by Vivek Kaul May 28, 2013

That the food grains management policy of the Congress led United Progressive Alliance (UPA) government is in a mess, we all know. But the tragedy is that the mess is getting messier.

A new report titled Buffer Stocking Policy in Wake of NFSB (National Food Securities Bill) authored by Ashok Gulati and Surbhi Jain of the Commission for Agricultural Costs and Prices (CACP), Ministry of Agriculture, provides more information on the issue.

The Food Corporation of India (FCI) directly and through other state government affiliates procures rice and wheat from farmers at the minimum support price(MSP) set by the government. These food grains are then distributed by the government through the various programmes that it runs, using the public distribution system. As per the current norms, FCI buys all the rice and wheat that farmers bring to it, as long as it meets a certain quality.

Over and above the grains required for distribution, the government also maintains a “strategic reserve”. This reserve is kept for bad times like a drought or any other unforeseen shock, when production of food grains tends to drop or their free movement is restricted. In such circumstances, the price of rice and wheat tends to shoot up. The government can utilise these strategic reserves, release them into the open market and ensure that the prices stabilise.

As per the prevailing norms the government needs to maintain a total food grain stock of 31.9 million tonnes as on 1 July, of every year. But the actual amount of food grain stock is much higher than this number. As the CACP report points out “The country is currently loaded with large stocks. For example, on 1 July, 2012, it had 80.2 million tonnes, and is likely to have similar or even higher amount this year, despite emerging as the largest exporter of rice (around 10 million tonnes in calendar year 2012) and exporting about 5.6 million tonnes of wheat in FY 2012-13.”

The situation seems to have continued this year as well. The food grain stock as on 1 April, 2013, stood at 59.8 million tonnes against the norm of 21.2 million tonnes, that the government needs to maintain as on 1 April, of every year. The situation is expected to continue even after the current wheat procurement season ends. The government procures more than 90% of the wheat, during the months of April and May.

After the procurement of wheat ends CACP expects that the total food grain stock will touch around 82.2 million tonnes, as on July 1, 2013.

This is way more than the total stock of 31.9 million tonnes that the government needs to maintain as on 1 July, of every year.

What is interesting, nonetheless, is that the wheat procurement has been way less than what was originally projected. “In 2013-14, the procurement of wheat was initially estimated to be 44 million tonnes by the government after due consultation with state governments, before the procurement season began in March-April, 2013. Gradually, it was realised by the end of April that it may not touch 44 million tonnes, but stop at around 40 million tonnes. With each week passing in May 2013, the estimate is being reduced and by the middle of May, it was being realised that total procurement of wheat may not cross 32 million tonnes. Such a drop in procurement estimate from 44 million tonnes to 32 million tonnes within less than two months is a cause of concern, and indicates the challenges in honouring the commitments under NFSB,” the report points out.

But even with this lesser procurement the food grain stock is way more than the requirement of 31.9 million tonnes. One explanation for the excess stock is that the government is preparing to introduce the right to food security, which will lead to an increase in the total amount of rice and wheat being distributed by the government. And hence, the greater stock.

Even taking that into account, the total food grain stock is much more than required. As the report points out “Anywhere between 41 million tonnes to say 47 million tonnes, would be a comfortable level of buffer stocks, covering both the operational needs of the NFSB as well as strategic reserves to take care of any drought or other exigency.”

So around 41-47 million tonnes of food grain stock would work well. But as on 1 July, 2013, the government of India is likely to have around 82.2 million tonnes of rice and wheat. This means that the government will have 30-40 million tonnes of excess stocks of food grains. This is food grain for which the government has paid the farmer but hasn’t released it into the market, leading to inflation.

As the CACP report points out “The value locked in these “excess stocks”, evaluated at their economic cost, ranges from Rs 70,000 crore to Rs 92,000 crore. This infusion of “excess” money into the economy without corresponding flow of goods is evident in the paradox of rising prices of rice and wheat amidst overflowing stocks in government godowns.”

What is ironical is that the government doesn’t even have enough space to stock all the food grain that it has been buying. The total storage capacity available is around 71.9 million tonnes. Now compare this to the total expected food grain stock of 82.2 million tonnes as on 1 July, 2013. What this means is that more than 10 million tonnes of food grain will be rotting out there in the open. And while that happens, food grain prices will continue to go up. Cereal inflation in April 2013 was at 16.65%. In comparison it was at 4.62% in March 2012.

The government has been buying up more and more of rice and wheat being produced in the country over the years. In 2006-2007, the government bought 32% of the total rice paddy produced. In 2011-2012, this had shot up to a massive 54%. In case of wheat, in 2006-2007, the government bought 18% of the total wheat produced. By 2011-2012, this had nearly doubled to 35% This has led to the government stocking up much more food grain than it actually requires.

As a recent report brought out by the Comptroller and the Auditor (CAG) General of India pointed out “The total food grains stock in the Central Pool recorded an increase of 45.8 million tonnes between 2006-07 and 2011-12.”

This has meant that the amount of food grain available in the open market has gone down and leading to higher prices. It has also more or less killed the private trade in the sector. As the CACP report points out “In recent years, the government has procured more than one-thirds of the total production and more than half of the marketed surplus of rice and wheat. Such large scale public procurement has strangulated the private trade (as has been the case in Punjab, Haryana and now Madhya Pradesh and Chhattisgarh). Of the total market arrivals of wheat and rice in these states, more than 80-90 percent is bought by the government, indicating a de-facto state take-over of grain trade. This reminds one of the failed experiment of wheat trade take-over in 1973-74.”

And any monopsony (a market where one buyer faces many sellers) be it the government or the private sector, is not good. This takeover of the grain trade in the country, by the government has come at a huge cost. The government has excess stocks of around 30-40 million tonnes of food grain with an economic cost of Rs 70,000-92,000 crore or lets take the midpoint of around Rs 80,000 crore. More than 10 million tonnes of this grain is rotting in the open i.e. around Rs 20,000 crore of public money gone down the drain. And this is a government which is struggling to control its burgeoning expenditure. India currently has one of the highest fiscal deficits in the world. Fiscal deficit is the difference between what a government earns and what it spends.

As the CACP report points out “It is creditable that India is currently in a state of ‘plenty’ but holding excessive stocks in godowns, which serve no worthwhile purpose, begs the question of economic efficiency in public expenditure. It will be much rational policy choice to liquidate these “excessive” stocks. The money, i.e., around Rs 80,000 crore under the most likely scenario, would certainly come in handy in the current times of high fiscal deficit and the increased availability of wheat and rice in the markets would rein in high food inflation, especially cereal inflation.”

Now that’s something worth thinking about.