A free lunch we cannot afford

Agriculture Minister Sharad Pawar has been consistently opposing expansion of the scope of the existing Public Distribution System (PDS) through the proposed Food Security Bill (FSB).

He talks with conviction because of his first-hand experience of the dismal functioning of the national procurement and distribution system of grains under the Food Corporation of India (FCI). This also means less grain in the market and more inflationary pressure on cereals.

Finance Minister P. Chidambaram criticised it because the revenue earnings of the Government will be financing an ever-increasing subsidy due to annual increases in minimum support price (MSP).

Productive investments in all sectors, including agriculture, will be adversely impacted.

Economists of the Government’s Commission for Agricultural Costs and Prices (CACP), who define the roadmap of agricultural policies, have calculated “additional” subsidy burden of Rs 1.20 lakh crore per annum from the existing Rs 90,000 crore — which the Food Ministry has conveniently ignored to project an illusion of “all is well”.

Nothing is for free

Law Minister Kapil Sibal sees the system as deficient for lack of identification of targeted beneficiaries. The Planning Commission is mum on the Food Security Bill conceived by the National Advisory Council (NAC).

The Prime Minister too is unwilling to push this messy policy. This can be inferred from the deferments by the Cabinet of the Ordinance option.

The States have differing views, some deem it encroachment of federalism and some want to go their way with Chhattisgarh as role model. Promulgation of an ordinance on the Bill, so fiercely debated, will be nothing short of a dictatorial act.

The BJP and Left parties appear to support the Bill only after “unacceptable” amendments are agreed to.

Hundreds of economists from India and abroad have openly cautioned the UPA Chairperson of pitfalls and likely mismanagement in this legislation.

The Bill is devoid of elementary principles of economics. It is based upon virtually ‘free’ supplies of rice/wheat/coarse grain, while nothing is “free” in life.

Theoretically, if everything is provided free to all, work culture will disappear, production/supply of goods will vanish and the national economy will be defunct.

Centre/state agencies, with built-in inefficiencies and corruption, will become “delivery boys” of grains that cost Rs 22/kg but are distributed at one-tenth the cost, Rs 2/kg to about 67 per cent of the targeted population.

Subsidy equals 90 per cent of the acquisition cost. Given that supply of safe water and insanitary conditions are very real problems in rural areas, we will still have malnourished and sick people on our hands despite virtually free grains.

Ideally, investment is required in environmental improvement rather than subsidies.

Due to ambivalence on the Food Security Bill for the last four years, about 77 million tonnes (mt) –worth $38 billion -- of grains have been hoarded in June 2013 under the supervisory control of the Food Ministry.

Excess stock, inflation

Offtake has been lower than allocations —indicating demand/takers of subsidised grains are absent, while the Government favours excessive procurement and storage.

With tightness in the market, 10 per cent average rate of cereal inflation annually in consumer prices should not come as a surprise.

Private trade stands marginalised by the nationalisation of grain acquisition policies, while the trend should be more of private trade and less of Government.

As of June, buffer norms mandate storage of 32 million tonnes. CACP estimates 41 mt will be adequate if FSB is cleared. Today surplus of (77-41) 36 mt ($13.6 billion) is the sunk cost that needs to be salvaged to fill in twin deficits — CAD and fiscal.

The Food Ministry is hesitant to utilise these surpluses either domestically or via exports, while they rot with no sense of accountability.

Wheat exports of 8-10 mt can be encashed if “fob” pricing is calibrated with world markets. But there is no pragmatic approach on this front this year.

Monsoon is progressing well and coming rice crop is expected to be bumper, giving confidence that any shortfall in wheat crop will be substantially made up.

Lack of covered storage

There is also the fact that 53 mt of covered storage, including 4 mt of open-air warehousing with FCI/agencies against 77-82 mt of requirement amounts to abundant wastage of food and funds.

Under the proposed Bill, the Centre intends to delegate the task of construction of additional storages to the States, which may not be practically feasible under strained Centre-States relations amongst diverse political parties.

The result will be that more tonnage will perish due to hoarding prompted by the Bill.

The Food Security Bill offers “grains” and not “welfare” to the poor man. Nine out of ten persons will want money/cash which they can spend at their discretion for their necessities in life — be it education, healthcare, house, travel, etc.

Poverty does not mean absence of common sense. Hence, grains will be resold to make money in the market at better prices — the problem the Government has been facing under the PDS system for the last 50 years.

The Bill is an open assault on human dignity, perpetuates corruption in food chain, and is obsolete in this time and age of financial engineering.

(The author is a grains trade analyst.)

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