In this article we will discuss about the government intervention in food grains of India.
Economics of Price Support:
About two-thirds of the increase in farm income in advanced countries of the European Union (EU) and in USA, is provided through price supports. For the typical price support, the government sets a minimum domestic price for the agricultural production and the government buys any amount that the farmers cannot sell in the market at the minimum support price. Domestic farmers receive at least the minimum price when they sell and domestic consumers pay at least the minimum price when they buy.
The price support is almost always higher than the world price for the agricultural product. If the country would import the product under free-trade, the price support requires that imports be restricted. Otherwise, clean imports would flood into the country and undermine the price support programme. If the support price is not too high (less than or equal to the no-trade price for the country) then the price support is actually a form of import protection.
If the country would export the product under free-trade, but the support price is above the world price, then the country’s farmers produce more than what is purchased by domestic consumers. The government must buy the excess amount at the high support price, build a buffer stock of food grains or export the surplus output.
But the government wills unicorn a loss on each unit of export. This loss, the difference between the support price and that the government pays and the lower price that it receives is an export subsidy, from the government. Foreign buyers will not pay the high domestic support price; they will buy only if the government offers a subsidized export price.
In this case, in which an exporting country sets a support price that is above the world price for the product, the price support policy in actually a combination of import-protection and export subsidy. It is against this backdrop that we study the government of India’s policy relating to food grains.
Three main components of India’s Food Policy during the plan period are:
(i) Providing minimum support prices for procurement and shortage of food items
(ii) Operating a public distribution system and
(iii) Maintaining buffer stocks so as to take care of natural calamities resulting in temporary shortages of food, and to act as a countervailing force against traders, speculators and unscrupulous business people who try to back up food prices rather artificially, especially during periods of food shortages.
Public Distribution System (PDS) of food grains is an important component of supply management of essential commodities. An efficient and well-functioning PDS ensures food security in an LDC like India.
The World Development Report (1986) defined food security as an “access by all people at all times to enough food for an active healthy life.” The availability of food grains such as rice, wheat, edible oils, sugar and kerosene is ensured through the PDS at prices generally lower than the market price.
Thus this is an essential element of Government’s safety net for the poor. The PDS operates through a network of fair price shops. On an average, one fair price shop is envisaged to cover a population of 2,000. For tribals, hill areas having poor infrastructure, additional items like tea, soap, pulses and iodised salt are made available under the scheme known as Revamped Public Distribution System (RPDS).
This scheme came into operation in 1,700 blocks in June 1992. Now it extended its coverage to 1,775 blocks. Under the RPDS, rice, and wheat are allocated to States and Union Territories for RPDS blocks at price lower by Rs. 50 per quintal than the issue price for normal PDS. To bring benefit to the poor this TPDS has introduced a two-tier, subsidised pricing system.
Over the years the PDS has come to be accepted as an effective instrument of controlling the prices of essential commodities. A major reason for this is that inflation has become an autonomous development in the economy and the policy-makers are unable to control the price situation.
Neither demand management policies nor increases in supplies have been totally successful in preventing a continuous rise in prices. When the supplies of essential consumer goods do not increase in proportion to the rise in demand, it becomes essential for the State to accept the responsibility of providing these items at fair prices through the PDS.
The principal objective of the PDS is to ensure adequate supplies of essential consumer goods to weaker sections of the population at stable prices in order to protect them from inflationary pressures. Since the demand-for such commodities are inelastic, even a slight fall in their output and availability leads to a sharp increase in prices. Moreover, as most of these commodities are agro-based, they are subject to large seasonal variations, too.
The PDS, therefore, seeks to control prices, reduce fluctuations in them and achieve an equitable distribution of certain essential consumer goods. It is also an important element of anti-poverty programme of the government. The number of fair price shops has increased from 3.02 lakhs in March 1984 to 4.50 in March 1998, of which 80% are in rural areas.
The responsibility for procuring and supplying six essential commodities, namely, wheat, rice, sugar, imported edible oil, kerosene oil and soft coke to the States is with the Central Government agencies such as the Food Corporation of India, State Trading Corporation of India, National Cooperative Consumers’ Federation and Coal India Ltd.
Moreover, various public sector oil companies are entrusted with the task of supplying these commodities at prices which are determined by the Central Government from time to time. The State Governments are authorised to add to these prices incidental charges like handling, transportation, etc., while fixing the retail prices.
Targeted Public Distribution System:
Since the Public Distribution System (PDS), as it operated initially, failed to serve the population below the poverty line (BPL), the system was streamlined through the introduction of the Targeted Public Distribution System (TPDS) in June 1997. Under the system each poor family was entitled to 10 kg of food grains at highly subsided prices.
Under the then existing universal PDS the non-poor also benefitted from the PDS and the poor were not able to take full advantage of the PDS supplies. The most notable feature of the scheme is the introduction of a two-tier subsidised pricing structure: for families below the poverty line (BPL) and for those above poverty line (APL).
While the BPL population received rice and wheat at a much low (or, at a highly subsidized) rate, the APL population gets its supply of cereals at a price which is much higher and closer to cost. The poor are identified by the State Government’s as per the state-wise poverty estimates of the Planning Commission.
To increase the extent of benefit to the poor, the allocation of BPL families has been increased from 101 kg to 201 kg per month at 50% of the economic cost from April 1, 2000. The allocation of APL families was kept unchanged at 10 kg per month at the level of 1997 at the price which was equal to 100% of the economic cost. The basic objective was to divert the subsidy to BPL and discourage APL families to benefit from PDS.
From July 2001, the BPL allocation of food grains was increased from 20 kg to 25 kg per family. It may be noted that Rs 4.15 per kg for wheat and Rs 5.65 per kg for rice, the Central Issue Price (CIP) for BPL families is 48% of economic cost.
On March 2002, the government reduced the issue price for APL rice and wheat by Rs 100 per quintal for a period of three months. At the same time the scale of issue for APL, BPL and Antyodaya households was increased to 35 kg per month.
As part of the TPDS the Antyodaya Anna Yojana has been launched in December 2000, 10 million BPL families have been identified and each family is being provided with 25 kg of food grains per month at a price of Rs 2 per kg for wheat and Rs 3 per kg for rice to the poorest of the poor families.
Additional quantities required by the states will be made available if stocks are adequate but while supplying food grains APL to the people States can add to the quantity and coverage of the subsidy from their own resources, if they so like. As noted above, while the issue price of food grains for BPL is fixed at about half of their economic cost, for APL the issue price is fixed at the economic cost of the FCI.
Coverage of the Scheme:
The TPDS is in operation in all States/Union Territories, except in Delhi and Lakshadweep. In these two States no distinction is made between BPL and APL because it has not yet been possible to identify the poor and distribution of special cards is not yet complete.
The building up of a buffer stock of food grains is important because it ensures food security to the country. Releases will be made from the stock in times of crop failure. But if stocks fall below the minimum levels fixed for each quarter in a year, stocks will be augmented either through imports or by raising procurement price (so as to give more incentives to farmers).
Procurement of Food Grains:
While the FCI procures food grains from the farmers, the National Agricultural Federation (NAFED) undertakes price support for pulses, oilseeds and other products. The FCI procures about 15% to 20% of India’s wheat output and 12% -15% of rice output. Trade in food grains is free in the sense that farmers can sell their marketable surplus to private traders if they receive prices higher than the Minimum Support Price (MSP).
Sometimes the FCI is saddled with huge stocks of wheat which is much above the stipulated buffer stock norms. This is largely due to higher procurement. This problem has become more serious in recent years due to poor off take of wheat under TPDS. Due to rising prices for APL families which have equaled the economic cost the off take of wheat by APL families has started falling since 2000-2001, as market prices fell below the APL prices.
At present wheat and rice are issued by the Central Government at uniform Central Issue Prices (CIPs) to the States/Union Territories under TPDS. The policy is to fix price for supply to BPL families at 50% of the FCI’s economic cost and for APL at 100% of the FCI’s economic cost.
The FCI’s economic cost has two components, viz., acquisition cost and distribution cost. Acquisition cost includes cost incurred by the FCI in procuring, paying State taxes, transporting, handling and storing of food grains. The issue price of food grains for both APL and BPL families has been revised downward due to reduction in the FCI’s economic cost in recent past.
Problems Created by Surplus Food Stock:
Initially, three main planks of the GOI’s food policy were:
(i) Raising production by giving incentives to farmers (through input subsidies, MSP, and institutional support)
(ii) Consumer protection through the PDS — food subsidy
(iii) Open market sale of food grains with a view to influencing market prices.
The policy worked quite well and proved to be effective over the years. The original objective of the PDS was to ensure that the public would receive food grains at lower than market prices. This was supposed to do considerable help to the poor people by supplying them cheap food even in a year of scarcity when market price rises due to crop failure.
However, of late, the situation has changed because the country is now faced with a huge surplus food stock. This is because domestic production has reached a level which is higher than what the market or the PDS can absorb. As a result, market prices have fallen below the APL price. Due to narrowing differential between the PDS and open market prices, particularly of wheat, off take has fallen.
Thus there is a need to raise procurement prices so that there is shortage of food in the open market and open market price rises. At the same time, the government is faced with the problem of carrying food stocks at high cost which virtually amounts to giving food subsidy to consumers.
If this problem is of a temporary nature it can be solved by raising the BPL quota as also through exports. However, if the glut is of a permanent nature because of higher MSP and inability of the domestic market to adjust to each year’s change in MSP apart from India’s pricing becoming internationally uncompetitive, it will be in the rightness of things to reformulate India’s food policy, to make it more relevant in terms of the changing domestic and global market scenarios.
Food Security in the Ninth Plan:
According to the Ninth Plan (1997-2002) an approach to national food security, which relied on domestic production of food needed for consumption as well as for building buffer stocks, could be described as a strategy of self-sufficiency. This was the strategy which was adopted in the early phase of Indian planning. To help the poor sections of society, the Government introduced the PDS and adopted dual price mechanism.
The issue price of food articles was fixed below the market price in order to unable the poor to purchase food at subsidised prices. However, the PDS which was taken as a true central element or the key mechanism in the Government’s, food policy failed to achieve the desired results.
Reviewing the food situation up to 1997 the Ninth Plan reached the following conclusion:
“In spite of mounting food subsidies, evaluation studies indicate that the supply of subsidised food grains through PDS has not resulted in improving the household-level food security. Self-sufficiency of food grains at national level and availability of food-grains at affordable cost at local level have not got translated into household-level food security for the poor.”
Agricultural Price Policy:
The management of food supply is an important component of the GOI’s agricultural price policy. And government intervention in the distribution of food grains has enabled the country to achieve self-sufficiency in three basic food items, viz, rice, wheat and sugar.
Their main objectives of the GOI’s agricultural price policy are:
(i) To assure remunerative prices to the farmers,
(ii) To smooth out seasonal price fluctuations and thus ensure stability in consumer prices.
(iii) To provide price incentives to farmers so that they are not only induced to produce more but also to diversify their output pattern so as to be able to meet the needs of consumers.
Minimum Support Price (MSP):
The GOI announces the MSP for selected kharif and rabi crops including rice, wheat and oilseeds on the basis of the recommendations of the Commission for Agricultural Costs and Prices.
In the post-reform period (i.e. since July 24,1991) since the annual average increase in MSP has been higher than the annual average rate of inflation, the rate of procurement and increase in the Government’s stocks of food grains have been unexpectedly high.
On the one hand, increases in the MSP have led to higher procurement. On the other hand, the compulsion to raise the issue price by a certain percentage every year during the 1990s had led to poor off-take. These two factors have conjointly aggravated the problem of managing India’s food economy by increasing food stocks which are now much above the stipulated buffer stock norms.
In recent years, annual increases in the MSP have been quite substantial and have exceeded the inflation rate. Higher procurement prices induce farmers to sell more to the FCI. The FCI procured more food grains than what was required for the country’s food security. This led to an increase in the burden of Government subsidy.
On the other hand, low stock-holding by private traders due to high provement price means higher open market price during the lean season. The burden of subsidy increases further due to the fact that the cost of carrying buffer stocks (comprising freight, storage, interest charges, etc.) are treated as a part of food subsidy.
The Central Government bridges the gap between the economic cost incurred by the FCI towards procurement, storage, distribution and wastage of food grains and its average realisation on the basis of issue prices. Consumer subsidy plus the cost of carrying buffer stock constitutes food subsidy.
There is a direct (mechanical) relation between the MSP and the issue price under the PDS, as also between the issue price and the market price of food grains. Since, in recent years, the FCI’s economic costs have been rising and are much above the free market prices, in July 2000 the economic cost of rice and wheat (to be distributed through the PDS) have been revised downward by the GOI on the basis of the recommendation of the Expenditure Reforms Commission (ERC).
In short, the present agricultural price policy of the Government aims at providing greater incentive to the farmers in two ways: through price support programmes and through removal of restrictions both on internal trade in food grains, as also on export of agricultural products.
Food Policy in the Tenth Plan:
The Tenth Plan (2002-07) made the following provisions restructuring the PDS:
1. Items other than wheat and rice, which are not the basic necessities of the poor, have been excluded from the scope of food subsidies.
2. The coverage of TPDS and food subsidy have been strictly restricted to BPL population.
The excess stock of food grains that have accumulated with the Government is partly the result of the high minimum support price (MSP) which often exceeded the levels recommended by the Commission for Agricultural Costs and Prices (CACP). There is need to go by recommendations of CACP.