Respected Finance Minister Sir,
Your recent policy initiatives -- deferment of GAAR for two years and enhancing custom duty on Gold imports by 2 per cent with an obvious intention for attracting overseas investments and reining in foreign exchange outflow, respectively -- have been highly appreciated and are sure to contribute towards containing the country’s twin deficit, current and fiscal.
However, the resilience of the Central Government on the food front has reached breaking point, with an imminent possibility of wheat and rice stocks rising above 90 million tonnes this year. “Food security” is now exploited by the States not only for unsustainable hoarding of grains, but also by imposing high taxes and statutory levies (e.g., Punjab imposes 14.5 per cent) on these basic staples, consumed by the poorest of the poor. This is because States find this an easy way out to ‘milk the Centre’, as the Centre is “obliged” to fund this expenditure.
WHEAT STOCKS
After accumulating a mountain of inventories, the Food Ministry has no viable outlets for its disposal. The coming wheat crop, due to favourable weather may be around 95 million tonnes — slightly higher than previous year, and procurement of wheat may touch 45 million tonnes.
Considering the gravity of this overstocking, you may consider following measures to rein in profligacy.
First, open-ended procurement of wheat by the Government may be deferred, as in the case of GAAR, for at least two years. Wheat procurement in April-June this year may be limited to 25 million tonnes (instead of 40-45 million tonnes as expected), by curtailing purchases from States that have statutory levies of more than 5 per cent.
Second, if States (like Madhya Pradesh) announce an additional “bonus” before harvesting, central procurement may be further curtailed from that State. These “small corrections” will help in limiting the potential sunk cost of Rs. 40,000 crore that the Government may incur in excessive procurement, warehousing, payment of local taxes and save around 20 million tonnes of grains from eventual deterioration and destruction in CAP warehousing.
Yes, open market prices of wheat may drop, but it will check the food inflation through abundant availability of grains in private hands and create greater price parity in international market for exports by the private and public sector that need to be raised to a minimum of 10 million tonnes in the coming year — as recommended by CACP (Commission for Agriculture Costs and Prices) --- thereby helping in reduction of trade imbalance.
The RBI will also feel comfortable in lowering interest rates once inflation is tamed. Simultaneously, it will send a message to States (especially Punjab, Haryana) that raising revenues by selling grains to FCI at the cost of the central kitty through disproportionate taxation cannot be taken for granted. This can also be “exceptional” year for relaying signals to diversify the crop pattern --- switch from cereals to oil seeds and pulses, which are highly import-intensive.
PREVENT WASTAGE
Will the farmer’s earnings be affected? No — with more wheat output this year, even lower per quintal price in open market will keep the earnings neutral. The pressure to affect releases by FCI at lower prices in the market will diminish.
The private sector, which is currently crowded out by almost “state take-over of wheat trade” in Punjab, Haryana and Madhya Pradesh, will purchase grains from the trade for domestic and exports to ensure price stability, provided a floating stock is available.
The private trade can take care of volatility in international prices and momentum on exports can be maintained.
To procure and put grains virtually in open bins at inflated cost, without putting them to use, and then losing money by selling below economic cost or for releasing to the States where there is no off take, is an act of ungratefulness to Mother Nature’s blessings of good weather, which have been denied to US, Russia, Australia and Argentina this year.
The forced subsidy on exports and wanton wastage also attracts public/CAG scrutiny, which may be extremely embarrassing if unchecked application of funds continues in the food (wheat) sector.
RICE SURPLUS
A similar approach is required for paddy procurement. Paddy is freely kept in premises of rice millers due to lack of storage space with Government agencies. Rice remains un-lifted by FCI and payments to millers are delayed.
Millers sell rice in the open market for liquidity and profit. If they don’t, the quality will shrink and, therefore, will be liable for rejection.
When FCI needs rice, the same is bought from the market, supplied to FCI and the obligation ceases.
Attempts to collateralise this arrangement by bank guarantees/ pledging have not been successful because the miller’s space is occupied and payment for the finished material depends upon the convenience of the FCI/state agencies.
The possibility of collusion between the officials and the millers cannot be ruled out.
On July 1, 2013, rice stocks are estimated at 32-35 million tonnes, against the buffer norm of 12 million tonnes. There is no offtake for exports from FCI stocks. Paddy is selling below MSP in several States, which confirms that supplies are more than adequate.
India exported 10 million tonnes rice last year from private stocks at competitive prices. But exporting such a large quantity in a rather small world market of 35 million tonnes has depressed world markets.
Vietnam and Pakistan have lowered their quotes and Indian exports have slowed down. Thailand is also overflowing with 17 million tonnes of rice stocks and pressure to destock them is mounting on Thai Government. So, the rice scenario is bearish.
Therefore, Mr Finance Minister, wisdom lies in sending right signals to procuring States to rationalise their taxes on food, and also allow the private sector to trade.
Else, food security will increasingly become hostage to States’ rent-seeking behaviour, at the cost of Central finances, all in the name of poor. There can’t be a bigger mockery of “food security” than this.
And I am sure you will not let this happen under your watch.
Tejinder Narang