Food security or financial starvation?

The proponents of the National Food Security Bill (NFSB), now under consideration of Parliament, would have never imagined that it would become a cocktail of PDS and conditional cash transfers (CCT). Distribution of grains at economic cost to the exchequer (the sum of purchase price, storage and distribution) and its subsequent subsidy to the targeted beneficiaries is proposed to be linked to cash transfers. The broad contours of CCT have been spelt out in recent press reports.

It is generally assumed that 35 kg of rice and wheat at Rs 3 per kg and Rs 2 per kg, respectively, will be distributed to BPL/APL families/other intended recipients, and that all the loose ends of CCT have been dealt with .

A discussion paper of the Commission for Agricultural Costs and Prices (CACP) candidly discloses that about Rs 7 lakh crore ($127 billion) will be the estimated subsidy over a period of three years for implementing this programme. In the absence of NFSB, this amount would have been limited to about Rs 3 lakh crore ($55 billion) maximum over three years. Concurrent operation of open ended procurement /storage/distribution of grains coupled with cash transfers can be a sure recipe for another acronym “Nation’s Financial Starvation Bill”.

The process envisaged

In the present thought process, NFSB may be operationalised in the following manner: The Union government will sell grains to State governments at economic cost which is 40 per cent more than the procurement cost.

The State government will distribute cereals to fair price shops (FPS) at the price (economic cost) determined by the Centre.

FPS will sell to targeted population at the corresponding price. The difference between price paid to FPS by the consumer and the subsidised price fixed by the Government will be reimbursed to the targeted beneficiary by cash transfers. The responsibility for efficient operations devolves on the States.

The scheme will be first introduced in the Union Territories and then replicated in various States. The Union or State government will be insulated or excluded from any claims, judicial or monetary, in the event of non-availability of grains. Put simply, Government has no liability whatsoever in the event of non-performance.

The Union government will reimburse funds to States in the event of non-supply of grains.

Fundamental issues

The above format raises some fundamental questions, which are: Have the State governments consented to abide by the above said protocol? If they have, will additional funding/resources be made available to them?

How will the FPSs access additional liquidity for purchasing grains at higher prices?

Will it be probable to repeat identical protocol in States as tested in Union Territories, where population is small and centralised control can be exercised?

Will cash transfer be made to the targeted beneficiaries well in advance so that they may buy grains at elevated prices?

Will States be at liberty to implement the scheme as per their convenience and not necessarily the procedure defined under NFSB?

Snags in system

Rice and wheat MSP was raised by 62 per cent and 54 per cent, respectively, during 2006-10. For argument’s sake, had NFSB been introduced in 2006, then cash transfers would have also gone up by an average of around 50 per cent by 2010. Ascending MSPs will escalate cash transfers annually to nullify increased cost to consumers.

The established practice is that FCI and its agencies mop up 33 per cent of the total production or 50 per cent of the marketable surplus grains, while offtake from the State is not commensurate with the total acquisition, resulting in build-up of inventories in unscientific storages. The carrying cost of the grains is also around Rs 2,400 per tonne per year. Grains may be stored for 3-4 years and the carrying cost multiplies, even if the storage burden is shifted from the FCI to States. (Grain stocks as on July 1, 2013, are expected to exceed 104 million tonnes, against 82 million tonnes last year, assuming FCI procures 40 million tonnes each of rice and wheat in kharif and rabi seasons). It is relatively easier to procure than to store and distribute. This hardly implies any improvisation over the existing system.

The major dichotomy is that price policy and income policy will run concurrently — that is, higher disbursal both to producers and consumers will be made from the taxpayer’s pocket or by printing rupees. The political establishment will claim that it has done a favour to the poor, while the poor will remain ignorant of the evaporating value of their money and savings by rising inflation and depreciating value of the rupee. Is it not exploitation of the ignorance of the poor? This cannot be a sustainable model.

Leave it to private players

Policymakers and lawmakers have to gradually reduce open-ended procurement; let private players take over the market in a “regulated” manner so that market prices decline, and then calibrate the quantum of cash transfer. Since the investment will be made by the private players, they will have to ensure sound warehousing and distribution. Eventually, FCI and other State agencies may have to withdraw from the present system of PDS.

Will annual production of wheat and rice decline in the absence of MSP-based centralised procurement? Not likely in the near term, but switching to other crops cannot be ruled out on the long term.

The reaction of farmers of the grain bowl of India — Punjab, Haryana and even those in Andhra Pradesh, Madhya Pradesh, Chhattisgarh, etc — who are accustomed to receiving prompt cash payments from Government agencies at mandi yards, cannot be assessed at present, but the proposal will be politically unpalatable.

The entire exercise of food security is a confused one. Howsoever noble the intentions, the modified rollout plan of NFSB is unworkable. NFSB ought not to be rushed through Parliament because of General Elections of 2014, unless conceived on viable economic grounds. Till its major snags are fixed, it will be preferable to continue with the existing system with its leakages and deficiencies rather than to create a distorted model, which is not intended in the original manuscript of NFSB.

(The author is a grains trade analyst.)

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