Food inflation: Blame the fisc, not private trade

Tejinder Narang | Updated on March 12, 2018

The Food Security Bill will actually drive up prices.   -  The Hindu Business Line

The fiscal deficit is the single biggest cause of food inflation.

To rein in food inflation, generally, policy makers and governments supplement the supply side. This is because attempts at demand compression could either be difficult or politically unpopular.

Traditional interventionist steps include release of buffer stocks, more imports, banning or restricting exports, imposing stock limits on private trade, subsidising domestic and imported goods, blaming or banning future exchanges in order to curb speculation, and providing doles or increasing wages.

All these steps — except offloading inventories and increasing imports — prove counterproductive and distort markets. They collectively create a parallel, covert market, because official interventions and notifications end up confirming that “shortages” are around the corner. This stimulates hidden or benami stocking, buying subsidised food and selling in the open market at a premium; vayda (futures) and hazr (spot) markets go underground.

Free supply of food or cash militates against national work culture and spirit of human dignity.

Indeed, all these actions are exercises in futility in India. According to a recent discussion paper, Taming food inflation in India, by Ashok Gulati and Shewata Saini of the Commission for Agricultural Costs and Prices (CACP), the nuisance lies elsewhere.

The paper states that “Three factors stand out in this regard: the ballooning/monetised fiscal deficit, rising farm wages, and transmission of the global food inflation; together they explain 98 per cent of the variations in Indian food inflation over the period 1995-96 to December, 2012”.

The prescription given is “Policies to rein-in food inflation will foremost require winding-down fiscal deficit, which has gone (at above 5 per cent of GDP) way beyond the guidelines laid out in FRBM (Fiscal Responsibility and Budget Management Act, 2003”. All “market interventionist” measures have little or no relevance, when the malaise is financial mismanagement.

With the Centre’s fiscal deficit alone at around 5 per cent of GDP (against a 3 per cent ceiling under FRBM), a 10 per cent average rate of food inflation should not come as a surprise. Why harass and blame private trade for food inflation?

The fiscal deficit is set to increase, once the Food Security Bill (FSB) approved by the Cabinet, comes into effect. It will enhance the fiscal deficit (by about Rs 30,000 crore), which will bloat annually when MSP is hiked. This running FSB expenses exclude extra storage and distribution cost, amounting to 25-30 per cent of acquisition cost, and additional outlay on infrastructure. So, the foundation of higher inflation in food items is being laid by FSB, even as official promises are being made to lower them! Prudent suggestions by the Agriculture and Finance Ministers were also ignored by the majority in the Cabinet.


On farm wages — the report notes that “during 2007-08 to 2011-12, nominal wages increased at a much faster rate, by close to 17.5 per cent per annum.

For the period since the 1990s, on an average, the money supply (measured by M3) has increased by 18 per cent, and this is combined by an agriculture GDP growth rate of 3 per cent”.

Open-ended procurement for rice and wheat continues at a higher MSP each year, despite surplus inventory, that will touch around 95 million tonnes by July 2013.

Too much money chasing too few goods will continue to push up farm prices.

A consistent long-term OGL import/export policy (rather than the ad-hocism of the past), which might be regulated with 5-10 per cent duty in exceptional circumstances, is suggested in this document. Neither is there any need to interfere with trade in cotton, sugar, edible oil and pulses.

Exports of rice, maize and soyameal handled by private trade have touched, respectively, 10 million tonnes, 3.5 million tonnes and 4 million tonnes last year — totalling Rs. 55,000 crore ($10 billion).

This is likely to be repeated this year with a 10-15 per cent variation either way.

However, wheat exports from FCI stocks are tightly regulated by PSUs and Government committees. Shipments were limited to 3 million tonnes in 2012-13, while shipments of 10 million tonnes in 2013-14 will be desirable. With larger exports, the trade deficit, current account deficit and fiscal deficit can be contained.


The report finally recommends:

Prune the fiscal deficit by cutting down fuel, fertiliser and food subsidies at the Centre and power subsidies at the State level. An estimated Rs 60,000 crore ($11 billion) will be saved.

Liquidate excessive grain stocks in the local market or through exports to recover sunk cost and carrying cost, by slashing government inventory to a maximum of 40 million tonnes, instead of 90-95 million tonnes in July 2013.

A revenue of Rs 100,000 crore ($18 billion) — can be realised, and a saving of Rs 20,000/tonne by reducing inventory to 50 million tonnes. These two proactive policy measures will cut fiscal deficit by Rs 160,000 crore ($29 billion).

Stop or review open-ended grain procurement, especially in States that impose high taxes (like Punjab Haryana) or give an extra bonus — like Chhattisgarh’s Rs 270 per quintal on paddy and Madhya Pradesh’s Rs 150 per quintal on wheat, crowding out private trade.

Gujarat has the lowest taxes, hardly any State procurement and yet has shown 10 per cent growth in agriculture over the last 10 years.

(The author is a grains trade analyst.)

Published on April 03, 2013

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