The Hindu Business Line : Time to throw open the silos

The Government’s revised food-grains production figure for 2007-08 has touched a record level of 230.67 million tonnes, up from 217.28 million tonnes in 2006-07, recording a growth rate of 6.16 per cent.

As of July 1, the Government had buffer stocks of 35.9 million tonnes, against a norm of 26.9 million tonnes, indicating a surplus of 9 million tonnes, 33 per cent more than the government needs to keep to feed its public distribution system as well a s manage any emergency in case of a drought in 2008-09.

Quite a bit of these bulging stocks are lying in the open, covered with a simple tarpaulin, and rodents are having a good time! And this is at a time when the country is reeling under high inflation and the global prices of grains, though coming down, still remain abnormally high!

It is perhaps time to rethink the grain management policy in terms of stocking, storing, and distribution of grains.

The simple question is why doesn’t the government unload its excess stocks in the open market or relax the stocking limits for private trade and allow them to export?

The rice exporters had approached the High Courts in some States to allow them to export rice so that they could fulfil their export commitments and also make some money while prices are high.

But the Centre approached the Supreme Court not to allow this. One wonders why? Why is the Government so panicky when its silos are filling up with grains?

The answer, presumably, lies in the fear of so-called ‘global food crisis’ that everyone in the international agencies has been talking about for the last six months or so. No wonder then, that the Indian policy-makers want to play it safe. They banned exports of wheat and common rice, suspended several agricultural commodities from futures trading, tightened the stocking limits on traders — even raiding a few of them for “hoarding”, raised minimum support price (MSP) of wheat and rice, and indirectly restricted the purchases by private corporate players till the Government had enough of its own stocks.

Bulging stocks may give some comfort to the policy-makers, but the cost of keeping this extra stock is pretty high, both nationally and internationally. Domestically, it is keeping the price in the open market high, and that too when everyone is complaining about inflation. This is even more so in the international market.

What would be a rational policy choice for the Government at this juncture? Our suggestion is: “release the brakes”!

Remove the lid

First, unload a part of this excess stock in the domestic market — say, about five million tonnes. It will bring down the prices of staples and give much-needed relief to the poor consumers, who need it the most. It will also make political sense for the ruling coalition that badly needs political support from masses.

Second, the Government should consider doing away with the blanket ban and allowing export with available stocks.

Particularly when grain prices are still high in the international markets. This will fetch the Government good profits, that can be used to offset a part of the ballooning fertiliser subsidy.

Third, allow the private sector to export grains so that it can keep its traditional customers happy. If the Government feels that this will make domestic prices flare up, it may be worth thinking of an export duty on grains of 10-20 per cent. This will fetch the Government extra revenue, while limiting the quantum of exports.

It will also have a calming effect on global markets, especially for rice. Has the Government considered how its decision to ban rice exports caused a flare-up in the global market for rice? It is time to cool it. Fourth, there is urgent need to de-link the MSP from the procurement price of grains. The procurement price should be flexible, in competition with private trade. The current practice of raising MSP, year after year, and using it as a procurement price, runs the risk of getting stuck in irreversible position, irrespective of what the market forces are.

Our submission is that MSP should be based on the principle of “bulk line paid out costs” — that is, covering the actual out-of-pocket costs of the bulk of (say, 90 per cent) production and farmers.

The procurement price should be based on market forces and the Government’s need to procure specific quantities. It may vary every week, and can vary across States, like any business corporation making its purchases from various centres.

The Government can also invite tenders from private parties for delivering certain amounts of grain at specific locations.

Resume futures

Fifth, to make sure that business is back to normal, and the Government acts in a market-friendly environment, it would be worth bringing these commodities back into the futures market. The only regulation that is needed in commodity exchange is that financial institutions and fund managers are not allowed to dabble and rig the market.

Last, it will be worthwhile to understand if the current system of food management meets the distributional goals for welfare improvement. The public distribution system needs to be streamlined to cater to food requirements of the poor and the consumption subsidy on specific commodities should be replaced by food coupons.

The costs incurred to stock, store and distribute the grains through public agencies are a huge burden on the exchequer and, in the event of controversies related to pilferage and other leakages, turn out to be even more burdensome. Strengthening employment guarantee schemes and new income transfer programmes can be more welfare-generating than public intervention in grain distribution.

It is the right time for the Government to relax the controls on grain markets, unload excessive stocks in the domestic and international markets, and contribute to bringing the markets back to normalcy. If the Government does not act now, it won’t be a surprise if, very soon, the country is again saddled with stocks far in excess of requirements, leading to huge waste and inefficiency.

One may soon see a repeat of July 1, 2002, when the Government had accumulated 63 million tonnes of grains, most of which was rotting in godowns, and which finally had to be liquidated with export subsidies!

(Ashok Gulati is director in Asia, and Kavery Ganguly, a senior research analys, at the International Food Policy Research Institute).

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