The budget & the food economy

By M. H. Suryanarayana

THE UNION budget for 2001-02 has assigned a strategic role to ``speeding up of agricultural sector reforms and better management of the food economy''. For the food economy, what matters most is the provision for the food subsidy and its implications. The food subsidy essentially goes to finance: (i) the operation of the Public Distribution System (PDS); and (ii) the cost of maintaining the buffer stock of grain. Both are important. While the former has promoted food security, particularly in food deficit States such as Kerala, the latter has provided food security to the country.

The budgetary provision for food subsidy during 2000-01 was Rs. 8,210 crores. The revised estimate is Rs. 12,125 crores. This increase is explained in terms of a rise in inventory carrying cost and the subsidy on account of the `Antyodaya Anna Yojana', launched in December 2000. This provides for identifying 10 million `poorest of the poor' families and supplying them 25 kg of grain per family a month at heavily subsidised prices. The subsidised rates are about equal to a quarter of the Food Corporation of India's (FCI) economic cost of procurement and distribution. These prices, at present, are Rs. 2/kg for wheat and Rs. 3/kg for rice. As per the Economic Survey 2000-01, this would call for an annual allocation of 30 lakh tonnes of grain, involving a subsidy of Rs. 2,315 crores.

The budget for 2001-02 has increased the allocation for the food subsidy to Rs. 13,675 crores, up by Rs. 1,550 crores. This is supposed to take care of the increases warranted by the Antyodaya Anna Yojana for a full year and `normal increases in cost of procurement, transportation, storage and other incidentals'. But it is not clear whether this would be an adequate provision. This is because the increase (Rs. 1,550 crores) in the food subsidy would not be sufficient even to meet the increase of Rs. 1,740 crore (Rs. 2,315 crores for an year minus Rs. 575 crores for three months) in subsidy requirement on account of just the Antyodaya programme for the full year, not to speak of the annual average rise in the minimum support prices of rice and wheat at rates exceeding 10 per cent, and other related carrying costs.

The budget has sought to introduce some changes in the management of the food economy. This is based on the following premise: Productivity has gone up. Food production has increased. As a result, stocks too have piled up. Current grain stocks are around 45 million tonnes. It is no longer an era of shortages. Food policy has to deal with surpluses. Hence, management of the food economy has assumed a critical role. Therefore, the budget has envisaged ``an enlarged role to the State Governments in both procurement and distribution of food grains for PDS in their respective States''. Henceforth, the Centre would not provide subsidised grain to States. Instead, its role would shift to one of providing financial assistance to the State Governments to ``enable them to procure and distribute food grains to BPL families at subsidised rates''. The FCI would confine itself to procurement of grain for maintaining food security reserves. Of course, it would oblige those States, which seek its help, with procurement of grain for their PDS.

How valid is the premise? Grain production has not increased in the current year. It has rather declined from 208.9 million tonnes in 1999-2000 to 199 million tonnes in 2000-2001, that is, by about ten million tonnes. The available surplus stocks of grain do not represent a real surplus after meeting the genuine `food security' needs of society but a surplus realised due to structural constraints on effective demand. But the Government seems to bother only about `market demand' and not `needs' when it remarks that there is a surplus because ``domestic production has reached a level which is much more than what the market or PDS can absorb''.

In addition, the realised increases in public stocks of grain are also due to the revised PDS pricing rule introduced in the 2000- 01 budget. The rule stipulates charging families above the poverty line (APL) prices equal to the economic cost of grain delivered through the PDS. But the economic cost of PDS grain is even higher than the ruling market prices. Thus, the APL families have virtually been priced out of the market for the low-quality PDS grain. The families below the poverty line (BPL) seem to have followed suit. As against the allotted amount of 7.51 million tonnes of wheat, the realised offtake was a mere 2.72 million tonnes during the first nine months of the current financial year. As regards rice, the offtake was 5.75 million tonnes against the allotment of 10.96 million tonnes. This is the real cause of the surplus stocks with the Government. Thus, the budget seems to lack an understanding of real issues and a long-term perspective.

However, the budget policy announcement on restricting the role and size of the FCI only makes a correction to this error process. This is because much of the inefficiency of the FCI and the rise in food subsidy have been due to the lopsided strategy on procurement-cum-distribution - that is, the priority accorded to stock accumulation over that of depletion. The FCI has been procuring grain, virtually without limit, at prices ever increasing but not at all justifiable in terms of real costs of production. As a result, stocks have piled up; costs have risen and hence, the subsidy too.

In recent years procurement prices have increased faster than the inflation rate. The Government's efforts to align the PDS prices with the FCI's economic cost of procurement and distribution have only reduced the off-take of grain from the PDS, contributing further to stock accumulation and the need for increasing food subsidy. Thus, one effective solution for the ever-increasing subsidy could be to regulate procurement in terms of both prices and quantities. The Government has made a good beginning by restricting the FCI role and size with reference to buffer-stocks and food-needy States. But, it is silent on the pricing strategy for procurement of grain. States such as Kerala, which have been complaining about the inferior quality of the rice supplied by the FCI, stand to gain since they can procure rice as per the domestic consumer preferences. Keralites, by and large, prefer the rice from Andhra Pradesh to that from Punjab.

In the limiting hypothetical situation, if at all the states make their own efforts at procurement, this would result in unnecessary duplication, wastage of capital, human resources and even grain. This does not dovetail well with the spirit of the structural adjustment programme, that is, promoting efficiency in resource use. Hence, it appears that essentially the new provision is to pave the way for privatisation of even food procurement required for the PDS (if not the PDS itself) and eventually for a programme of food stamps.

Many poor and backward States such as Bihar do not lift the full amount of subsidised grain allotted to them. With a shift in form from Central assistance in terms of subsidised grain to that in finance, cash- strapped States may end up misallocating such resources, unless they are tied, to meet short-term priorities.

Finally, it is now well established that international grain prices have been highly volatile and unstable. However, thanks to Government intervention and regulation, grain prices have been relatively stable in India. Hence, unregulated liberalisation and alignment of domestic prices with international prices, if carried too far, would result in imparting volcanic price instability in the food economy rather than reaping the benefits of globalisation and efficiency.

(The writer is Professor, Indira Gandhi Institute of Development Research, Mumbai.)

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