Inflated support

The latest increase in the minimum support price for wheat point to an approach that will hardly help correct the distortions in the food economy.

ON March 23, the Central government made its long-delayed announcement of the minimum support price (MSP) for wheat for the rabi procurement season. The decision was delayed till the last hour: the harvest had already begun in Madhya Pradesh and was only days away in Punjab and Haryana.

Once again, it was Punjab and Haryana that exercised a decisive influence on the government. Contrary to the expert consensus that the MSP for wheat was running at inflated levels and needed to be trimmed or at least restrained, the government decreed an increase of Rs.30 a quintal for the rabi harvest. This brings the MSP for wheat to Rs.610 a quintal, when both the Ministries of Agriculture and Food had concurred on the need to maintain it at the existing level of Rs.580. The outcome of this decision, which is with great credibility attributed to the Prime Minister's Office, could be a greater embarrassment of riches for the Food Corporation of India (FCI). With the political costs involved being what they are, the government is in no position yet to begin correcting the rampant distortions that have crept into the food economy over a decade of structural adjustment.

The basic parameters on which a decision could be based had been spelt out by the Commission on Agricultural Costs and Prices (CACP) as far back as August last year. Ideally, said the CACP, the MSP for wheat should be Rs.520. This would just about bring procurement and offtake from the public distribution system (PDS) into balance, putting the brakes on the spiral in wheat stocks. Once an equilibrium was established, the government could begin a process of stock depletion through open market sales that did not seriously destabilise the fundamentals of supply and demand.

With the political context factored in, a reduction of Rs.60 in the procurement price was perhaps considered infeasible. Recognising this, the CACP recommended that the MSP be maintained at its existing level. With procurement by official agencies still likely to increase substantially at this level, the CACP then suggested a number of non-price measures including a crash programme to augment the storage capacity available with the official agencies and a reduction in the central issue price for the PDS.

In the assessment of the CACP, the decision to peg issue prices for families above the poverty line (APL) at the economic cost incurred by the FCI had led to a steep drop in offtake through the PDS. This led to a further accumulation of stocks and a quite perverse burgeoning of the food deficit. This situation could be corrected, said the CACP, if the issue price for APL families were to be cut to between 80 and 85 per cent of the economic cost incurred by the FCI. In the aggregate, there would not be an increase in the subsidy burden on this account. Rather, it would only call for the reallocation of subsidies that would otherwise have been disbursed in the open market sales scheme (OMSS).

These prescriptions were derived from the concrete experience of the government's rather clumsy efforts to manage food stocks through a year of apparent plenty. In rabi 2000, wheat procurement went beyond all previous achievements. On July 1, wheat stocks in the central pool touched 27.8 million tonnes, against the normative level of 14.3 million. This was partly because the rabi procurement had opened on April 1 with a stockholding of 13.1 million tonnes against the stipulated norm of 4 million. But a more significant factor was the generous increase in procurement price to Rs.580 a quintal against the CACP's recommendation that it be kept at the earlier year's level of Rs.550.

Concurrently, the government notified an increase in the issue price for APL consumers and the sale price for the OMSS, to Rs.900 a quintal. This was expected to hold the balance even between official procurement agencies and private trade. There was an increase in wheat output in both Punjab and Haryana by the order of 12 and 16 per cent relative to initial estimates.

Faced with a huge buildup in its warehouses, the government reacted with something approaching panic. A decision was made to conduct a wheat auction where a reserve price below the FCI's economic cost was set. When this failed to cause a serious dent in the problem of burgeoning stocks, the OMSS price was slashed to Rs.700 a quintal and then to Rs.650.

None of this succeeded in bringing down stocks. Rather, the drop in OMSS prices impelled private traders to offload own stocks rather than risk a further erosion. Ironically, the softening of open market prices proved a further disincentive to private traders. Experience has shown that the volume of procurement in any year is directly proportional to the ratio of MSP to the open market prices prevalent just prior to the harvest. By pushing down open market prices, the government's inventory management operations might end up contributing to a further increase in its stocks.

Market sales at a price below the FCI's economic cost is not the only element of irrationality that the government has introduced in a desperate effort to contain its food stocks. Public sector corporations, which enjoy a monopoly on wheat exports from official stocks, were till recently given the grain at a knock-down price of Rs.415 a quintal. The rate has been raised to Rs.430 since April 1 and an intent has been announced to enable private trade to participate in exports. The procedure now conceived is to invite competitive tenders from the trade and allocate wheat to the highest bidder.

Union Minister for Food Shanta Kumar has fixed a total export target of 5 million tonnes for wheat from the FCI's stocks in the current financial year. In subsidising foreign consumers through the exchequer, this scheme compounds the misgivings highlighted by the CACP. If the subsidy earmarked for exports and open market sales were to be reallocated for the domestic market, the entitlement of both BPL and APL families to essential grain would be greatly enhanced. The stockholding would simultaneously be reduced, contributing to an overall easing of the fiscal burden.

The CACP's recommendations were premised upon this analytical reading of the dynamics of the market. Contrary to the propagandist view that an MSP of Rs.580 would be unfair to the farmer, the data collated by the commission shows that even an MSP of Rs.520 would cover a large part of the cultivation costs. A fairly sound estimate puts "C2 costs", which cover all actual cash expenses, the interest on value of owned assets, rental value of land and implicit value of family labour, at Rs.480 a quintal of wheat. The only major cost component that is not covered here is the remuneration that a farmer might expect for his management inputs.

However, since a cutback in the MSP was considered politically infeasible, the CACP urged at the minimum the maintenance of the status quo. That too proved inadequate for the pressure groups that have established their own zones of influence within the National Democratic Alliance government. A week before the final decision on the MSP was announced, Haryana Chief Minister Om Prakash Chautala told a farmers' rally in Hissar that he had baulked the proposal to peg the price at Rs.520. Two days after the decision was announced, Chautala and Punjab Chief Minister Parkash Singh Badal participated in the "unity rally" staged by the beleaguered ruling coalition in Delhi. Observers were quick to note that there was surely more than mere coincidence in the sequence. But for the larger public, the costs of these unsubtle political manoeuvres could well be greater distortions and irrationalities in a vital sector of the economy.