Thursday, June 21, 2012

Government, Food grains, Common man and Monsoon - the Indian dilemma


India is always a land of contradictions, on top of that government is doing everything it can to increase it. What else you can say about the mountain of rice and wheat on one side and a skeleton, malnutrition body on another side?

Economists often say most of our problems are internal. Either we are not doing something which we are supposed to do, or we are over doing something. In short we often fail to find an optimal middle ground. Consider the case of farmers, harvest, minimum support price, procurement, public distribution system and inflation.

Government needs to make sure that farmers get a fair price for what they produce, in other words it needs to act as an agency to save farmers from the exploitation of middle men. Does it mean that government have to buy the harvest directly? Well, it ends up doing exactly that. In order to support farmers both central and state governments from time to time bought crops at minimum support price (MSP). This value can be more than that of market value. According to one report, over the past five years MSP for wheat went up by 80%.

Buying stocks in huge quantities will create another problem – Where we will store it? According to one report, central government ended up buying 40% of last year’s harvest. We are buying something in huge quantities totally forgetting about the availability of storage space. Over the years we tried to increase MSP but in the case of ware housing capacity improvement was pathetic. Obviously increasing the MSP will create a political advantage, but building storage capacity not. Shortage of warehouses means, we are storing around 20mn tonnes of grain in the open, that too at the time of monsoon!!!

Buying 40% of harvest, GOI is removing the same amount from open markets. In other words even if there is a bumper harvest, price for food items will not come down proportionately as a good percentage will go to government’s hand. A portion of this stock will go to the PDS, which is not so efficient in handling the huge amount of grains. So the wastage will be higher plus the price in the open market will not come down.

Moreover government needs to pay for whatever they are buying; this will stretch the public finance to the breaking point. Consider an e.g. for wheat GOI is paying 20% more than that of international price, means we can’t export it profitably. What more, grain lying in open won’t carry high price in international markets. In a recent attempt to sell the grain in international markets the highest bid received by GOI was 23% below the price it had paid for the procurement.

GOI will suffer losses even if it decided to sell the grains in Indian market. By delaying the decisions, grain lying in open will become prey for monsoon. In both ways, we will end up in the losing side. This mean even after clocking a record production of rice and wheat the price is still very high and in many places people are not getting enough food to eat as well.

What we can do?

First of all government in partnership with private/farming sector needs to create enough storage capacity in the production areas and villages. This will reduce the wastage and farmers will be able to store the grains for longer periods. Next step is, instead of providing a quick fix like increasing MSP government needs to focus on how to increase the agro productivity; our productivity levels are a far cry compared to developed countries; forget developed countries, even many developing countries are very much ahead of us in terms of agricultural productivity. Government needs to buy enough grain to ensure food security of our country, rest needs to flow to the open market. Creating an artificial scarcity will never help the consumers.

Sajeev.

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