Blundering through on the food front

The latest revision in foodgrain prices under the open market sale scheme is but a recognition of the fact that there was something seriously amiss with the Finance Ministry's assumption that all that was needed to reduce the quantum of food sub sidy was to raise prices under the public distribution system.

SQUEEZED between rising stocks in an overburdened storage system and falling offtake from the public distribution system (PDS), the Union government has, for the second time in a month, slashed foodgrain prices under its open market sale scheme. On July 11 it had reduced from Rs.900 a quintal to Rs.750 the price at which wheat is sold through the open market scheme in Punjab, where most of the stocks lie. And on August 9, the price for wheat sales from all its northern godowns was reduced further to Rs. 650.

Since the all-India price was set at Rs. 900 on April 1 with the 'economic cost' of wheat procured and allocated by the Food Corporation of Indian (FCI) as the benchmark, this reduction is bound to increase the food subsidy bill of the Centre. However, t he benefit of that subsidy would now go to traders rather than to consumers belonging to the below poverty line (BPL) and above poverty line (APL) categories. What is more, the increase in subsidy, it is now clear to all, is the direct effect of initiati ves adopted by the government to reduce the food subsidy bill by hiking the price at which food is distributed through the PDS.

As part of the government's drive to curtail subsidies, the central issue price (CIP) for wheat for the APL families, which was Rs.450 a quintal in January 1999, had been increased in two steps to Rs.682 a quintal on April 1, 1999. The measures announced in Budget 2000-2001, along with the subsequent increase in the minimum support price (MSP) for wheat, took this up further to Rs.900 a quintal on April 1, 2000. There was thus a doubling of the APL price for wheat over a 15-month period.

One consequence of this sharp increase in issue prices was a fall in offtake. The 52 per cent hike in PDS prices last year had already caused PDS wheat offtake to decline from almost eight million tonnes in 1998-99 to less than five million tonnes in 199 9-2000. With the further 32 per cent hike with effect from April 1, PDS wheat offtake during April-June has predictably plummeted again, to less than seven lakh tonnes from over 12 lakh tonnes in the corresponding period last year. This occurred despite a doubling of the PDS allocation at half the APL prices for the BPL population.

While the hike in issue price has reduced offtake, procurement has risen sharply. As part of its game of paying off the Bharatiya Janata Party's allies and their supporters, the National Democratic Alliance (NDA) government has been hiking the MSP for wh eat by amounts far in excess of those recommended by the Commission for Agricultural Costs and Prices (CACP). The most recent such hike, from Rs.550 to Rs.580 a quintal, in fact went totally against the recommendation of the CACP that there be no further increase in the MSP. Further, contrary to the Commission's repeated suggestion that MSPs be announced before sowing, the announcement this year was made only after the Budget presentation in February, by which time the grain was near harvesting.

This implies that the announcement of an enhanced MSP would not have done anything to encourage farmers to produce more. But it did have two other effects. First, it encouraged a larger diversion of harvest arrivals from private trade to government agenc ies. As a result, wheat procurement during April-June 2000-2001 reached a record high, crossing 16 million tonnes. Secondly, with the Budget having linked PDS prices automatically to the economic cost, PDS prices increased with the higher MSP.

In the event, the quantity of foodgrain procured by the government rose while the offtake declined further. This obviously increased the government's stockholding substantially. Wheat stocks with the government, which had reached 13 million tonnes on Apr il 1, from a level of less than 10 million tonnes on April 1, 1999, are now over 27 million tonnes. Given the current trend in offtake, wheat stocks at the beginning of the next marketing season, on April 1, 2001, are likely to be at least 20 million ton nes, or fully five times the required norm of four million tonnes, on that day.

The situation in the case of rice is only slightly better. The PDS issue price for Grade A rice for APL families had been increased from Rs.700 a quintal to Rs.905 a quintal in February 1999, and this was increased further to Rs.1180 a quintal on April 1 , 2000. Despite the price rise last year, PDS offtake during 1999-2000, at 10.9 million tonnes, was almost unchanged from the offtake of 10.7 million tonnes during 1998-99. This was because the 29 per cent increase in the issue price of rice was only abo ut half as much as that in the case of wheat. In fact, there was no increase in prices for consumers in many rice consuming States which chose to absorb the higher CIP through enhanced subsidies of their own.

However, rice stocks, which were slightly less than the required norm of 11 million tonnes on April 1, 1999, increased to 14.9 million tonnes on April 1, 2000 because procurement this year has also been a record at more than 16 million tonnes. This was p artly the result of higher output and partly the result of low world prices which reduced demand from exporters. But, as in the case of wheat, the main reason behind the increase in procurement was that the MSP for paddy was fixed at a level 11 per cent above that recommended by the CACP. Moreover, this year's hike of 30 per cent in the issue price of rice has already caused PDS offtake to decline by more than 30 per cent to 1.8 million tonnes during April-June 2000 from 2.6 million tonnes in the corres ponding period last year, despite the doubled allowance for BPL households. Rice stocks on October 1, 2000, when the next procurement season will start, are therefore expected to be at least 11.5 million tonnes, well over the required norm of 6.5 million tonnes on that date.

An obvious consequence of such high levels of stocks is the risk that grain may rot, or be devoured by pests, simply because of a shortage in storage capacity.

The total storage capacity (including cover and plinth storage which should ideally be used only temporarily) available at present with the FCI, the Central Warehousing Corporation, and the State Warehousing Corporations, adds up to about 46 million tonn es. As against this, the publicly held stocks of wheat and rice are now in excess of 41 million tonnes, so that the utilisation of available public sector storage capacity is already around 90 per cent at the national level. In Punjab and Haryana, stocks already exceed storage capacity and grain has to be stored in the open, awaiting transportation to other locations.

On top of this, paddy procurement is due to begin in October and, if last year's figures are any indication, about nine million tonnes of paddy is likely to be procured during the first six weeks in Punjab and Haryana alone. This influx, given that stock s on October 1, 2000 may be close to 38 million tonnes, means that all storage capacity could be exhausted before November-end when stocks peak before their normal seasonal decline by April. But even if the situation is managed in October-November, throu gh temporary construction and recourse to the hiring of private storage, the problem would recur in an even more acute form from April 2001, when wheat procurement is due to begin. The exact extent of the problem will then depend on the size of rice proc urement during October-March of the coming season.

Even if rice procurement falls from over 14 million tonnes last year to 12 million tonnes, the total stocks at the beginning of the next wheat procurement season are likely to be over 40 million tonnes at current levels of offtake. Since available storag e capacity would then permit only a maximum wheat procurement of around eight million tonnes, the choices before the government are limited. It could take immediate steps to increase offtake; or opt for a crash programme of godown construction; or, faili ng both these, it could decide to contain next year's wheat procurement to less than half of this year's actual figure.

CONFRONTED with this situation, the government has over the last two months taken certain desperate decisions designed to increase offtake from its stocks. These started with an announcement in June that five million tonnes of wheat would be auctioned at a reserve price below the CIP. When this failed to evoke any trade response, the price in the open market sales Scheme was reduced to Rs. 700 a quintal for sales effected in Punjab. When this too failed to evoke much of a response from traders, prices u nder the open market sales scheme were cut by a further Rs.50 a quintal on wheat stocks coming from all godowns in the northern region.

This has created an anomalous situation on two counts. First, sales to millers through the open market sales route are now at a lower price than sales to the APL population through fair price shops. This implies that the issue price hike has increased, r ather than reducing the overall subsidy bill. And the benefit of the subsidy has been transferred from poor consumers to rich traders. Second, since the lower price under the open market sales scheme applies only to stocks available in the north, millers from the south opting for purchases under the scheme would have to meet the transportation costs to carry these stocks to their own region. This would mean that the benefit of the subsidy being given to traders is being restricted to the richer traders from the surplus producing region.

These moves are the result of the government's refusal to accept the embarrassing truth that its decision to raise issue prices in order to reduce subsidies was a blunder. But very recently even this has been conceded. On receipt of a report from the Exp enditure Commission, to which the government had referred the matter, estimates of the economic cost of wheat and rice have been revised down to Rs.830 and Rs.1,130 a quintal from Rs.900 and Rs.1,180 a quintal respectively. This has allowed cuts being ma de in the CIP accordingly, while maintaining the principle declared in the Budget that these prices will in future remain linked to the economic cost.

This latest revision is something of an accounting jugglery, involving moving certain items from the economic cost to the cost of holding buffer stocks. But it is at least a recognition that there was something seriously amiss with the Finance Ministry's view that all that was necessary to reduce the food subsidy was to raise PDS prices. Even more explicit was the Food Minister's defence when he had reduced the open market sales scheme price in Punjab to well below the economic cost. He had then argued that since the cost of carrying buffer stocks was around Rs.175 a quintal, a sales subsidy of up to this amount would actually reduce the overall food subsidy if this increased offtake and reduced stocks. By that logic, and on the basis of the Expenditur e Commission's revised calculations which have since reduced the economic cost and increased the costs of holding buffer stocks, the APL prices for rice and wheat ought also to have been revised downwards to almost around where they were before the hikes in the Budget.

Unfortunately, these signs of the government's recognition of the blunder it had committed on the food price front have come well after the poor have paid the price in two ways: in the form of higher prices which forced them to reduce their offtake; and in the form of lost opportunity for employment creation based on the surplus foodstocks which are being offloaded with a subsidy to the private trade. To use the jargon of the liberalisers: the subsidy has indeed been targeted; but the targets, as is per haps inevitable within that perspective, have been the rich rather than the poor.