Why half reforms are worse than none

By Prem Shankar Jha

The Vajpayee Government's management of the economy has not exactly been a success. In the three years since it came to power, the GDP growth rate has declined relentlessly till it was barely 5 per cent in 2000-01. Since December, the rate of industrial growth, which was in any case an unimpressive 6 per cent, has fallen to 1.9 per cent. Share prices are at a record low and the crash of a major investment fund has cost 20 million investors roughly half their life savings. But its failure is reflected most strikingly in an embarrassing surplus. This is of foodgrains in the Government's stocks.

When Mr. Yashwant Sinha presented this year's budget, the country's buffer stocks of foodgrains had touched the till then unheard of level of 47 million tonnes. At the end of June, this had risen to over 60 million tonnes. The Government has been trying to bring down this surplus for some time, but so far its main concern has been with the huge and mounting subsidies that having to hold it has involved and the impact that it has had on the fiscal deficit.

At present the cost of procuring, holding and distributing the foodgrains is about Rs. 5 per kilogramme, more than the issue price to the ration shops. Last year Mr. Sinha tried to reduce the deficit by raising the price of foodgrains sold through the ration shops to consumers above the poverty line to its economic price, that is, the total cost of providing the grain to the ration shops. But this led to a catastrophic decline in sales by the ration shops, as their prices forged ahead of market prices in many parts of the country. Mr. Sinha thus learned that the subsidies were not being generated by low issue prices but excessively high procurement prices. This was leading to an oversupply of foodgrains to the public distribution system that could not be sold.

Failed bid to cut procurement

This year he tried to tackle the food subsidies by announcing a sharp reduction in fresh procurement by the Centre. The Centre, he said , would only procure enough to maintain buffer stocks needed to ward off a drought. If the States wanted to maintain the public distribution system, they would have to take the responsibility for both procurement and distribution. Since the Centre, even in February, held 23 million tonnes more of foodgrains than the buffer stocks needed, and since the States were in no financial condition to subsidise foodgrain sales, this meant in effect an end of the support price system in agriculture. .

Had Mr. Sinha been able to gain the concurrence of the rest of the NDA, and the State chief ministers, this would have cut an estimated Rs. 12,000 crores from the Central deficit. What is more important, it would have begun a rapid shift away from the mercantilist food policies of the past. Policies that aimed at self sufficiency at any cost, because they had been forged in the 1950s against a backdrop of sixty years of perennial food shortages - towards an open, market determined cropping pattern. This would have brought down cereal prices in the open market to the immense benefit of the poor, and hastened the shift from foodgrains to cash crops that had begun as far back as 1978-79 but been retarded by the offer of higher and higher support prices for rice and wheat.

But these plans came to grief on the reef of politics. Even before the first food minister's conference, Punjab announced that faced with a bumper wheat crop, it had issued instruction to its agents to buy up all the grain that the farmers were offering. At the conference, Punjab and Haryana forced the Centre to agree to pick up all of their purchases. As a result, instead of drawing down its stocks, the Centre increased them by another 13 million tonnes by the end of June.

Its recent announcement of a 30 per cent cut in the price of foodgrains sold to above poverty line ration card holders was a panic reaction by a government that had run out of ideas. But a moment's reflection will show that this will at the most slightly slow down the rate of growth of the food mountain. For only in one year in the entire decade of the 1990s has the offtake from the public distribution system come even close to total procurement. In all others it has hovered between half and four fifths. Thus even with one or two poor monsoons, the food mountain is likely to grow to 100 million tonnes in the next five years. By then, it will have become not just a domestic but also an international scandal, for it will equal the annual food output of the whole of sub-Saharan Africa.

Absence of transition strategy

There are two lessons that the leaders of all political parties need to learn from the food fiasco. The first is that contrary to what economic theorists may prove with their mathematical models, half reform is worse than full reform. The second is that the challenge to governance in implementing economic reforms lies not in defining where one wants to go but in framing a transition strategy for getting there that minimises the economic and political cost of doing so. Not just in food but in every aspect of economic policy the government has done neither.

In agriculture, the goal should be to remove all elements of administered cost and subsidy to the farmer, so that he determines what he will produce entirely on the basis of signals from the market. So far as protecting the poor is concerned, this needs to be done with a system of food stamps that can be targeted precisely to the most needy groups and will give them the flexibility they lack today of spending it on the things they need most at any given moment of time.

A transition strategy to get there will need to take into account the real short run damage that the sudden withdrawal of support prices could do to larger farmers especially in the food surplus States. The way to deal with this is to phase out the withdrawal of Central support prices and phase in the introduction of food stamps over three or preferably five years. It is ironic that the government is prepared to take five years to phase out fertilizer subsidies, even though the bulk of these goes to a handful of high cost domestic manufacturers, but could not work out a similar phase out plan for food subsidies.

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