The food economy

By C. Rammanohar Reddy

THE GOVERNMENT has been able to stick to its decision to reduce the food subsidy. But the basic `problem' will not go away. Indeed, in spite of the fact that the prices of the cereals sold through the public distribution system (PDS) have now been raised, the subsidy is sure to overshoot the budgeted amount this year. With a record procurement of wheat, the stocks in the godowns of the Food Corporation of India are expected to touch almost 40 million tonnes next month. The cost of carrying this huge food mountain will therefore result in an exceptionally large subsidy.

To placate the critics of the hike in PDS prices, the Union Finance Minister, Mr. Yashwant Sinha, has said he is referring the issue to the Expenditure Commission. However, the core issues go beyond the size of the food subsidy. They have to do with the many ways in which the Government intervenes in the food economy. They also have to do with how over the years this intervention has come to mean many things to many sections of the economy. Looking at it solely as a subsidy issue will therefore give limited answers to a very limited question.

The food subsidy itself is influenced by the prices at which rice and wheat are procured every year from the surplus producing regions of the country. It is also influenced by how efficiently (or inefficiently) the FCI is able to store and distribute the grain. And the subsidy is affected as well by the size of the population covered by the PDS. Yet, the Government has so far addressed the issue entirely in terms of the prices at which the cereals are sold to the holders of ration cards - as if the procurement prices, the FCI's operating costs and the coverage of the PDS do not matter. The many factors that influence the size of the food subsidy are themselves part of a system of Government intervention that is now hydra-headed and is subjected to pulls and pressures from different directions.

The first point of Government intervention in the food economy is when every year it sets the minimum support prices for cereals (and for a number of other food and non-food crops). But the minimum support prices have long since ceased to become floor prices at which the Government enters the market. They are for all practical purposes procurement prices which influence open market prices. It is therefore in the interest of farmers with grain to sell to have the procurement prices raised higher and higher. This the lobbies of Haryana, Punjab and western Uttar Pradesh have been quick to recognise and have used their clout at the Centre to increase the procurement prices substantially in recent years. Between 1995-96 and 1999-2000, the procurement price for paddy has been raised by 36 per cent and that of wheat by more than 50 per cent. In each of these years and for each of these crops, the percentage increase in the procurement price has been higher than the wholesale price inflation - i.e., these crop prices have been raised by more than what is warranted by the average increase in the cost of all commodities.

The second intervention is in the Government's holding of buffer stocks. These stocks are supposed to be used to both dampen price surges in the market as also meet scarcities in years of a production shortfall. The minimum stock of cereals with the Government is supposed to vary during the year between 16 million tonnes (in April) and 24 million tonnes (in July). But with support prices becoming procurement prices and the farm lobbies able to raise these procurement prices, the FCI ends up with as much as the 35 million tonnes it now has and the 40 million tonnes it expects to hold in June. Since January 1994, buffer stocks have been consistently well above the norm. On only one occasion (October 1997) have FCI stocks been below the norm. Large food stocks naturally add to the costs of stocking and distribution.

The third intervention is of course in channelling the cereals the FCI has bought through the PDS to the `above' and `below the poverty line' consumers and a number of food-for-work programmes. But here again the PDS meets different needs in different regions. In a food-deficit State such as Kerala, it ensures the availability of cereals. In self-sufficient States such as Andhra Pradesh it works - through sale of cereals at less than market prices - as a form of income support.

There is then also the cost of the FCI's operations. Last year, there was a 58 per cent `mark-up' of the FCI's economic cost of wheat over the procurement cost. In rice, it was 30 per cent. This large difference is partly the result of the interest burden imposed by the huge buffer stock the FCI is carrying. But it is more the contribution of waste and inefficiency in the FCI. Therefore pegging issue prices for the poor at 50 per cent of the economic cost and for the non-poor at the full cost is to ask consumers to pay for the FCI's inefficiency.

With so many factors contributing to making the PDS cereals more expensive than they should be, it is obvious that merely increasing the issue prices is to take the narrow and mechanical approach of controlling the food subsidy. Of course, the usual argument is that very little of the subsidy actually reaches those most in need of food security. That is true. But in which case we should be asking how to reach the subsidised cereals to the poor and not how to raise the issue prices. (If the 35 per cent of the population identified as poor are to receive 20 kg of cereals a month per family, then the PDS should be able to handle 17 million tonnes of cereals just for this section of the population - the non-poor's requirements are extra - while in 1999-2000 the offtake for the poor was under 6 million tonnes.) The food economy needs action on many fronts. First, a higher product price cannot be the main instrument to reward farmers. Higher farm incomes have to come from higher productivity - which brings into question the role of research, transfer of research to the field and public/private investment in agriculture. Second, some thought has to be given to how best the Government can provide support prices, buy cereals for the buffer stock and meet PDS requirements - without pushing up market prices as it does now. Third, can the FCI operations be made more efficient? Should the FCI continue in its present form or should it stick to maintaining a buffer stock? Some have argued that private companies should compete with the FCI, that futures trade can prevent the need for the FCI to acquire and hold large stocks and the use of food stamps can do away with both the FCI and the PDS in their present form.

Some of these proposals are extreme ones and each has its problems. For example, the same problems that plague identification of beneficiaries in the PDS will plague a food stamp scheme. And food stamps may work in the cities and towns where grain is always available in the market. But what, for instance, of the interior of Bihar, Madhya Pradesh and Orissa where availability of cereals is itself the problem. The poor will have food stamps but there will be no grain available to exchange them for.

Finally, the big question is how to expand the food security system so that all those who need income support get it (partly) in the form of subsidised grain. Until now the only discussion we have been having is how to contain the food subsidy. But, unlike the one now in place, if a food security system can be devised by which most of India's poor can access subsidised grain, then even a large subsidy is worth paying for. The food subsidy for 2000-01 is budgeted at Rs. 8,100 crores, which is less than one half of one per cent of India's GDP. If a modicum of food security can be provided with a subsidy equivalent to even one per cent of the GDP then it should be worth paying the cost.

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