Tasks on the grain policy front

The High Level Committee on Long-Term Grain Policy recommends the reintroduction of a universal public distribution system with uniform central issue prices for rice and wheat, and the separation of the poverty-alleviation function from the PDS.

WE have witnessed an irrational situation on the food front over the last few years. The Government of India (along with State agencies) has accumulated around 65 million tonnes of rice and wheat as stocks. At the same time, hundreds of millions of Indians remain chronically undernourished and food insecure. Concurrently, in many parts of India, the livelihoods of cultivators, particularly small cultivators, have been threatened. Agricultural producers face steep declines in prices of agricultural commodities, and have suffered large losses, and this has even led to suicide in many cases. It is noteworthy that this price collapse has occurred not only with respect to tobacco, coconut and other cash crops but also with respect to rice and wheat, the two major cereal crops, in certain regions of the country. It was in this context that the Ministry of Food and Public Distribution set up a High Level Committee on Long-Term Grain Policy, chaired by Professor Abhijit Sen, to examine all major aspects of grain policy, including procurement and price support to cultivators, storage and distribution.

The tasks set before the committee, as the chairman notes, were particularly challenging, and the deliberations were a humbling experience, as the committee was asked to set out principles and guidelines for long-term policy when there was clearly a short-run crisis in the grain management system. The committee submitted its report in July 2002.

In respect of the production of rice and wheat, the understanding of the committee has been that, notwithstanding the present situation of huge, and deteriorating, stocks of grain, "policies to encourage and assist the production and distribution of food grain, especially cereals, remain integral to the development strategy of the country". This follows from the assumption that the major objectives of the current public food security system, namely price support for farmers, price stability for producers and consumers, and the availability of affordable grain for consumers, particularly poor consumers and those in regions of food deficit, will remain relevant over the long-term, at least over a 20-year horizon. Government intervention will be required in order to achieve these objectives.

Take an example. India accounts for about 15 per cent of the total world consumption of cereals. In today's international trade regime, both world production and trade in cereals are highly distorted by the policies followed by the rich countries. While the rich countries are currently subsidising production heavily, they may push up prices if they acquire monopoly in world trade. In this situation of future uncertainty in world markets, and India's still low calorie intake, the goal of food self-sufficiency remains an indispensable component of national agricultural policy. The committee reviewed different projections of cereals demand for 2020, and argued that to meet even the middle level projections of cereal demand in 2020, which amounts to 260 million tonnes of cereals for food and feed, the growth in yield has to increase. Clearly, it is feasible to achieve self-sufficiency in cereals, but this will require continued efforts on the production front.

To maintain self-sufficiency in cereal production, and to sustain our agricultural community in the new international trade regime, the main recommendation of the committee on the producer front is to continue with the policy of minimum support prices (MSP). This is based on the recognition that "MSP policy was critical in India's achievement of foodgrains self-sufficiency". However, the policy has been distorted in recent years, and the committee recommends that the fixation of MSP be strictly on the basis of production costs. Specifically, it has suggested that the MSP be based on the C2 cost of production (which refers to all costs including the imputed costs of family labour, owned capital and rental on owned land), as determined by the Commission on Agricultural Costs and Prices (CACP). By assuring open-ended procurement or purchase of grain at the announced MSP, the government ensures an adequate return to cultivators.

One of the flaws of the present MSP policy is that it is implemented only in a few States (most importantly, Punjab, Haryana and Andhra Pradesh) while cultivators in many other States do not receive an adequate price. In this context, the committee has recommended that MSP become more widespread and that it be given statutory status. The MSP should truly be a national level support price across various regions, rather than remaining confined to established surplus regions. This means that procurement or support operations should be increasingly directed towards States where they have not been prevalent. It is suggested that MSP be extended without delay to eastern India, a region that has tremendous potential for the cultivation of food grain, but where cultivators have suffered sharp price falls and sold at distress prices in the last few years. For the effective implementation of the MSP policy, the Central government will have to "make the (necessary) fiscal and banking provisions".

The Food Corporation of India (FCI) has been the agent of the Government of India in the implementation of its grain policy. It was set up in 1964 "to undertake the purchase, storage, movement, transport, distribution and sale of food grain and other foodstuffs". Today, the FCI has a remarkable national network and the capacity to move grain to any corner of India as and when required. Recognising that the "FCI has performed its core functions reasonably well", the committee recommends that it "continue to do so". However, to extend the MSP and act at least as the "buyer of last resort", the FCI will have to play a developmental role in certain regions of India while withdrawing from other regions where State agencies are now able to handle price support and procurement operations. For instance, the government should ensure that the "FCI opens procurement centres in areas of distress sale". At the same time, recognising the inefficiencies in the working of the FCI, the committee argues that the FCI has to "change the way in which it does business" and has listed specific recommendations for improving its functioning.

While the FCI remains the central nodal agency implementing government policy on grain, it is visualised that State agencies and even private traders will play a larger role in the future in the grain management system. There are specific recommendations to encourage private trade. These include, for instance, simplifying legal conditions on private trade by reviewing existing orders issued under the Essential Commodities Act. The committee has, however, argued against abolishing the Act, as it can be used to regulate private agents participating in the public food management system. The lack of uniformity of taxes on food produce in different parts of India is also a disincentive to trade and the committee's report calls for a uniform upper limit on taxes and other levies on agricultural produce. High rates of taxation on food grain lead to higher food prices.

FOR consumers, food security requires physical and economic access to food of adequate quantity and satisfactory quality. Historically, in India, the public distribution system (PDS) has been one of the important means of ensuring physical access to food grain at reasonable prices in all parts of the country through the network of fair price shops. With the introduction of targeting (the Targeted PDS) in 1997, based on the official poverty line, the PDS has not been able to perform its traditional functions. First, the PDS is no longer able to stabilise prices effectively by transferring grain from surplus to deficit regions since allocations to States are no longer based primarily on demand relative to production. The main criterion for grain allocation is the incidence of income-poverty in a State. For instance, allocations of grain to Kerala, a highly food-deficit State and one with the most effective PDS network in the country, declined sharply after the introduction of targeting. This followed from the fact that the incidence of income-poverty in Kerala was not very high, and allocations to the PDS were made according to the size of the official "below poverty line" or BPL population. Secondly, while the intention of the Targeted PDS was to reach benefits to the poor, the outcome has not been satisfactory on account of numerous and diverse problems in identifying the "poor". Since around 50 per cent of the population is chronically malnourished and an even higher proportion is likely to be vulnerable to undernutrition, targeting has excluded a large number of food-insecure persons from the PDS. Thirdly, by restricting distribution of grain to the BPL population alone, the viability of fair price shops and the distribution network has been affected.

In the light of this situation, the key recommendation of the committee is to reintroduce a universal public distribution system for consumers throughout the country with uniform central issue prices for rice and wheat. The poverty-alleviation function can be separated from the PDS, and the benefits for specific target groups can be given to States as cash assistance. State governments should be allowed flexibility in formulating alternative local food security schemes for specific vulnerable groups or areas.

Finally, it is clear that immediate and bold steps are required to reduce the level of stocks held by the Central and State governments. There are four main components of the short-run package recommended by the committee. First, to set the MSP at the level of the average C2 cost as determined by the CACP, and to extend and defend this MSP throughout the country by various means including providing statutory status to the MSP. As this would lower the price received by farmers in certain surplus States, a compensation package has been proposed. Secondly, to dispose of grain that is old or that which was purchased under relaxations of quality specifications from stocks as soon as possible and in a transparent manner. This is needed to restore consumer confidence in the quality of grain held in the central pool and distributed to the PDS and other welfare programmes. Thirdly, to move immediately to a universal PDS, with common central issue prices for all consumers, of Rs.4.50 a kg of wheat and Rs.6 a kg of rice. To strengthen the PDS network, a small cash incentive, linked to use of grain, for State governments has been recommended. Fourthly, a major expansion of employment programmes, including a doubling of the Sampoorna Gram Rozgar Yojana, is recommended. In the present situation of huge stocks of grain and huge reserves of foreign exchange, there is no danger of an inflationary situation arising from the implementation of large public works to improve rural infrastructure. At the same time, such public works will inject new demand into the now-depressed rural economy. The present grain stocks can become, as the committee observes, an opportunity "for the nation to commit itself to eradication of destitution and chronic malnutrition".

Dr. Madhura Swaminathan is a Professor at the Indian Statistical Institute, Kolkata. She was a member of the High Level Committee on Long-Term Grain Policy.