Absurdly high food stocks are fuelling inflation

This is not an opportune time for upward revision of “grain reserves” or “buffer norms” of wheat/rice stocked under the supervision of Government.

The proposed buffer norm of 53 million tonnes, envisaged in view of the requirements of the Food Security Act (FSA) makes no sense whatsoever, given the alarming levels of food inflation.

This is not the least because the implementation of the FSA has been deferred for a year or so.

The responsibility of dealing with FSA and hiking buffer norms rests with the next Government. Hence, the preparedness of the state governments to deal with FSA can also be assessed.

Many state governments are pursuing their own food subsidy schemes.

The possibility of further postponement of FSA or modifications in norms cannot be ruled out.

With FSA on the backburner, there is no reason to hike buffer norms. Not doing so will, in fact, help rein in cereal inflation.

Propelling food inflation Any action that propels inflation higher should not be entertained at the highest levels of government. In November 2013, wholesale cereals inflation was about 11 per cent — rice inflation was 15 per cent and wheat 7 per cent.

Stock levels with FCI/agencies were about 45 million tonnes on December 1, 2013 – that is about 20 million tonnes more than required.

Any formal indication to the state governments of Punjab, Haryana, Andhra Pradesh, Chhattisgarh, Madhya Pradesh and Rajasthan that the Centre will procure more wheat and rice in the coming months will make matters worse.

It will trigger political populism in the states, suck in more grain for FCI/state agencies, crowd out the private players, precipitate a higher fiscal deficit and therefore will be super-inflationary.

Upward revision of buffer norms and the pursuit of economic welfare are contradictory approaches.

BUFFER RATIONALE A maximum buffer limit of 53 million tonnes — mooted by the Food Ministry — also amounts to virtual nationalisation of grain trade. Assuming an annual offtake of 61.2 million tonnes under the FSA, a stock requirement of 38-40 million tonnes should be sufficient.

(This is calculated as follows: An annual requirement of 61.2 million tonnes works out to 5.1 million tonnes of demand or reserve requirement per month.

Assuming the buffer norm to include three months of monthly demand (15.3 million tonnes), three months of reserves (15.3 million tonnes), and 7.5 million tonnes of strategic reserves, the total need does not exceed 38-40 million tonnes.) An excess inventory of 13-15 million tonnes translates into an economic cost of Rs 32,500-37,500 crore, and most of this grain is destined to rot, given the state of our storage infrastructure.

Such huge buffer requirements will spur inflation, kill the private market and trigger “unnecessary” imports at a much higher cost on Government account.

Once the higher volume of buffer norms are approved, it becomes difficult to cut them down. A review of the buffer norms should be undertaken.

Prioritise storage space

Availability of storage space for grains with the Government is yet area of concern. The Food Minister claims stocking capability at 74 million tonnes, which includes kaccha and pucca structures.

How can grain stored in open ground covered with half-torn plastic sheets be considered as acceptable storage?

The upward revision of norms should be taken only after looking at these ground realities.

Any immediate move should be put off for the time being.

(The author is a grains trade analyst.)

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