Government of India must stop hoarding food

 rot-in-the-fci-godowns

Vivek Kaul

Food inflation has been an issue of huge concern over the last few years. In a recent report titled What a waste! Crisil Research points out that “food inflation has averaged 8.1% in the last decade, and over 10% in recent times.”
This when agricultural growth has been robust and our granaries continue to overflow. Agricultural growth over the last decade stood at 3.6% per year, in comparison to 2.9% per year, in the decade before that. Hence, the conventional argument that food inflation is a result of not enough supply in comparison to demand, doesn’t totally hold.
The Food Corporation of India (FCI) puts out a number indicating its food grains stock every month. As on June 1, 2014, the food grain stock, which includes rice, wheat, unmilled paddy and coarse grains, stood at 74.8 million tonnes. At the beginning of June 2008, the stock had stood at 36.4 million tonnes.
This indicates that the government through FCI has bought and hoarded more and more of rice and wheat produced in the country. In a May 2013 research report titled Buffer Stocking Policy in Wake of NFSB (National Food Security Bill) written by Ashok Gulati and Surbhi Jain of the Commission for Agricultural Costs and Prices(CACP) it was estimated 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.
The current level of food grains with the FCI is significantly more than 41-47 million tonnes. One impact of this is that the government spends money in buying the “extra grain” which it does not require. This adds to the government expenditure and in turn the fiscal deficit. The fiscal deficit is the difference between what a government earns and what it spends. The CACP authors had estimated that an excess stock of 30-40 million tonnes would cost the government anywhere between Rs 70,000 to Rs 92,000 crore.
The main reason for this “extra procurement” is the fact that the Congress led UPA government kept increasing minimum support price(MSP) of food grains over the years, at a fast pace. In 2005-2006, the MSP for common paddy(rice) was Rs 570 per quintal. By 2013-2014 this had shot up to Rs 1310 per quintal, an increase in price of around 11% per year. In comparison, between 1998-1999 and 2005-2006, the MSP of rice had increased at the rate of 3.8% per year.
In case of wheat the MSP has gone up by 14% per year between 2005-2006 and 2013-2014. In comparison, between 1999-2000 and 2005-2006, the price had gone up by 4% per year.
In fact, the decision to increase the MSP was totally random. A report released by the Comptroller and Auditor General in May 2013 pointed out that “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.”
Other than the government expenditure shooting up, the rapid increase in MSP has led to more and more food grains landing up with the government. The FCI does not have enough storage capacity for this grain. This is one reason why newspapers frequently carry pictures of food grains rotting, lying in the open. “Between 2005 and 2013, close to 1.94 lakh tonnes of food grain were wasted in India, as per FCI’s own admission in the Parliament,” the Crisil report points out. Rice formed 84% of the total damage.
Further, the excess procurement has also led to high inflation, as a lower amount of rice and wheat have landed up in the open market. The CAG report points out that 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.
Also, with MSPs going up every year at a rapid rate, “the cropping pattern” the Crisil report points out “has been biased towards food grains like rice and wheat, and have led to excessive production”.
Given this, one way of bringing down food inflation is the government releasing stocks of rice and wheat into the open market. One problem here can be that the procurement is concentrated in a few states. In case of wheat these states are Punjab, Haryana and Madhya Pradesh. And in case of rice, these states are Andhra Pradesh, Chattisgarh and Punjab. Hence, stocks will have to be moved from these parts of the country to other parts. More than that the government needs to stop procuring more than what it needs to run its various programmes. This will be beneficial from the fiscal deficit front as well as help moderate inflation.
This becomes even more important given that the India Meteorological Department expects the monsoon to be below normal at 93 per cent of the long period average. In this scenario, the production of grains is expected to take a hit. If the government continues with excess procurement, less grains will land up in the open market and push prices further up.
Also, when it comes to production of food products like milk, milk products, egg, fish and meat, supply has been lagging demand. The production has risen only at the rate of 3-4% between 2009-2010 and 2012-2013, whereas the price has risen at the rate of 14-15%, the Crisil report points out. This needs to be addressed.
When it comes to fruits and vegetables, the Agricultural Product and Market Committee(APMC) Act was passed to help farmers. Instead, it has made them vulnerable to traders backed by political parties. The huge increase in price of onion last year, despite a small fall in production is an excellent example of the same. The trader cartels need to be broken down.
These steps need to be taken if food inflation has to be controlled in the time to come.

 The article originally appeared in The Asian Age/Deccan Chronicle on June 17, 2014

(Vivek Kaul is the author of the Easy Money trilogy. He can be reached at vivek.kaul@gmail.com

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About vivekkaul
Vivek Kaul is a writer who has worked at senior positions with the Daily News and Analysis(DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System , the latest book in the trilogy has just been published. The first two books in the trilogy were published in November 2013 and July 2014 respectively. Both the books were bestsellers on Amazon.com and Amazon.in. Currently he works as an economic commentator and writes regular columns for www.firstpost.com. He is also the India editor of The Daily Reckoning newsletter published by www.equitymaster.com. His writing has appeared across various other publications in India. These include The Times of India, Business Standard,Business Today, Business World, The Hindu, The Hindu Business Line, Indian Management, The Asian Age, Deccan Chronicle, Forbes India, Mutual Fund Insight, The Free Press Journal, Quartz.com, DailyO.in, Business World, Huffington Post and Wealth Insight. In the past he has also been a regular columnist for www.rediff.com. He has lectured at IIM Bangalore, IIM Indore, TA PAI Institute of Management and the Alliance University (Bangalore). He has also taught a course titled Indian Economy to the PGPMX batch of IIM Indore. His areas of interest are the intersection between politics and economics, the international financial crisis, personal finance, marketing and branding, and anything to do with cinema and music. He can be reached at vivek.kaul@gmail.com

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