by Vivek Kaul
Also, the Green Revolution gave the government the opportunity to get in and scuttle the private trade in foodgrains. Big Government stepped in and ended up creating a mess. In October 1972, it was announced that the government would take over the wholesale trade in wheat from the next marketing season. The wholesale trade in rice was to be taken over the next year. This turned out to be a big disaster, as wheat started disappearing from the market, prices shot up, and India had to go back to importing wheat. And this time, there was no PL-480 to fall back upon. In 1973, India had to import 2.4 million tonnes of wheat. This shot up to 4.5 million tonnes in 1974 and 7.2 million tonnes in 1975.715
The irony of it all was that the Green Revolution was still unfolding. What did not help was the fact that the price of wheat in the international market had shot up from $80.30 a tonne in 1972-1973 to $166.40 a tonne in 1973-1974.716
Those were the days when India used import substitution as a strategy and did not have access to huge foreign exchange reserves like it does now. And the foreign exchange it did have could not all have been used for importing wheat. In this scenario, some good sense prevailed, and the government finally let go of its stupid plan of taking over the wholesale trade of rice and wheat.
As the Report of the High Level Committee on Reinventing the Role and Restructuring of the Food Corporation of India (better known as the Shanta Kumar Committee), released in January 2015, points out in this context: “The government of India realised the wrong move it had taken in [its] procurement policy of taking over the wholesale trade in wheat and rice, and finally gave up that policy in 1975 for the better. There was a subtle policy message in all these events: don’t try to take over the markets, let the markets function competitively [emphasis added], wherever they can, and [the] state should enter only where markets fail, and provide an effective floor price to farmers.”
But this understanding did not last for long. In the coming decades, the government of India, through the FCI and other state procurement agencies, started to procure as much rice and wheat as was brought to it. And this has had severe repercussions on several fronts.
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In late June 2016, the Food Minister, Ram Vilas Paswan, said that, by July 2016, the entire country would come under the ambit of the National Food Security Act (NFSA). The minister remarked that the Act, which was “in force in 33 States/UTs”, would be implemented in the “states of Tamil Nadu and Nagaland” by July 2016.717
The National Food Security Ordinance (NFSO) of 2013 was promulgated on July 5, 2013. A little over two months later, the National Food Security Act was enacted, on September 10, 2013. Given this, it has taken the states nearly three years to implement the Act. But that is not surprising, given that any Big Government measure needs time to be rolled out through the length and breadth of the country.
The Food Security Act essentially made the right to food a justiciable right rather than a general right. It gave food security a statutory backing. The Act offered food security by freezing the price of rice, wheat and coarse cereals at the central issue prices of Rs. 3, Rs. 2 and Re. 1 per kg, respectively, for a period of three years, i.e., up to July 2016.
As we have seen earlier in the chapter, the PDS in India started to evolve during the Second World War. Over the years, it moved towards providing subsidised food. In 1997, the targeted PDS (or TPDS) was launched with a focus on the poor.718 It aimed at providing food as well as fuel (kerosene) at subsidised prices to the poor through a network of more than five lakh ration shops.
The TPDS was divided into two parts: a) the households below the poverty line (BPL); and b) the households above the poverty line (APL).
Within the BPL category, there is another category, referred to as the ‘poorest of the poor’. These households are covered under the Antyodaya Anna Yojana (AAY), which was launched in 2000. It covers the poorest among the BPL category. This includes a) marginal farmers, b) slum dwellers, c) rural artisans, like potters and tanners, d) the destitute, e) primitive tribal households, and f) daily-wage workers in the informal sector, like cobblers, rickshaw pullers, etc.719
Nearly 2.42 crore households come under the AAY.720 Hence, the TPDS essentially had three parts: a) AAY; b) BPL other than AAY; and c) APL. In comparison, the National Food Security Act has only two categories: a) AAY, and b) what it calls ‘priority’. As per Section 10(1) of the Act, the definition of priority is left to the state governments.
What is interesting, nonetheless, is that the Act delinks the distribution of subsidised foodgrains from poverty estimates. It aims at covering three-fourths of the rural population and half of the urban population. In fact, as per the 2011 Census, the Act aims at providing subsidised foodgrains to around 16.57 crore households, or 81.35 crore individuals, which is about two-thirds of India’s population.721 This is Big Government at its biggest.
Those coming under AAY are entitled to 35 kilograms of foodgrains every month, as was the case under the TPDS as well. Those coming under the priority category are entitled to 5 kilograms of foodgrains per person per month. There are other entitlements under the Act as well. This includes entitlements of meals for pregnant women, lactating mothers and children up to 14 years of age.722
As is the case with most government schemes, the intention was noble, but the consequences turned out to be far-reaching and negative. Let’s consider them one by one.
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The National Food Security Act is built on top of a very leaky PDS, which is used to distribute subsidised foodgrains. Various studies over the years have pointed out towards the same. In a 2011 research paper titled ‘Trends in Diversion of Grain from the PDS’, Reetika Khera looks at leakages in the PDS between 1999 and 2007. Leakage essentially refers to the proportion of the rice and wheat released by the FCI which does not reach the consumers it is intended for.
In 1999-2000, around 24 per cent of the grain was diverted. The situation got worse, and in 2004-2005, around 54 per cent of the grain was being diverted. This then improved a little, and in 2007-2008, around 44 per cent of the grain was leaking from the PDS.723
There were some interesting sub-trends as well. The leakage of wheat was significantly more than that of rice. In 1999-2000, the all-India rice leakage was at 9.9 per cent. For wheat, the figure was at 48.6 per cent. In 2004-2005, 41.3 per cent of rice and 70.3 per cent of wheat were diverted away from the PDS. In 2007-2008, the figures stood at 37.2 per cent and 57.7 per cent, respectively.724
Also, the leakages were more in some states than others. As Khera writes: “There is a regional dimension to PDS purchase and diversion rates, with the bulk of the functioning states falling in the peninsular region, whereas, barring Rajasthan and Gujarat, the languishing states are concentrated in the eastern part of the country (Assam, Bihar, Jharkhand and West Bengal).”725
Another estimate is made in a December 2012 research paper by the CACP titled ‘The National Food Security Bill—Challenges and Options’. As the paper states: “In 2009-10, 25.3 million tonnes were received by the people under PDS while the off-take by states was 42.4 million tonnes, indicating a leakage of 40.4 per cent.”726
In a February 2015 research paper titled ‘Understanding Leakages in the PDS’, Jean Drèze and Reetika Khera estimate that leakages had fallen to around 41.7 per cent by 2011-2012, against a leakage of 54 per cent in 2004-2005. A major reason for this fall lies in the fact that states in the Eastern part of the country, which had been very leaky in the past, had shown considerable improvement.
In Jharkhand, the leakage rate fell from 85.2 per cent to 44.4 per cent. In Odisha, the leakage rate fell from 76.3 per cent to 25 per cent. In Chhattisgarh, the leakage rate fell from 51.7 per cent to 9.3 per cent. States like Punjab, Haryana and Rajasthan also saw a massive fall in leakage rates.
As Drèze and Khera write: “The moderate decline in leakages at the all-India level is largely driven by sharp declines in states that are known to have undertaken serious PDS reforms in recent years, e.g., Chhatti
sgarh, Odisha and Bihar. On the other hand, a number of states with high leakages have shown virtually no progress between 2004-2005 and 2011-2012, e.g., Madhya Pradesh, Maharashtra and Uttar Pradesh.”727
But the biggest fall was, rather surprisingly, in Bihar. The leakage fell from 91 per cent to 24 per cent. This is something which is clearly around unexpected lines. For a state which had leakage rates as high as 90 per cent, a leakage rate of 24 per cent is very low indeed. Drèze and Khera further suggest that there had been more improvement since 2011-2012 (as mentioned earlier, their paper was published in February 2015). As they write:728
Reforms took place in the last three years, and particularly in the last 12 months or so, as the Government of Bihar made strenuous efforts to implement the National Food Security Act in anticipation of the assembly elections. A new list of ration cards was prepared.... About 75 per cent of rural households in Bihar today have a new ration card, or an Antyodaya card. For the first time, most people know that they are entitled to 5 kg of foodgrains per person per month from the PDS. Opposition parties are helping them to know their rights and demand their due. All this has put the entire system under tremendous pressure to perform, in sharp contrast with the situation that [had] prevailed until just a few years ago, when most people in Bihar got virtually nothing from the PDS.
Assembly elections happened in Bihar in October and November 2015.
The major part of the all-India leakage happened in the APL, or the above the poverty line category. Using National Sample Survey data, Drèze and Khera show that the leakage in the BPL category was around 30 per cent. In comparison, the leakage in the APL category was at 67 per cent. Given that 11.52 crore households were there in the APL category, this pushes up the overall leakage figure. 729
The question is: Why was the APL category so leaky? The reason lies in the fact that the APL category became a sort of a dumping ground for excess food stocks. As Drèze and Khera write: “In the absence of any other mechanism to reconcile procurement and distribution, and to avoid further swelling of food stocks that had already gone through the roof, the APL quota was the default outlet…. Very often, APL households had no idea of what they were supposed to get from the PDS. Corrupt dealers dutifully kept them in the dark and exploited their ignorance. In some states, the bulk of the APL quota went straight to the black market.”730
In another research paper dated January 2015 and titled ‘Leakages from the Public Distribution System and the Way Forward’, Ashok Gulati and Shweta Saini put the leakage at 46.7 per cent during 2013-2014. In absolute terms, the leakage was at 25.9 million tonnes. As had been observed in Khera’s 2011 study, the leakage in wheat was substantially greater than that of rice. Nearly 36.2 per cent of the rice leaked from the PDS, in comparison to 62.9 per cent of the wheat.
In fact, as per Gulati and Saini, in 15 states, the leakage was more than 50 per cent. In some North-Eastern states, like Nagaland and Manipur, the leakages were as high as 95 to 97 per cent. When it comes to leakages in absolute numbers, Uttar Pradesh tops the list.731
What this tells us is that, despite less leakage than in comparison to the past, the Indian PDS continues to remain very leaky. As the Shanta Kumar Committee Report points out: “Leakages don’t happen in a vacuum. There is connivance at several levels, breeding corruption. It is now time to think out of the box and find some alternative policy solutions that can plug such large-scale leakages and associated corruption, and that can ensure that benefits reach directly to the neediest.” This becomes clear from the excessive leakage in the APL category, which couldn’t have been possible without the active connivance of the owners of the ration shops that constitute the PDS.
Another factor that needs to be considered here is that, in many states, there are more ration card beneficiaries than the estimated population of the state. This includes states like Chhattisgarh, Andhra Pradesh, Tamil Nadu and Kerala.732 This basically means that the government is spending much more on food security than it needs to.
The state of Chhattisgarh offers an interesting example. A year before the National Food Security Act was passed, the state passed the Chhattisgarh Food Security Act. The state Act had a greater coverage (at 90 per cent) than the national Act (at 78 per cent) in the state. The state Act offered both rice and wheat at Re. 1 per kg, as compared to the national Act’s Rs. 3 per kg for rice and Rs. 2 per kg for wheat.733
With a monthly entitlement at 35 kilograms per individual above the age of 18, there is a huge economic incentive in getting a separate ration card made. This explains why a state with a population of 2.8 crore has 3.1 crore ration cards. Not surprisingly, the food security bill of the state jumped from Rs. 717 crore in 2011-2012 to Rs. 4,600 crore in 2014-2015.734
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The government needs to procure rice and wheat in order to distribute it at a subsidised price through the PDS. While earlier this was a general right, now food security is a legal right under the National Food Security Act. As mentioned earlier, the government declares the minimum support price for 23 crops, of which it primarily buys rice and wheat.
Interestingly, when things first started in the late 1960s, the government used to declare a procurement price as well as a Minimum Support Price (MSP). The MSP acted as a floor price. The assurance was that the price of a commodity would not be allowed to fall below a certain level, even if there was a bumper crop. Over and above this, there was the procurement price at which the government actually bought rice and wheat through the FCI and other state procurement agencies for distribution through the PDS. This price was normally higher than the MSP but lower than the market price. This basically ensured that the market, and not the government, set the price for rice and wheat. This system was done away with in 1975-1976, when the present system of declaring only one price (i.e., the MSP) was started.735
For the last four decades, the government has been declaring an MSP at which it buys rice and wheat. The system, as it has evolved, has resulted in open-ended procurement, with the government procuring as much rice and wheat as the farmers bring to it. What has not helped over the years, as is true in the case of sugarcane, is that the various state governments have been declaring bonuses over and above the MSP.
The bonuses over the years led to even more foodgrains ending up with the central government in the godowns of the FCI. This has had multiple repercussions.
The open-ended procurement of rice and wheat by the central government, along with the high bonuses offered by the state governments and the rapid increase in the MSP, led to the de facto nationalisation of the grain trade over the years. Almost three-fourths of the marketable surplus is purchased by the government.736 This leaves very little for the private trade.
The marketable surplus is essentially the total production minus the total amount of foodgrains retained by the farmer. The latter is done primarily to take care of self-consumption and for seeding purposes, payments to be made in kind to labourers, other necessities of life and gifts.737 Thus, the marketable surplus is essentially the total amount of produce that is available to be sold in the open market.
In fact, the trend of extremely high purchases was observed between 2006-2007 and 2011-2012. In May 2013, the Comptroller and Auditor General came out with a report titled Performance Audit of Storage Management and Movement of Foodgrains in the Food Corporation of India. The report showed how more and more of the rice and wheat being produced by the farmers lands up with the government. In 2006-2007, 75.8 million tonnes of wheat was produced by the Indian farmers. Of this, nearly 18 per cent landed up with the FCI and the state government agencies. In 2011-2012, the wheat produce had shot up to 93.9 million tonnes. Of this, nearly 35 per cent landed up with the FCI and the state government agencies.
When it comes to rice, the situation was even more pronounced. In 2006-2007, the total rice production was at 93.4 million tonnes. Of this, 32 per cent landed up with the FCI and the state government agencies. In 2011-2012, the rice production was at 104.3 milli
on tonnes. Of this, a whopping 54 per cent landed up with the FCI and the state government agencies.
A major reason for this was the fact that the minimum support price was increased at a very rapid rate during the period. As the CAG report pointed out: “No specific norm was followed for [the] fixing of the Minimum Support Price (MSP) over the cost of production. Resultantly, it was observed [that] the margin of the MSP fixed over the cost of production varied between 29 per cent and 66 per cent in [the] case of wheat and 14 per cent and 50 per cent in [the] case of paddy during the period 2006-2007 to 2011-2012.”
Typically, the MSP needs to be fixed depending on the rates recommended by the CACP, which comes under the Ministry of Agriculture. While determining the MSP, the 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 was not being followed.
Furthermore, as more and more rice and wheat landed up with the government, there was less of it available in the open market. In 2006-2007, 63.3 million tonnes of rice ended up in the open market. By 2011-2012, this had fallen, by a huge 23.6 per cent, to 48.3 million tonnes. The same was true for wheat as well, though the drop was not as pronounced as it had been in the case of rice. In 2006-2007, the total amount of wheat in the open market had stood at 62.1 million tonnes. By 2011-2012, this had dropped to 61.4 million tonnes.
Take a look at Figure 12.2, which shows us how the government stock of foodgrains has gone up over the years.
As can be seen from Figure 12.2, the stock of foodgrains with the government went up from around 18 million tonnes in 2004-2005 to around 60 million tonnes in 2012-2013. This meant that not enough rice and wheat was going around in the open market, and this, not surprisingly, led to cereal inflation.