Financial Daily from THE HINDU group of publications
Tuesday, Apr 02, 2002
Agri-Biz & Commodities - Foodgrains
To procure or not to procure
Kala Seetharam Sridhar
THE Government is debating if it should do away with the minimum support price and replace it with an income support policy by which the farmers will be compensated for the difference between the market price and the MSP.
In India, administrative solutions, such as the MSP, are chosen to solve economic issues determined by demand and supply, the reason being the choice of the industrialisation strategy. We chose the heavy capital-intensive-based approach rather than the textiles-based strategy that would have fostered better linkages between agriculture and industry. A textile-based strategy would have entailed development of natural resource-based industries, such as beverages, consumer products, and intermediate products that use raw material from agriculture as their inputs. So, there would be one-to-one correspondence between agricultural and industrial growth.
However, in the case of a heavy capital-intensive strategy, there is no demand from industry for raw materials from agriculture, irrespective of surplus agricultural output. So, the Government had to resort to the MSP for farmers whenever there was good agricultural harvest, which has been the case every year since the Green Revolution. Thus, the MSP is itself truly artificial.
What are the implications of the MSP? First, it caused the paradox of high foodstocks in FCI (Food Corporation of India) granaries. This is because the Government buys too much and sells too little. Farmers prefer to sell their grain to the Government than to the traders because the Government has been constantly increasing the MSP. The MSP for rice and wheat was 34 per cent and 53 per cent higher last year than it was in 1996-97 against the overall inflation of 22 per cent. In 2000-01 alone, stocks with the government increased 56 per cent. The cost of holding is also estimated to exceed Rs 12,000 crore this year.
Procurement by the government for distribution means lower availability of foodgrains in the open market that creates higher prices for consumers. Given that the average farmer is more of a net buyer than a net seller, continuation of the MSP decreases consumer welfare.
Continuing with the MSP will slow the pace of reforms. Theory shows that direct income support is less distortionary, compared to the MSP that distorts relative prices. So, if the average farmer is a net buyer, he would benefit from an income support system as long as he could sell his grain in the open market. Income support can be implemented by making mandatory the submission of receipts that clearly state when and where the transaction took place and how much the farmer was paid for his grains by the trader.
Currently, the difference between procurement at MSP and disbursement of foodgrains through the public distribution system (PDS) is absorbed by the government in the form of food subsidy. Apart from costs, the surplus foodgrains procured do not reach the poor through the PDS. Reasons?
Poor utilisation of foodgrains by States: The 35 States and Union Territories together lifted less than half of the allotted rice and one-third of wheat under the PDS compared to much higher proportions in 1996-97. Since States' poor lifting of foodgrains is related to lack of adequate distribution networks and storage facilities, their utilisation through the PDS will improve if distribution and warehousing were to be privatised.
Poor quality of foodgrains: This is the case even in such States as Kerala that has one of the most extensive PDS networks in the country. The low quality has prevented the poor from making use of foodgrains sold through the PDS.
(Lack of) affordability of foodgrains: Especially of the grain sold through fair price shops to those living below the poverty line (BPL). For instance, the issue price of rice (per kg) at fair price shops in Orissa for BPL customers is Rs 6.30 a kg, compared to Rs 3.50 in Tamil Nadu, Rs 3 in Gujarat, and Rs 4 in Pondicherry.
Unless the quality of grain is improved and some permanent means of purchasing power such as non-farm employment is created, mere procurement through the MSP or subsidised distribution through PDS cannot provide food security.
The food-for-work programme, initiated by the Government, is a step in the right direction. States may attempt to identify their poorest/starving households for the programme through local involvement.
Making use of surplus food in the granaries can prevent starvation deaths. Moving towards an income support policy is a humane step toward reforms. Continuation and/or increasing the MSP is certainly not the answer.
(The author is Assistant Professor, Indian Institute of Management, Lucknow.)
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