by Vivek Kaul
As can be seen from Table 12.2, cereal inflation peaked in 2013-2014, after the cereal stocked with the government had correspondingly peaked in 2012-2013. Hence, Big Government essentially drove the price of foodgrains up. The irony was that, while the godowns of the FCI and other state procurement agencies were burgeoning with rice and wheat, prices in the open market were going up.
Figure 12.2: Government stock of foodgrains (in million tonnes) between 2004-2005 and 2015-2016.
Source: Food Corporation of India.
In fact, the government had procured so much rice and wheat during this period that it had the additional problem of storing it properly. During this period, pictures and reports of rice and wheat rotting in FCI godowns appearing in newspapers was a routine affair. And this wasn’t surprising. In June 2012, the total quantity of foodgrains with the FCI had peaked at 82.4 million tonnes.
Table 12.2: Urban, rural and overall cereal inflation (in percentage) between 2012-2013 and 2015-2016.
Source: Centre for Monitoring Indian Economy.
This hurt in two ways. One, as we have seen, is that it drove up foodgrain prices. The other problem was that a lot of government money had been used up in buying what was essentially a useless asset. (How does excess foodgrains rotting in godowns help anyway?) When the government had bought this excess of foodgrains, the money was paid out. This excess money chased the same amount of goods and services, and drove up inflation in the process. Also, this money could have been better used somewhere else.
Ashok Gulati and Shweta Saini estimate in a research paper titled ‘Buffer Stocking Policy in the wake of NFSB: Concepts, Empirics and Policy Implications’ that the “value locked in these excess stocks, evaluated at their economic cost, ranges from Rs. 70,000 crore to Rs. 92,000 crore”.738 This was also the time when the government was running a high fiscal deficit and the money could have been much better utilised elsewhere.
What did not help was the fact that the government had been acquiring significantly more foodgrains than it had the capacity to store. As on April 1, 2012, the storage capacity of the FCI stood at 33.6 million tonnes. Over and above this, the Central Warehousing Corporation had a total storage capacity of 10.6 million tonnes. This meant that the total storage capacity worked out to a little over 44 million tonnes.739 Given this, it was hardly surprising that newsreports and pictures of rotting grains appeared in the media.
Nonetheless, the interesting thing is that cereal inflation has actually come down after peaking in 2013-2014. The reason for this lies in the fact that the total amount of foodgrains with the government has also come down. In 2012-2013, the foodgrains in store had stood at around 60 million tonnes. By 2014-2015, this had fallen, by around a third, to 41.3 million tonnes.
This, of course, meant that the availability of foodgrains in the open market went up and, in the process, cereal inflation came down. One reason for this lies in the fact that, in July 2014, the Narendra Modi government made a policy decision which limited the ability of the state governments to declare a bonus on rice and wheat over and above the MSP.
If a surplus state (i.e., a state which produces more foodgrains than it requires for distribution through the PDS) declares a bonus, then it can go ahead with the procurement, but the FCI will only acquire as much as would be required to meet the needs of the PDS in that state. The state government would have to bear the cost of any ‘extra’ procurement.
This is a major reason behind the fall in the stocks of foodgrains with the government. The other reason is a slower increase in the MSP of rice and wheat over the past few years. Between 2005-2006 and 2012-2013, the MSP of wheat went up from Rs. 650 per quintal to Rs. 1,350 per quintal at the rate of 11 per cent per year. Since then, between 2012-2013 and 2015-2016, the prices have gone up, by around 4.2 per cent per year, to Rs. 1,525 per quintal.
In the case of rice, the MSP went up from Rs. 570 per quintal in 2005-2006 to Rs. 1,250 per quintal in 2012-2013 at the rate of 11.9 per cent per year. Since then, this has slowed down. Between 2012-2013 and 2016-2017, the price has gone up, by 4.1 per cent per year, to Rs. 1,470 per quintal. Hence, lesser meddling by the government has led to a slower increase in the price of foodgrains.
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The government of India maintains, through the FCI, a certain amount of buffer stock in order to ensure that it has enough grains to distribute through the PDS. This also includes strategic stocks of five million tonnes of foodgrains (three million tonnes of wheat plus two million tonnes of rice).
In January 2015, the Cabinet Committee of Economic Affairs (CCEA) revised these norms. Table 12.3 shows the total amount of buffer stock that needs to be maintained at various points of time during the course of any year.740
Table 12.3: Mandated buffer stock of foodgrains (in million tonnes).
Date Buffer Stock
1st October 21.2
1st January 25
1st April 21.2
1st July 31.9
Source: Food Corporation of India
While the total amount of foodgrains stocked with the government has come down over the past few years, the government still stocks more than what is required. Take a look at Figure 12.3, which shows the actual stock of foodgrains with the government over the past year and compares it with the mandated buffer stock. As is clear, the government has been stocking much more than what it requires to maintain under the buffer stock.
This excess stocking costs the government a lot of money. It is worth remembering here that the FCI and other state procurement agencies procure rice and wheat at a certain price. This is then sold throughout the country at a significantly lower price. Let’s take the case of rice. In the marketing season 2016-2017, it will be acquired at Rs. 1,470 per quintal, or Rs. 14.70 per kilogram.
Under the National Food Security Act, this rice will be sold at Rs. 3 per kg. Hence, the FCI will lose Rs. 11.70 for every kilogram of rice that it sells. Over and above this loss, it also has to bear the procurement as well as distribution costs. The procurement costs include statutory charges, like the market fee, rural development cess, value-added tax, etc. It also includes costs like the cost of gunny bags, administrative costs, labour and transport charges, etc. Distribution costs include costs like handling expenses, storage expenses, interest charges (on the working capital loans that the FCI takes on), transit losses, storage losses, etc.741
If the amount of actual stock is above the buffer stock, the costs of the FCI go up. This includes costs like storage costs as well as storage losses. The government needs to compensate the FCI for this. As Vijay Paul Sharma writes in an IIM Ahmedabad working paper titled ‘Food Subsidy in India: Trends, Causes and Policy Reform Options’: “The share of… subsidy recorded an increasing trend since 2007-08 due to [the] build-up of foodgrain stocks with the FCI.”742
This happens against the backdrop of the government perpetually trying to bring down its fiscal deficit. In the process, the FCI gets short-changed. As I write this, in early August 2016, the unpaid dues of the government to the FCI amount to Rs. 61,000 crore. (As we have seen earlier, in Chapter 10, this is the bit about the government fudging accounts in order to meet its fiscal deficit target.) In order to keep operating, the FCI needs to keep borrowing. In 2013-2014, it borrowed Rs. 35,150 crore. This jumped to Rs. 70,820 crore by 2015-2016. This basically implies two things: a) foodgrains are being sold cheap; and b) foodgrains are being sold cheap on borrowed money, which ultimately adds to the fiscal deficit of the government. This tells us that Big Government can hurt in many more ways than what seems obvious.743
Figure 12.3: Actual stock versus the buffer stock of foodgrains (in million tonnes) between 1st October 2015 and 1st July 2016.
Source: Food Corporation of India.
This has led to the food subsidies of the government soaring over the years. The food subsidies of the government in 1979-1980 had stood at Rs. 600 crore, or 0.52 per cent of the GDP. This jumped to Rs. 92,000 crore, or 0.88 per cent of the GDP, in 2013
-2014. These calculations are based on the GDP at current prices with a base year of 2004-2005. (In January 2015, India moved towards a new method of calculating the GDP. The trouble is that the figures for this new series are available only up to 2011-2012 as of now. Hence, I have made a comparison only until 2013-2014, even though more recent statistics are available.)
Nevertheless, we can look at the numbers for 2014-2015 and 2015-2016 in isolation. In 2014-2015, the food subsidies had stood at Rs. 1,17,671 crore, or 0.94 per cent of the GDP. In 2015-2016, the food subsidies stood at Rs. 1,39,419 crore, or 1.03 per cent of the GDP. Hence, there has been a clear jump in the food subsidies in recent years. Given that a huge proportion of the foodgrains never reaches those it is intended for, there is a huge amount of leakage taking place. Furthermore, the over-procurement by the government adds to the problem.
Also, it needs to be kept in mind that the food subsidy figure, currently at 1.03 per cent of the GDP, is still understated. This is basically because the government hasn’t paid the FCI all that it has to for carrying out the food procurement and distribution operations. The government follows a cash accounting system and only acknowledges expenses once payment has been made. This has led to a situation wherein payments to the FCI remain unpaid. The money has been spent by the FCI, but remains unpaid by the government, and hence, is not acknowledged as an expenditure (as explained earlier in Chapter 10).
Obviously, figuring out what is wrong with India’s open procurement policy isn’t rocket science. Various research studies have pointed towards the same. So has the Shanta Kumar Committee, which presented its report in January 2015.
The government is trying to achieve multiple objectives through the single tool of open procurement and then stocking.744 It is trying to ensure that it has enough strategic stock of foodgrains so that, in the case of price volatility, it can release grains into the open market and prevent a rapid increase in prices. At the same time, it is trying to ensure that it has enough foodgrains in order to meet the requirements of the Food Security Act. Thirdly, it is trying to ensure that the nutritional needs of the people are met. The trouble is that nutrition needs cannot be met by just providing rice and wheat at a cheap price. In fact, one impact of the open procurement of rice and wheat has been that farmers haven’t been growing enough pulses, leading to a huge spike in their prices over the past few years.
Finally, by offering a minimum support price and carrying out open procurement and stocking, the government is trying to incentivise the production of rice and wheat. The trouble is that, at times, these needs are at odds with one another. Take, for example, the fact that open procurement, with the government buying as much rice and wheat as the farmers bring to it, leads to lesser grain in the market and, in the past, has pushed up prices. So, while the government has ended up encouraging production, it has, at the same time, gone against food security by ensuring that the prices of foodgrains go up.
Or take the fact that price support for rice and wheat discourages farmers from growing other crops like pulses. This pushes up the prices of these crops. This makes it difficult for people to fulfil their nutritional needs.
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Earlier in the chapter, we saw that a major portion of the foodgrains that the government distributes through the PDS does not reach those it is intended for. So one end of the chain is very leaky. How about the other end? Does the procurement of foodgrains benefit farmers who sell to the government? And if it does, what proportion of the farmers does it benefit?
The question that needs to be answered here is whether farmers are aware of the MSP policy? The answer is not very encouraging on this front. The Economic Survey of 2015-2016 does not paint a pretty picture. As it points out: “[In] Punjab and Haryana, almost all paddy and wheat farmers are aware of the MSP policy…. Even for paddy and wheat, where active procurement occurs, there is a substantial variation across states – with only half or less paddy and wheat farmers reporting awareness of [the] MSP, especially in states such as Gujarat, Maharashtra, Rajasthan, Andhra Pradesh and Jharkhand. This points to the possibility that procurement in these states may be happening in some districts and not in others.”
This lack of awareness essentially ensures that very few farming households actually benefit from the MSP. As the Shanta Kumar Committee Report points out:
If one adds all agricultural households having sold paddy and wheat to any procurement agency, the number of households comes to just 5.21 million (2.55 million paddy households during July-Dec 2012; 0.55 million paddy households during Jan-June, 2013; and 2.11 million wheat households during Jan-June 2013). This figure of 5.21 million households, as a percentage of [the] total number of agricultural households (90.2 million), comes to just 5.8 per cent. This is the finding from the latest survey conducted by [the] NSSO, with such detailed questions on issues of households’ awareness about [the] MSP and selling their produce to procurement agencies. But if one adjusts this with common households that sell both paddy and wheat, and/or by the per cent of quantity sold by each household at [the] MSP, the figure of direct beneficiaries comes even lower.
As we can see for rice and wheat, less than six per cent of the farming households benefit from the MSP policy of the government. For other crops, the numbers are even lower. Furthermore, much of this procurement seems to be happening from the large farmers in a few selected states, like Punjab, Haryana, Andhra Pradesh, Madhya Pradesh and Chhattisgarh.745
As the Shanta Kumar Committee Report points out: “In some of these states, state agencies procure 70-90 per cent of [the] marketed surplus of wheat and rice, literally taking over the markets and crowding out [the] private sector, committing [the] similar mistake as was committed during the wholesale trade take-over during 1973-75. It speaks of a highly skewed incentive system in favour of larger farmers.”
There are multiple things which aren’t right here. One, the MSP policy largely benefits large farmers. Two, it is concentrated only in a few states, and hence, other states lose out. Inequity of such a large proportion shouldn’t be happening in the world’s largest democracy. Three, more importantly, it encourages farmers to grow crops in areas where they shouldn’t be grown.
Take the case of rice being grown in Punjab. Rice needs a lot of water. Hence, it shouldn’t be grown in a semi-arid region like Punjab. But given that the acquisition of rice is concentrated in that region, Punjab is the fourth largest rice-producing state in India. In fact, in 2014-2015, it produced 11.25 million tonnes of rice. The state of West Bengal produced the most rice, at 15 million tonnes.
As far as land productivity is concerned, Punjab has by far the highest rice productivity in India. The state produces 39.3 quintals per hectare. This is followed by Haryana, at 32.1 quintals per hectare, and Andhra Pradesh, at 30.5 quintals per hectare. Of course, land productivity does not take the usage of water into account.
As the document titled The Price Policy for Kharif Crops: The Marketing Season for 2016-17, brought out by the CACP, points out: “If water consumption is measured in terms of per kilogram of rice, West Bengal becomes the most efficient state, which consumes 2,169 litres to produce one kg of rice, followed by Assam (2,432 litres) and Karnataka (2,635 litres). The water use is high in Punjab (4,118 litres), Tamil Nadu (4,557 litres) and Uttar Pradesh (4,384 litres). … [This] shows that the most efficient state in terms of land productivity is not necessarily the most efficient if irrigation water is factored into. This is because of high rainfall in the eastern region.”
So, once water usage is taken into account, Punjab really doesn’t come out on top when it comes to productivity. A major reason why Punjab is able to produce as much rice as it does despite being in a semi-arid region, where a large amount of water isn’t available (unlike in the case of West Bengal), is because electricity is free for farmers. This essentially leads to massive over-pumping of water to grow rice.
As per the Central Ground Water Board, out of the 137 blocks in Punjab, 110 come under the over-ex
ploited category when it comes to water.746 Furthermore, the document titled The Price Policy for Kharif Crops: The Marketing Season for 2015-16 points out: “Given that this water is extracted by mining groundwater, as is being done in much of… [the] Punjab and Haryana belt (particularly in [the] case of rice), where [the] water table is receding by 33 cm each year, thereby shrinking its per capita availability....”
It is only with this exploitation of groundwater that Punjab manages to end up producing as much rice as it does. As mentioned earlier, in 2014-2015, it managed to produce 11.25 million tonnes of rice, only a little less than Andhra Pradesh, which produced 12.23 million tonnes.
Also, given the dietary habits of Punjabis, almost all of the rice that the state produces ends up as a marketable surplus. This isn’t surprising, given that Punjabis are primarily roti eaters and that rotis are basically made from wheat. In fact, of the 11.25 million tonnes of rice which Punjab produced in 2014-2015, 11.19 million tonnes ended up as a marketable surplus.
Of the marketable surplus, 8.15 million tonnes of rice was acquired by the FCI and other state procurement agencies. This is the highest quantity of rice that the government acquired from any state that year (as is clear from Figure 12.4(a)).
Figure 12.4(a): State-wise marketed surplus (absolute figures) of rice during 2014-2015.
Source: The Price Policy for Kharif Crops: The Marketing Season for 2016-17, CACP.
What the pie charts (Figures 12.4(b) and 12.4(c)) tell us is that Punjab has 13 per cent of the country’s marketable surplus when it comes to rice, but the government ends up procuring one-fourth of the total rice from the state. This shows that the fact that the government procures the maximum amount of rice from Punjab encourages the farmers to produce more rice in a semi-arid region.
Figure 12.4(b): Percentage distribution of the state-wise marketed surplus of rice during 2014-2015.