FCI's mandate should be changed to enable it to undertake open market intervention more effectively.

Wheat prices in the country today are ruling at roughly a quarter or more compared with what they were a year ago. This, perhaps, captures the common man's misery from the burden of high prices better than any measure of inflation that official statistics reveal. The situation is made worse by the fact that the Food Corporation of India's (FCI) godowns are overflowing with some 43 million tonnes (mt) of wheat — over three times the required buffer and strategic reserves. Wheat inflation of this order occurred last in 2006. But at that time, the FCI had hardly 6.5 mt of stocks, well below the levels necessary to undertake effective market intervention. This is not at all the case now, with the FCI saddled with problems of plenty and Indian farmers having harvested an all-time-high crop of 94 mt. Nor can one blame high minimum support prices (MSP), which, at Rs 1,285 a quintal for wheat, is below the ruling open market rate of Rs 1,500-1,600.

It all boils down, then, to the Government's inability and indecision with regard to managing its surplus wheat inventories. Even if an independent assessment of the quality of a large part of this grain stored most unscientifically may not be available, there is simply no justification for its being allowed to rot, while consumers are paying much more even in a bumper crop year. True, prices have also firmed up because of demand from exporters, taking advantage of drought in the US that has made wheat dearer in global markets on top of a weak rupee. As a result, the private trade, after lying practically dormant in the past five years, has suddenly become active. But 3 mt of exports on private account cannot be reason enough for domestic prices surging by a quarter. What is this quantity, after all, in relation to the 43 mt with the nation's biggest hoarder? But instead of getting the FCI to offload its stocks in the domestic market, the Government is keen more to allocate these for exports. How perverse and misguided can policy get!

The above artificial surge in open market prices — courtesy the FCI's ‘hoarding' operations — will send wrong signals to farmers. They would be encouraged to plant more of wheat this time rather than crops in genuine short supply, especially oilseeds and pulses. The FCI's role needs to change to become more of a market intervention arm of the Government. Its stocks can, then, be deployed mainly to ensure that markets across the country are adequately supplied with grain. That will enable consumers to source their entire requirements from the market, with the poor and vulnerable sections being entitled to subsidy through direct cash transfers to their bank accounts against such grain purchases. A similar cash transfer mechanism for farmers — to pay the difference between the MSP and price received from open market sales — would obviate the necessity for the FCI to maintain stocks beyond normative requirements at a huge cost to the exchequer.

(This article was published on November 4, 2012)
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