Sheer fear makes us store more for our future. This phenomenon is not restricted to individuals. Even the Government departments like the FOOD CORPORATION OF INDIA follows suit.
Consumer price inflation for May is 9.31 per cent. The biggest driver has been food inflation, of which the biggest contributor is cereals and products: 14.74 per cent in rural areas, a whopping 21.25 per cent in urban areas, together working out to 16.29 per cent overall. This is unpardonable.
The government has in its stocks 77 million tonnes of grain right now. If grain prices are still soaring above the birds of the sky, there can only be one explanation: mismanagement. Those in charge of managing our food stocks have demonstrated utter incompetence or criminal negligence. In either case, all those in charge — minister and babus — should be sacked and, in case of negligence, prosecuted for causing hunger, malnutrition, scaring an already timid RBI off reducing interest rates and, thus, contributing to economic slowdown.
One excuse the babus have for not getting rid of surplus stocks — in relation to a buffer stocking norm of 31.9 million tonnes as of July 1 — is their dread of not being able to show sufficient grain to feed the gargantuan requirements of the food security law being forced through, at the instance of the UPA chairperson. Hell hath no fury like a UPA chairperson scorned, the babus tell their insipid minister in charge of food, and, together, they do nothing, either to estimate the likely requirement of grain as per the food security law or to sell their stocks in the market to increase availability and reduce the price or at least the rate of price rise in the case of grain.
The Commission for Agricultural Costs and Prices has done an estimate of the revised buffer stocking norms. The July target, it estimates, would be 41 million tonnes. Which still leaves the government with huge surpluses. And this is a danger of the food security law: of making the government the largest hoarder and pushing up food prices.
The government has for decades operated a public distribution system (PDS) of subsidized cereals. This has required a buffer stock whose size varies through the year, depending on the procurement season. Conventional norms required a stock of 31.9 million tonnes on July 1 each year, the end of the rabi procurement season.
This needs to be raised because of the new National Food Security Bill (NFSB), that aims to step up subsidized cereal supply (five kilos per month of wheat or rice) to 67% of the population. If the aim is to be completely self sufficient and not have any imports even in bad years, then a buffer stock of 46.7 million tonnes is required. Allowing for modest imports in bad years, a buffer stock of 41.7 million tonnes is enough, say Gulati and Jain.
However, the actual food stocks are estimated to touch a whopping 82 million tonnes on July 1, 2013. This may be revised down to 76 million tonnes since wheat procurement has been far less than expected this year. The NFSB will require subsidized grain sales to rise to 62 million tonnes per year. But actual cereal procurement has been much higher, which is government stocks have been rising inexorably.
Relative to buffer stock needs as calculated by the economists, the government has around 35 million tonnes of excess food stocks. This does not improve food security at all: food is needed in empty stomachs, not in overflowing godowns. Indeed, there is not enough godown space for current stocks, so much of it is stacked in the open under plastic sheets. Inevitably, millions of tonnes will be eaten by rats and other vermin, or spoiled by rain.
Moreover, holding such excess stocks ties up Rs 70,000 crore to Rs 90,000 crore of bank credit, say Gulati and Jain. This credit is not being used for any productive purpose — the excess stocks are a deadweight burden on the economy. But they mean that Rs 70,000-90,000 crore less of credit is available for small and medium companies that desperately need it. Excess stocks shift scarce credit from productive enterprises to dead mountains of rotting grain.
Whether or not this is formally acknowledged in budget documents, this borrowing for food stocks is really part of the fiscal deficit. Finance MinisterChidambaram is very anxious to bring down the fiscal deficit, and so has been squeezing capital spending, although this is much needed. Far better would a squeeze on food stocks.
Gulati and Jain talk of shifting socks from the centre to the states, but that would merely reshuffle the problem and not end it. There is every reason to follow the second option of Gulati and Jain, to export a large amount of excess stocks. Last year, India exported around 10 million tonnes of rice and 5.6 million tonnes of grain, and even so stocks rose to a record high.
Clearly, a more aggressive export policy is warranted. Global food prices are still high, so additional rice and wheat exports of say 25 million tonnes would fetch at least $10 billion. This will have several positive consequences. First, the trade deficit will come down from current levels that are ringing alarm bills.
That in turn will reduce India's dependence on dollar inflows, which has become dangerously high. It will tend to strengthen the rupee, thus curbing inflation and benefiting millions (as also the re-election prospects of the Congress Party). Some will say that the rupee needs weakening to encourage exports, but the currency has already fallen 22% in two years.
Gulati and Jain favour a switch from physical delivery of cheap grain to conditional cash transfers to beneficiaries. This will greatly reduce waste in inefficient government procurement and distribution. FCI employees are paid 7 to 8 as much as contract workers used by private traders. Much "food security" spending is actually tax payments to state governments like Punjab.
Gulati and Jain estimate that with a cash transfer system, buffer stock requirements will crash to just 10-15 million tones. This will hugely reduce the fiscal deficit and release funds for more productive investment in agriculture. That will be a much better route to food security.
This needs to be raised because of the new National Food Security Bill (NFSB), that aims to step up subsidized cereal supply (five kilos per month of wheat or rice) to 67% of the population. If the aim is to be completely self sufficient and not have any imports even in bad years, then a buffer stock of 46.7 million tonnes is required. Allowing for modest imports in bad years, a buffer stock of 41.7 million tonnes is enough, say Gulati and Jain.
However, the actual food stocks are estimated to touch a whopping 82 million tonnes on July 1, 2013. This may be revised down to 76 million tonnes since wheat procurement has been far less than expected this year. The NFSB will require subsidized grain sales to rise to 62 million tonnes per year. But actual cereal procurement has been much higher, which is government stocks have been rising inexorably.
Relative to buffer stock needs as calculated by the economists, the government has around 35 million tonnes of excess food stocks. This does not improve food security at all: food is needed in empty stomachs, not in overflowing godowns. Indeed, there is not enough godown space for current stocks, so much of it is stacked in the open under plastic sheets. Inevitably, millions of tonnes will be eaten by rats and other vermin, or spoiled by rain.
Moreover, holding such excess stocks ties up Rs 70,000 crore to Rs 90,000 crore of bank credit, say Gulati and Jain. This credit is not being used for any productive purpose — the excess stocks are a deadweight burden on the economy. But they mean that Rs 70,000-90,000 crore less of credit is available for small and medium companies that desperately need it. Excess stocks shift scarce credit from productive enterprises to dead mountains of rotting grain.
Whether or not this is formally acknowledged in budget documents, this borrowing for food stocks is really part of the fiscal deficit. Finance MinisterChidambaram is very anxious to bring down the fiscal deficit, and so has been squeezing capital spending, although this is much needed. Far better would a squeeze on food stocks.
Gulati and Jain talk of shifting socks from the centre to the states, but that would merely reshuffle the problem and not end it. There is every reason to follow the second option of Gulati and Jain, to export a large amount of excess stocks. Last year, India exported around 10 million tonnes of rice and 5.6 million tonnes of grain, and even so stocks rose to a record high.
Clearly, a more aggressive export policy is warranted. Global food prices are still high, so additional rice and wheat exports of say 25 million tonnes would fetch at least $10 billion. This will have several positive consequences. First, the trade deficit will come down from current levels that are ringing alarm bills.
That in turn will reduce India's dependence on dollar inflows, which has become dangerously high. It will tend to strengthen the rupee, thus curbing inflation and benefiting millions (as also the re-election prospects of the Congress Party). Some will say that the rupee needs weakening to encourage exports, but the currency has already fallen 22% in two years.
Gulati and Jain favour a switch from physical delivery of cheap grain to conditional cash transfers to beneficiaries. This will greatly reduce waste in inefficient government procurement and distribution. FCI employees are paid 7 to 8 as much as contract workers used by private traders. Much "food security" spending is actually tax payments to state governments like Punjab.
Gulati and Jain estimate that with a cash transfer system, buffer stock requirements will crash to just 10-15 million tones. This will hugely reduce the fiscal deficit and release funds for more productive investment in agriculture. That will be a much better route to food security.
Courtesy: The Economic Times
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