorly procures its rice and wheat from states like Punjab and Haryana. But over the last few years high MSPs have motivated various state governments to set up more and more procurement centres. A good example is Madhya Pradesh, which emerged as the second largest procurer of wheat last year by having set up more procurement centres over the years and by also offering a bonus to the farmers over and above the MSP. This year Bihar seems to have got into the act. As a recent editorial in the Business Standard points out “Bihar, only a marginally wheat surplus state, has this year set up more grain procurement centres than the major wheat-growing states of Punjab, Haryana and Uttar Pradesh put together.”
So the moral of the story is that both the central and state government are procuring more and more of the rice and wheat that is being produced, distorting the rice and wheat market totally. As V S Vyas an economist with the Prime Minister’s Economic Advisory Council told Business Today “Stock in the market is important, not the total stock.”
It is unlikely that the MSP are going to come down this year given that Lok Sabha elections are due next year and hence the Congress led UPA will continue to offer ‘boon-dongles’ to citizens of this country. And even though the global production of rice and wheat is likely to go up as suggested by The Times of India, there will be no relief for the Indian consumer.
The article originally appeared on www.firstpost.com on May 13, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)
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)
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)