Reaping the whirlwind

By Prem Shankar Jha

Last month the Union Minister for Public Distribution, Mr. Shanta Kumar, announced that India would export foodgrains and the Government would sell a part of the surplus stock in its warehouses in the domestic market at an estimated loss of Rs. 1,000 crores, in order to bring down the stock of foodgrains from its present embarrassing level of 40 million tonnes to a more manageable 26 million tonnes. It is by no means sure that it will succeed in doing either to the extent it desires.

While the Government has not given the breakup of its planned sales, it would be reasonable to assume that it plans to sell around four million tonnes of rice and wheat abroad, and another 10 million tonnes in the home market. Both these targets would be over-ambitious. India exports around five million tonnes of rice every year but is a newcomer in the market for wheat. The scope for increasing rice exports may therefore be limited, and the market for Indian wheat has still to be created.

What is more disturbing, the sale of foodgrains in the domestic market below its economic cost would amount to a tacit retreat from the Union Finance Minister, Mr. Yashwant Sinha's attempt to cut food subsidies by raising the issue price for above poverty line consumers to the economic cost of purchase, storage and distribution. As this was virtually the only step he took in the last budget to cut subsidies, this retreat will hold the Government up to ridicule and greatly hearten the opponents of fiscal reform in the country. Many of them are within the ruling alliance.

The below cost sale of foodgrains surpluses is in any case an act of desperation that highlights the criminal folly of the food procurement and distribution policies of the last three decades.

From the nation's point of view it would be far better if the Government failed to disembarrass itself of the surplus stocks, than if it succeeded. Success would give it the excuse it seeks to continue with a mercantilist foodgrains policy that is as outmoded as the command economy was, when it brought India to the brink of disaster in 1991. What the country needs today is for the food mountain to grow and grow till the Government can no longer hide the millions of tonnes of wheat that are rotting every year, and can no longer sustain the burden of mounting food subsidies, and is forced to abandon the present foodgrains policy in favour of a more market-guided one.

High procurement prices

Why has the food mountain grown so large? Because too much rice and wheat are being procured. Between 1991 and 2000, the annual offtake of foodgrains from the public distribution system increased by 3.5 million tonnes. In the same period, the annual procurement of wheat and rice increased by 11 million tonnes.

Why has procurement outstripped offtake? Because procurement prices have been raised by a succession of populist governments, first at the Centre and then in the States in defiance of the Centre, at a rate that bears no relationship to the annual rise in the cost of living. As procurement prices provide a floor for market prices, the overall effective rate of increase can be judged from the annual rise in market prices. This has been of the order of 9.8 per cent per annum for wheat in the 1990s, and only a shade less for rice. Against this the annual rate of inflation has been around 8 per cent.

Who gains from this policy? In the short run at most 20 per cent of the farm families, who have a surplus to sell in the market. Who loses? In the descending order they are the 30 per cent of the rural population that has no land, and little access to ration and fair price shops; the urban poor who have to supplement what they buy from the ration shops by purchasing food in the open market, the Government which has to incur higher deficits and therefore borrow more; and future generations of job seekers who face lower rates of public investment and economic growth, and therefore fewer new jobs.

In the long run, even the farmers lose from such high procurement prices. This is because by inflating the returns on cereal farming to a level that the market would not by itself sustain, the Government discourages them from shifting to cash crops, and in particular to horticulture where returns are ten to twenty times those on rice and wheat. Last but not least, since both wheat and rice surpluses come mainly from parts of the country where land is becoming saline and waterlogged because of excessive irrigation, the environment is the final casualty of this policy.

Time for food stamps

The right course of action for the Government would be to wind down the food procurement and distribution system and replace it with a policy of stabilising prices by buying and selling in the open market, and meeting the needs of the poorer sections of the population for subsidised food through a system of food stamps. Open market prices tend to reach their peak in the two months before the new crop arrives in the market and slump only for a period of two months after that.

It should therefore be easy for the Government to follow a contra-cyclical policy that builds just enough of a buffer stock to meet emergencies till imported food can arrive in the market and bring down prices.

As for food stamps, the idea has been around for some time and has been accepted in principle by the Government. But its aim should be not so much to cut subsidies as to replace the present system in which less than a quarter goes to the genuinely poor, with one in which the poor become the only beneficiaries.

Food stamps worth Rs. 100 a month for the roughly 35 per cent families below the poverty line will cost the Government Rs. 8,400 crores a year. This is marginally less than what it is spending on inefficient food subsidies today.

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