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Friday, May 27, 2022

Offloading excess foodgrain stocks through open market operations will generate much-needed resources for govt

Let the Modi government listen to its own chief economic advisor, what his team had to say in The Economic Survey: Reduce the coverage under PDS; link issue price to at least half of the procurement price; and move gradually towards cash transfers.

Written by Ashok Gulati |
Updated: June 22, 2020 9:37:20 am
The estimated economic cost of rice in 2020-21 is Rs 37,267/tonne and that of wheat is Rs 28,838/tonne. (Illustration by C R Sasikumar)

India is staring at some stressful months. Fighting the coronavirus on one hand, and defending the borders from Chinese incursions on the other will require mobilising large resources. Most economists are projecting the fiscal deficit (Centre and states combined) to be about 10-11 per cent of GDP. Going beyond that may not be very prudent. It requires urgent scanning and pruning of unproductive public expenditures. While the sale of non-strategic state enterprises has been on the cards for quite some time, the Narendra Modi government has not been very successful on that front so far. And now, given the recessionary outlook, it may not be easy to get a good price for “state silver”.

However, there is one area which the Modi government can tap to raise more than Rs 1,00,000 crore, provided it takes bold steps. It is the “mountains of grain” that the Food Corporation of India (FCI) has accumulated. As on June 1, FCI had unprecedented grain stocks of 97 million metric tonnes (mmt) in the Central Pool (see Figure). Even on July 1, when the procurement of rabi ends, FCI is likely to have grain stocks of about 91-92 mmt, against a buffer stock norm of 41.12 mmt that are required for the Public Distribution system (PDS), and some strategic reserves. So, compared to this norm, on July 1, FCI will have “excess stocks” of at least 50 mmt.

The estimated economic cost of rice in 2020-21 is Rs 37,267/tonne and that of wheat is Rs 28,838/tonne. Even if one takes a conservative and lower ballpark figure of Rs 30,000/tonne for simplicity as the combined economic cost of rice and wheat, the value of this “excessive stock”, beyond the buffer norm, is Rs 1,50,000 crore. This is unproductive capital locked-up in the Central pool of FCI. Unlock this by liquidating “excess stocks” through open market operations as much as can be done by inviting the private sector in a big way to hold these stocks, at whatever reasonable market price it can get. It will not recover its full economic cost, as they are much higher than the prevailing market prices, but by not liquidating it, FCI will keep incurring unnecessary interest costs of about Rs 8,000-10,000 crore per annum. This is simply dumb food policy.

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The Modi’s government’s recent amendment of the Essential Commodities Act, via the ordinance route, can come handy to instil confidence in the private sector for building large scale storage. The ordinance assures that stocking limits will not be imposed on the private sector, except under exceptional circumstances such as natural calamity, and wars. It should, however, delete the clause of “extraordinary price rise”, if it really wants to invite the private sector building large and modern storage facilities (silos). It will propel investments in building more efficient food supply lines. The only condition could be to register large storage facilities under the Warehousing Development and Regulatory Authority (WDRA) to know how much stock is there with the private sector, and where.

The other two ordinances relating to agri-marketing are already commendable. The one on “The Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Ordinance, 2020” creates multiple channels for farmers to sell their produce outside the APMC mandi system and also helps towards an unfettered all India market for agri-produce. Of course, it will be resisted by many states that are taking undue advantage of the APMC mandis’ virtual monopoly power. But if the central ordinance is implemented in its true spirit, it will be a game changer.

The other ordinance named “The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Ordinance, 2020” aims to encourage contract farming. The basic idea behind this is that farmers’ sowing decisions should be made in view of the expected prices of those crops at the time of harvest. It is forward looking and more aligned to the likely demand and supply situation. The current practice, where farmers’ sowing decisions are more influenced by last year’s price, often leads to the problem of boom and bust. Although honouring an assured price remains a challenge when actual market conditions differ widely at the time of the harvest, there are ample cases of success with varying models of contract farming hedging the price risks of farmers.

Together, all the three ordinances are in the right direction, and with minor refinements as they become law, they can lay the foundation of a much more efficient agri-marketing system in India than the existing one. The Modi government needs to ensure they are implemented properly by states, which will benefit both the farmer as well as the consumer. The main losers in this game would be some arhatias (commission agents), who have been scooping up an unduly large share in the agri-value chains. Some local political leaders who are in close nexus with the arhatias’ lobby may also lose clout.

The other related area to mobilise additional resources is that of food subsidy. In the Union budget of 2020-21, a sum of Rs 1,15,570 crore has been provisioned for food subsidy. This number is highly misleading as FCI has been asked to borrow more and more resources from other sources, especially the National Small Savings Fund (NSSF). As on March 31, 2020, borrowings from the NSSF were Rs 2,54,600 crore, on which FCI pays interest rate of 8.4 to 8.8 per cent per annum. So, the real food subsidy bill for 2020-21 amounts to Rs 3,70,170 crore (Rs 1,15,570 crore plus Rs 2,54,600 crore). Let the Modi government listen to its own chief economic advisor, what his team had to say in The Economic Survey: Reduce the coverage under PDS; link issue price to at least half of the procurement price; and move gradually towards cash transfers. These steps will save a minimum of Rs 50,000 crore annually. And the country needs these resources desperately to save lives, both from the virus and at borders.

The writer is Infosys chair professor for agriculture at ICRIER

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