Opinion

Subsidy on imported pulses will distort market

TEJINDER NARANG | Updated on October 23, 2012

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A huge arbitrage of 77-1,200 per cent between the market and PDS prices will destabilise market equilibrium.

The supply-demand gap of about 3 million tonnes of pulses — on account of India’s production of 17 million tonnes, against consumption of 20 million tonnes per annum — is showing signs of widening.

SUBSIDY IMPACT

The Ministries of Agriculture, and Consumer Affairs, Food and Public Distribution fear that escalating domestic prices of pulses can prompt higher food inflation due to lower output of kharif (summer) pulses. Hence, traditional interventionist measures were contemplated in early October, which, unfortunately, may again prove to be counter-productive. They may not help in providing relief to poor consumers.

After terminating its scheme of import subsidy of pulses for PDS, operational between August 2008 and June 2012, the Government has revived its blueprint for import of one million tonnes of pulses to be distributed in 2012-13 by State governments through PDS channels.

Under the new dispensation, subsidy on imports has been enhanced from Rs 10/kg to Rs 20/kg or from Rs 10,000/tonne to Rs 20,000/tonne, equivalent to $192.50 to $385/tonne, respectively. This announcement stands discounted in the future and spot exchanges. Prices have not softened.

The major demand for PDS imports, in the past, has come from Andhra Pradesh, Maharashtra, Tamil Nadu, Kerala, Rajasthan, Punjab, Himachal Pradesh, Chhattisgarh, Madhya Pradesh and Uttar Pradesh. The new scheme is so tempting that many other States may jump in.

ARBITRAGE POSSIBILITIES

From the market’s point of view, a subsidy of $385/tonne is a negative customs duty on Government-sponsored imports to depress sales prices under PDS. Nevertheless, the fundamentals of elementary physics are equally applicable to markets — the more a coiled spring is compressed, the more it rebounds with greater reaction and disruptive force.

Likewise, an intensive intervention will disable private imports. It will create significant market distortion, due to a huge arbitrage of 77-1200 per cent between the market and PDS prices (see table).

For example, chana’s market price of Rs 45/kg will have a PDS price of Rs 22/kg; likewise tur’s market price of Rs 43/kg will be countered by Rs 20/kg in PDS; yellow peas traded at Rs 24/kg in the market could be available at Rs 1.85 in PDS. Arbitrage opportunities of 3-5 per cent are enough for diversion of funds and commodities, while 77-1,200 per cent spreads between PDS and market will destabilise the market equilibrium. Though the terms of implementation of the revived subsidy schemes are yet to be officially spelt out, indications are that import might be routed through PSUs of the Department of Commerce and NAFED/NCCF under the supervisory guidance of Departments of Consumer Affairs for onward distribution by State governments.

SCOPE FOR DIVERSION

Some of the apparent ambiguities are as follows.

One million tonnes of pulses cannot be sourced from international market due to paucity of surplus supplies, unless yellow peas are also included in PDS. So far, yellow peas (imported from Canada, France, Ukraine, Russia) had an “insignificant” share in PDS imports, while the States were keener to import items such as chana, tur, urad, moong, etc, ( from Myanmar, Tanzania, Malawi, Australia etc.)

The tender-centric approach of PSUs results in an abnormal spike in international prices, even if import is limited to 0.2-0.3. million tonnes, while some contracts remain unexecuted due to sellers defaulting on the prospects of getting higher prices elsewhere. The subsidy, after three or four months, will be substantially neutralised. It invisibly benefits foreign sellers.

Private trade will be at continuous odds with lower local and higher CIF values. Import through established trade will be minimal; supply-demand mismatch will expand and “pulse inflation” will come into effect in local markets.

Unscrupulous elements will ensure continuous leakages of low priced pulses from PDS stocks and thrive by trading in the open market.

Higher imports of yellow peas can be anticipated if importing agencies are compelled to meet their import allocations through substitution of chana (chickpeas). Availability of peas at a low cost of about Rs 2 /kg will be highly rewarding by diversion in the open market which is now trading at Rs 24/kg. This item does not need any processing by dal mills, unless traded in split form.

As usual, the beneficiaries will be other than those intended. The entire system both at the Centre and the State will be decidedly prone to unethical practices.

Even if we go by the experience of import of fertilisers and crude oil, which are also subjected to negative customs duty, their prices have been rising in the domestic market and have spurred economic mismanagement. Now, pulses also appear to be included in the same category.

The Department of Consumer Affairs, from April 2007 to March, has implemented similar schemes with 15 per cent discount for the open market and Rs 10/kg discount for PDS.

Prices could not be reined in because the macro aspects have remained unsettled. The current interventionist role of the Government by way of encouraging negative customs duty disturbs the equilibrium in the market. Cash transfers are the real option, for which PMO is expediting the mechanism.

(The author is a freelance commodity analyst.)

Published on October 23, 2012

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