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Wednesday, May 27, 2020

Reform of grain management system could free up resources for infra investment

The massive accumulation of grain stocks is the result of a very inefficient strategy for food management wherein the procurement for wheat and rice (paddy) remains open-ended, but the disbursal of those stocks remains largely restricted to PDS.

Written by Ashok Gulati | Updated: January 6, 2020 11:08:57 am
The question being asked is whether the Indian economy can be put back on the 7-8 per cent growth trajectory and can agri-GDP grow at least at 4 per cent. (Illustration by C R Sasikumar)

With GDP growth rate plummeting to 4.5 per cent and with the agriculture GDP (GDPA) growth at 2.1 per cent in the second quarter of this fiscal year, everyone concerned with the economy is anxious. The question being asked is whether the Indian economy can be put back on the 7-8 per cent growth trajectory and can agri-GDP grow at least at 4 per cent.

It may be noted that in UPA 2 and Modi 1.0, while the average GDP growth rate was 7.2 and 7.5 per cent respectively, agri-GDP (GDPA) growth slowed in the Modi period to 2.9 per cent, far below the 4.3 per cent rate achieved during UPA 2. And now, when the quarterly growth in GDPA is hovering at around 2 per cent, it is a cause for great concern (Figure-1). Agriculture still engages about 44 per cent of India’s workforce. If the masses do not gain from the growth process, their incomes remain subdued, then the demand for manufactured goods, housing and other goods will remain low. Low demand in the economy is one of the main reasons behind India’s great slowdown today.

Interestingly, it is during this slowdown that inflation has started to surge after a long period of low inflation under Modi 1.0. Inflation is led by different components of the food segment — cereals, pulses, and vegetables — in the consumer price index (CPI).

Everyone is waiting to see how Finance Minister Nirmala Sitharaman can prop up the economy by boosting demand without causing undue inflation (beyond the threshold level of 6 per cent to be maintained by the RBI). Also, there is the challenge of not slipping on the fiscal deficit target of 3.3 per cent, although the Comptroller and Auditor General of India (CAG) has already indicated that the real fiscal deficit of the country is much more if one accounts for the loans taken by many public sector undertakings (PSUs).

Sitharaman has already announced an investment package for infrastructure of about Rs 102 lakh crore over the next five years, which implies more than doubling the growth in infra-investments from its current levels. The legitimate question being asked is: Where will the resources come from? The announcement does not unveil any clear strategy on the resource mobilisation front.

Here are my two cents to raise (save) Rs 50,000 crore per annum to finance infrastructure projects without causing high inflation or without breaching the fiscal deficit target. The prime minister and the finance minister should take a look at the massive inefficiency in the grain management system under the National Food Security Act (NFSA) to find the required resources.

The NFSA gives certain quantities of wheat and rice to 67 per cent of the population at Rs 2/kg and Rs 3/kg respectively, while the economic cost of these to the Food Corporation of India is Rs 25/kg and Rs 35/kg respectively. This led to a provision of Rs 1.84 lakh crore for food subsidy in the last Union budget. Not many people know that the FCI had pending bills of Rs 1.86 lakh crore that have not been cleared by the government, and that it has been asked to borrow more and more to finance its operations. The grain stocks with the FCI are far more than double the buffer stock norms as on January 1, every year.

The massive accumulation of grain stocks is the result of a deeply inefficient strategy for food management wherein the procurement for wheat and rice (paddy) remains open-ended, but the disbursal of those stocks remains largely restricted to the public distribution system (PDS). The open market operations (OMO) are much less compared to what is needed to liquidate the excessive stocks. We don’t have a clear strategy. And now, if the rabi procurement is good, FCI may not have the storage space to accommodate it. The money locked in these excessive stocks (beyond the buffer norm) is more than Rs 1 lakh crore. Even if the government decides to liquidate half of it, it can garner Rs 50,000 crore to finance at least half of its infrastructure projects. We need bold moves to reform our grain management system. There is no need to set up another expert committee for this. The blueprint for reforming the grain management system was presented to the PM by the Shanta Kumar panel. The report is on the FCI website.

Only three points need reiteration: First, while the poor under the Antyodaya category should keep getting the maximum food subsidy, for others, the issue price should be fixed at, say, 50 per cent of the procurement price (as was done under Atal Bihari Vaypayee for the BPL category). Second, limit subsidised grain distribution under NFSA to 40 per cent of the population rather than the current 67 per cent. After all, we must ask: What proportion of the poor cannot afford even the basic rations? The Indian government has not given any number for poverty since 2011 — it was 21 per cent as per the Tendulkar poverty line. It is time for the Modi government to tell the nation what is the level of extreme poverty in India. Third, limit the procurement of rice particularly in the north-western states of Punjab and Haryana where the groundwater table is depleting fast, and invite private sector participation in grain management.

If the government can implement just these three points, it can save another Rs 50,000 crore annually. On top of this, it will help the government to reduce its fiscal deficit. And if it liquidates stocks fast, it can contain inflation too. Can the Modi government focus on reforms and implement them? Only time will tell.

This article first appeared in the print edition on January 6, 2020 under the title ‘Lifting growth, containing inflation’. Gulati is Infosys Chair Professor for Agriculture at ICRIER.

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