Opinion Keeping up with godowns

In the midst of this heated exchange,the government’s even-tempered chief economic advisor,Kaushik Basu,wrote up an analysis of India’s foodgrain policy as a working paper and had it quietly put on the finance ministry’s website. Basu takes issue with the frequently-expressed moralistic view that the government is sitting on rotting foodgrain as its people starve. That view is understandable,he feels,but misguided. Storage isn’t the only issue. Production,procurement,storage and release; the entire chain of foodgrain policy is the problem. Try to fix only one link,and it may wind up making another one weaker,and indeed breaking the entire system at the first moment of stress.

He uses a simple game theory model,common in the industrial organisation theory which he used to teach at one point,to examine one such problematic consequence. If the government uses its standard method to distribute its current excess stock — asking for tenders from traders for a bundle of foodgrain — he demonstrates that the actual eventual supply of food will be higher the smaller is the bundle. Thus,if we want the price to actually fall,the bundle will need to be very small indeed. And that may not be possible.

Thus try and put our stocks out there — and we’ll wind up merely privatising the wastage. We try and give it out free — and a lot of it will be sold back to us through our procurement policy. You simply can’t fix one link by itself.

So how did we get here? Basu sails into the stupidity of the situation: in years of low prices,he points out,the government didn’t buy more,as it should have. It bought less. Now prices are high — and we aren’t releasing more than we should. The system is too rigid,depending as it does on political,discretionary intervention. We need a system of automatic rules that will ensure it doesn’t happen again. And we can’t be paranoid about private profits — if the millers make a couple of bucks,that’s OK,as long as the system gets food to the poor: “the secret of keeping profits low and delivering food to the ultimate consumer is to release the procured grain in small quantities to large numbers of traders and millers and giving them the freedom to make profits.”

Though that isn’t enough,thinks Basu. The only real fix is to dump the entire chain,and replace it with a coupon-based system. This is something that Basu would dearly like to see happen as a result of his tenure as CEA: an entire chapter of the Economic Survey this year hammered away at the problem,answering an entire slew of objections to the idea.

It seems a pity that in all the outrage swirling about the topic,the quiet voice of reason is lost. Even more puzzling: why is there nobody giving this sort of excellent advice in the National Advisory Council?

What is the problem?

Food prices have been high since late 2009. What is troubling is the amount of food stocks that we have continued to hold during this period of high prices… We may not have succeeded in the role of evening out fluctuations in food production as effectively as it could have.

Are there larger implications?

A pervasive weakness that runs through India’s foodgrain policy is that in the name of helping the farmer and the consumer,and likely even with the earnest intention of doing so,we have ended up creating a foodgrain policy framework that has not got high marks on either account. Many of India’s poor households do not get adequate,nutritious food and many of our farmers remain impoverished… We have intervened and created special incentives which hold back large segments of the population in agriculture,who actually deserve to move out to industry and manufacturing.

What’s the popular view? Why is it badly thought through?

The popular view,understandably alluring,that all the government has to do to support poor consumers and poor farmers is to direct subsidies at them,and make sure that anybody caught cheating the system and adulterating food is punished misses the important question: punished by whom? For that we have to rely on another layer of bureaucracy and police force,which will open another layer of opportunity for cheating the system.

…If the grain is just given away at a low price to whoever comes to buy,it is likely that a part of this food will get picked up by traders and resold to government through the procurement window. In other words,government will end up subsidising repeatedly for the same foodgrain. This shows that one has to take a holistic view of the system of foodgrain management — production,procurement and release…

… While we no doubt should improve our storage facilities,it is important to be clear that that in itself will not lower the price of food. To achieve that we need to redesign the mechanics of how we acquire and release food on the market.

What should we change immediately?

First,we have to have a ready set of rules of how and when to release foodgrain,a kind of Standard Operating Procedure (SOP). There should be no need to have special cabinet committees to take the decision. If prices are rising,there has to be a rule about the automatic release of food… Second,after we release the food,we should not try to excessively monitor what the buyer of the food does with it. As per present practice,the food that is released through open market operations by the FCI is sold to millers,and only rarely to traders. These millers are then prohibited from selling the wheat to yet other buyers and make profit from this. However,if our aim in releasing food is to lower the price,it is not clear why we should prohibit further reselling of the food. The instinctive urge to prevent anybody from making a profit — and creating a bureaucracy to monitor this — does more harm than good.

What does basic economics tell us?

The price [poor people outside the PDS face is above the price they would have had to pay in case there was no government intervention… Interestingly — and this is a point that is not understood well at all in government — the amount of dampening effect we have on food price depends critically on “how” the food grain is released. The same total amount of grain off-loaded on the market through different mechanisms can have very different effects on the price. Also note that,if the government procures more than it releases the average market price will be higher than [otherwise. This is not surprising at all. If government becomes a net hoarder,its effect has to be to raise the average price.

… If the government’s aim (in times of drought) is to lower the price of foodgrains,it is not enough to release a large quantity of foodgrains,X. In addition,this should be released in small batches to many traders or directly to consumers.

Extend that economic logic. What would it imply?

The basic idea is that the subsidy should be handed over directly to the poor household instead of giving it to the PDS shop owner with the instruction that he or she transfer it to the poor. This can be done by handing over food coupons to BPL households,which they can use as money to buy food from any store. The store owner can then take the coupon to any bank and change it back for cash.

Excerpted from Kaushik Basu,‘The Economics of Foodgrain Management in India’,finmin.nic.in