Unwarranted hike

THE DECISION TO increase the minimum support price for wheat in the 2000-01 rabi marketing season by 4.5 per cent is of a piece with the trend in recent years of continuously raising prices without much regard for the recommendations of the Commission on Agricultural Costs and Prices or the impact they will have on retail food prices and the food subsidy. The increase though relatively small is not going to help solve the subsidy problem and it will lead to a further increase in unsold stocks with the Food Corporation of India.

While in discussions and policy decisions on the food subsidy the focus is solely on the issue price of cereals sold through the public distribution system (PDS), the regular and large increases in procurement rates have made the bigger contribution to both higher market prices and a larger subsidy. Procurement prices cannot be kept at artificially low levels. Yet, in recent years the support prices for wheat in particular have enjoyed astronomical increases largely because of the enormous clout of the farm lobbies of the wheat surplus areas of Punjab, Haryana and western Uttar Pradesh. Between 1995-96 and 1998-99, years when the overall rate of inflation was low to moderate, the wheat support price was raised by as much as 45 per cent. Under pressure from the farm lobbies and their State Governments, large bonuses were added on to the procurement prices, which were themselves higher than the CACP recommendations. This has only increased the holding cost of the FCI and therefore the food subsidy as well. The Economic Survey of 1999-2000 offers a number of cogent arguments on the need for `restraint' in setting procurement prices. First, since 1995-96 the annual increases in the procurement prices of both wheat and rice have out-stripped inflation. Second, these prices become the floor for the open market prices and therefore contribute to a higher than warranted rise in retail prices, in spite of large harvests. Third, the FCI is forced to procure cereals at these high prices in quantities that are far more than what are required for food security purposes. Fourth, as private trade is not able to make large purchases at these high prices stocks during the lean season dwindle. Since the FCI does not off-load its own stocks quickly, open market prices rise sharply even as inflation in the prices of other commodities remains low. The net result of the Government's procurement price policy in recent years has been larger stocks with the FCI, higher food inflation and a bigger subsidy as well.

However, the Government has not learnt its lessons and has chosen not to exercise restraint in setting the support price for wheat for the 2000-01 marketing season. Where the CACP had this year recommended an unchanged support price - no doubt partly to neutralise the substantial increases of recent years - the Government has chosen to raise it. The increase this year is relatively small, but it comes on top of the steep hikes of recent years. Moreover, the hike is once more larger than the current rate of inflation. A moot question is whether or not farmers groups will, as in recent years, agitate for a bonus and if they do how the Government will respond. The recent controversial decision on the food subsidy also enjoins the Government to keep the issue price for the poor at half the economic cost and for the rest of the population the issue price should cover the economic cost. Since the new support prices will lead to an increase in the economic cost, the PDS issue prices for wheat have to be further raised. In other words, even before the controversy over the decisions announced in the Union Budget has been sorted out the Government has created the conditions for yet another increase in the issue price of wheat.

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