Commodities

How Govt can fight food inflation

Tejinder Narang | Updated on August 27, 2014

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Plus ça change, plus c'est la même chose (The more things change the more they remain the same ): A French proverb.

In its earnest to tackle rising food inflation the new Government has taken a welcome initiative to delist fruits/ vegetables including onions (FVO) from the Agricultural Produce Marketing Committee (APMC) Act, while all other measures are as usual – short term of political expediency, repeated several times in past while long term reforms are awaited.

The Government attributes spurt in food inflation to hoarding by traders. That is a standard cliché. When inflation surges, traders are labelled as “middlemen” resorting to unjust enrichment. Though the Prime Minister is encouraging cohesiveness amongst all participants for economic development, the system is still stuck in the old mind set keeping traders at an arm’s length. The fact is that FCI, on behalf of the Government, is the nation’s largest hoarder, year after year with no accountability. As of June 2014, about 32 million tonne of “excess” grains at an average cost of Rs 25,000/ tonne, totalling Rs 80,000 crore, are stored in warehouses.

Onions, Government, Traders

Action against de-hoarding is a state subject. Therefore, the onus of tackling shortages/inflation gets transferred to States after the Centre asks States to “act”. If States and union territories carry out direct intervention through PSUs or agro federations/marketing boards for subsidised distribution of FVO items, this amounts to induction of another intermediary/layer which procures from private trade and then under-prices a commodity to consumers which can also be exposed to round tripping. Operational cost and losses of such official intermediaries (bound to exist in perishable commodities) get debited to state exchequers funded by common man. It is again more of Government and less of governance.

Elimination of traders was one of the major factors in this collapse of socialistic system in Soviet Union and East European nations. In a free economy, middle men or traders are logistical arteries of free flow of commodities that function 24 hours/ 365 days with utmost alertness because their own funds and profits are at stake. Traders are better connected with farmers than the bureaucracy. Medium size trading businesses have a limited capital and cannot afford to hoard FVOs with a very short shelf life, even if negative impact of El Nino is perceived, as bullishness in coming months.

The Government could have called a meeting of some of stakeholders (prominent farmer leaders/traders) for resolution of their problems/bottlenecks/disputes at Nashik/Mumbai’s Vashi market/Delhi Azadpur depot, to ease the supply side. However, the Government resorted to closed door meetings without engaging instruments of action that matter in the market. By keeping trade out of retailing, points of supply side /sale diminish and last mile availability wanes. Inflation even in short term may not be reined as PSUs/marketing federations will take time to respond in procurement and distribution. Due to vigilance’s oversight, these agencies are rule bound and are slow to react in dynamic market.

Rice

The decision of releasing 5 million tonnes (mts) of additional rice to States is a step forward for destocking FCI, though contours of release mechanism are hazy. Do States/APL beneficiaries require this rice? Moving the rice will require about 2,000 railway rakes (carrying capacity of each rake is about 2,500 tonnes). This is in addition to about 2 mt rice distributed per month through PDS by FCI equivalent to 800 rail rakes or 27 rakes per day. Will such a vigorous movement be feasible? The devil is in the detail. If intent of release is implemented only then it will send a sentiment of bearishness in domestic market, otherwise not.

Furthermore, there is no open market sale (OMSS) price for rice as in the case of wheat as there are no bulk users of rice. Above Poverty Line (APL) release price is Rs 8/kg, while BPL release price is Rs 4/kg against average open market price of Rs 24-27/kg, while economic cost is Rs 29/kg and bare cost is Rs20/kg. Thus fixation of release rice for the market is critical.

If 5 mt is disposed of at APL/BPL values, beneficiaries will be tempted to trade at Rs 10-14 a kg through illicit channels to create liquidity of Rs 3,000- 5,000 crore and it will further fuel inflation. Preferably, Government sale price must be Rs 18-20/kg to offset risk of diversion back to FCI and to block generation of black money. Indeed a tough task for policymakers. Also, why hike MSP of paddy this year if food inflation is to be curbed?

Pulses & edible oils

Price sentiment of pulses and edible oils internationally is bearish. By announcing credit lines to the states, mandate to import is given in advance and that may firm up world markets of these commodities. Probability of unwanted imports on government account cannot be ruled out.

APMC Act

The decision to exclude FVO from the ambit APMC act has been widely welcomed as it provides freedom to stakeholders to sell and buy. This should enable some respite on inflationary pressures but action from the states on this advisory will be watched.

But other mega reforms – limiting procurement from states who give bonus on paddy/ wheat (like Chhattisgarh, Punjab, Haryana, Rajasthan , MP) and who levy heavy local taxes ranging from 5% to 14.5%; rationalising Food Security Act, building hygienic storage facilities and calibrating MSP judiciously and not politically (as in the case of sugarcane) also need immediate attention. If the present system of sometimes supporting producers/farmers and then subsidizing consumers continues, fire-fighting on food inflation will continue frequently and indefinitely.

The writer is a trade analyst

Published on June 23, 2014

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