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Public Distribution System -- II -- Can States absorb the price hike?

M. Raghavan

Kevileno Angami

THE sudden spurt in the central issue prices of foodgrains may have two immediate consequences: First, the States may absorb the increase effected in central issue prices and try to maintain their PDS as earlier. Second, if the first option does not work , the BPL families may forego a part of their cereal consumption, as they cannot afford to pay such hefty hikes effected in the issue prices. The APL families may shift away from PDS, as the open market prices are now lower than the revised issue prices.

The first option seems unlikely on fiscal grounds. Even otherwise, many States have been gradually cutting down their PDS on account of frequent increase in the central issue prices. For instance, Kerala -- by far the best-run PDS in the country. The ave rage offtake of rice in the State was around 15 lakh tonnes before the introduction of the TPDS. This fell to 12.7 lakh tonnes in 1999-2000. There were times when the State government could withdraw the entire central pool allocation and distribute it th rough the PDS.

In recent years, the State's offtake is only 65-70 per cent of the allocation. Earlier, the amount used by the State government to take delivery of the PDS allocation was almost twice the State's Plan revenue expenditure. In recent years, it has dropped to around 85 per cent. The State is, of course, trying to stabilise the prices of mass consumption goods through other avenues, such as the well-known Maveli stores. But what is important to note here is that the State's record of maintaining the most wi dely-acclaimed and efficiently-run PDS is being gradually eroded, as the Centre is frequently pushing the rising economic cost of the FCI into the issue price.

In the present case, Kerala is reported to have protected its people from the hikes in the issue price. (West Bengal, Andhra Pradesh and Tamil Nadu, too, did so.) But if the central issue price is going to be indexed to the economic cost, as announced, t here is a limit beyond which it cannot go.

Another case in point is that of the North-East, the country's most chronically food-deficit region. The States in this region are not known to run their PDS very efficiently. However, a fact generally ignored in the discussions on food security is the a ttempt by these States to set up fair price shop networks on a par with, or better than, many others. For instance, in contrast to the national average of one fair-price shop (FPS) to serve a little more than 2,000 people, the north-eastern region has on e FPS to cater to the needs of 900 people.

In such States as Meghalaya, Mizoram and Assam, each FPS outlet covers a much smaller number of people. The only two States in the region where the ratio of FPS outlets to population coverage is low are Tripura, with one FPS for 2,500 people, and Nagalan d, where one outlet serves as many as 4,500 people.

According to the prescribed ration quota, these States together are entitled to receive almost 2 million tonnes of cereals per annum. Given the kind of escalations effected in the issue prices from time to time, they could not requisition, on an average, more than 1.6 million tonnes of cereals per annum. The quantity they actually lifted was around 70 per cent of the allocation. In the 1980s and early 1990s, these States could set apart the equivalent of 33-48 per cent of their Plan revenue expenditure for lifting the allocated cereals.

By the close of the decade, while Mizoram could increase the proportion and Assam could just maintain it at the earlier level, the proportion had fallen sharply in other States in the region. Considering their fiscal condition, it is most unlikely that t hese States could set apart more funds for running their PDS, or absorb the present hikes in the issue prices.

If the States are unable to absorb the increased issue prices, one option is to pass it on to the ration card-holders. However, when the new central issue prices were announced, the retail open market prices of rice ruled below the revised APL issue pric es in rural and urban centres of almost all States, except Delhi, Assam, Tripura, Gujarat and Rajasthan.

Similarly, the retail prices of wheat were also below the APL issue prices in all the States, except Andhra Pradesh, Bihar and Karnataka. With the arrival of rabi harvests, the prices of wheat and rice in the open market further declined. At present, in Delhi, the prices are reported to be lower by Rs. 2-2.50 per kg than the APL issue prices. The Delhi Government has, therefore, asked its 3,400 FPS to procure rice and wheat from the open market and distribute to the card-holders.

Unless the State governments can absorb the revised issue prices, there is no need to access cereals from traders for distribution through the FPS. Otherwise, the consumers can buy their cereals directly from the open market. If this happens, a larger nu mber of the PDS outlets will have to close down. In any case, with the existing market price differential, APL families need not go to the PDS in States where prices are lower than the issue price.

Nonetheless, to cater to the BPL families, at the revised ration quota, the government would require 14.3 million tonnes of both rice and wheat. The quantity may be less to the extent the BPL families are forced to forego the ration due to higher issue p rice. This implies, on the one hand, down-sizing the PDS to almost one-third or less and, on the other, searching for other means to dispose of the huge food stocks with the central pool.

The latter, in all probability, is going to be a Herculean task. On April 1, the stocks with the FCI were put at 28 million tonnes. Add to this the procurement of 15 million tonnes of wheat and 2 million tonnes of rabi rice this season (April-June). If t he offtake in this period is limited to the BPL quota, then, as on July 1, the total stocks of rice and wheat with the central pool would be around 41.5 million tonnes.

If the BPL families also forego a part of their allotment because of the high price, the stocks would be still higher. As on this date, the stipulated minimum buffer stock with the central pool is 24.3 million tonnes, leaving an excess stock of more than 17 million tonnes. There are two options, other than PDS, to dispose of the excess stocks: (i) open-market sales, and (ii) exports.

It is seen that at present the domestic prices of wheat and rice are much below the economic costs to the FCI. The open-market offloading of excess stocks is, therefore, ruled out. Regarding exports, the international reference price of rice is now quote d at $198 per tonne, against the FCI's economic cost of around $260 per tonne; and of wheat, at $94 per tonne, compared to the economic cost of around $205 per tonne. That is, the prices in the domestic market are higher by Rs. 270 per quintal for rice a nd Rs. 480 per quintal for wheat.

Thus, if the size of the PDS has to be pruned drastically, and if the domestic and international prices are lower than the issue prices, the FCI would be left with no option but to retain the stocks and add to the burden of carrying costs. The problem wi ll not end there. As this cannot continue for long, a time will come when the present minimum support price system has to be dispensed with. Are we ready for that?

(Concluded)

(The authors are Director and Assistant Director respectively of the Commission for Agricultural Costs and Prices. Their views are personal.)