The Hindu Business Line : Mixed reaction to cut in foodgrains subsidy on expected lines

THE mixed reaction to recent increase in issue price and reduction in quantity of foodgrains supplied under the public distribution system (PDS) as also under welfare programmes (Antyodaya Anna Yojana) has been entirely on expected lines. Extreme positions are evident.

The Union Government claims that the move is part of the reform process in foodgrains management that would save avoidable cost, reduce subsidy burden and improve fiscal discipline.

The Left, on the other hand, has expressed serious objection to the decision of the Cabinet Committee on Economic Affairs to increase prices and reduce the quantum supplied. It is seen as nothing short of an anti-poor move.

The merit of the decision is debatable. Much might be argued on both sides. It was in 2003 that the last upward revision in issue prices was made. Obviously, cost increases and inflation will have to be taken into account.

However, there is more to the story than meets the eye. It is the timing of the decision that is the crux of the issue. It is not that this Government was earlier unaware of the need to reform foodgrains management, cut costs and reduce the food subsidy burden.

Low buffer, Budget behind hike: It is reasonable to assume that the Government has chosen to do it now for two critical reasons. One is that buffer stocks, especially wheat stocks, with public agencies are running critically low; and two, the Government wants to avoid announcing the hard decision in the forthcoming Union Budget so that the positive outlook of the Budget is not marred.

By reducing the quantum of rice and wheat supplied under PDS and welfare programmes, the Government believes it would be able to tide over the situation of tightening inventory and avoid imports.

For instance, at the current pace of wheat supplies, there would be a little buffer stock left in public warehouses by April. The new season would have to begin with virtually zero inventory, a dangerous precedent and potentially explosive situation.

Import fear: There is strong suspicion, and even reason to believe, that it is not out of sudden realisation to effect reforms and cut cost that the Government is talking about in foodgrains management; but it is purely out of compulsion to somehow manage the situation without having to import. The only way for the Government to `manage' the situation is by reducing the quantum of grains supplied.

Policymakers have been repeatedly claiming that the country had enough buffer stocks of grains to take care of PDS and welfare programmes until the next harvest and that wheat imports were not warranted under the circumstances. Indeed, such assertions have abetted the strong price sentiment, rather than rein-in price rise. Open market wheat prices have already breached Rs 900 a quintal and are threatening to touch Rs 1,000 a quintal.

Price to soar?: By reducing the quantum of foodgrains under PDS and welfare programmes, the Government is driving the intended beneficiaries to the open market where prices have risen sharply because of a combination of factors including lower output, lower procurement, low stocks with public agencies and too much speculative money chasing foodgrains, especially wheat.

The CCEA decision can actually give a further push to open market prices because it is now an additional signal of precarious stock position and reluctance to rein-in prices, if need be through imports.

At a time when the poor need all manner of support, the Government move has actually made them worse-off than before.

Ironically, the stock market may be doing very well; manufacturing and services sectors are growing strongly; but agriculture is not doing well at all. It is the admitted position that agricultural growth rate in the first three years of the current Plan period was dismal - averaging less than 1.5 per cent a year.

Incomes in the hands of nearly 60 per cent of the population dependent on agriculture and related activities have obviously increased just marginally. The poor need Government support now more than anytime before.

It's no reform only cost cut: Reforms in foodgrains management are a larger issue than are being made out to be by the Government. Reforms must take into account end-to-end activities including fixing minimum support price, procurement policy covering quantum and geographic dispersal, role of Food Corporation of India and delivery mechanism to targeted beneficiaries. What the Government has done at present is to prune some costs, not reform.

Indeed, the social costs of denying poor people access to adequate quantities of low priced foodgrains may be greater than the economic benefits that the Government may intend to garner.

Importantly, the Government does not seem to want the forthcoming Union Budget marred by unpleasant and politically sensitive decisions.

It should surprise none if the next Budget turns out to be friendly because most of the hard decisions, such as the one on foodgrains, may be announced before February 28.

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