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A scam in pulses import? CAG estimates Rs 1,200 crore loss on import of subsidised pulses by Tejinder Narang

In December 2011, CAG tabled a well-analysed audit report in Parliament claiming a loss of 1,200 crore, or $250 million, on the import of subsidised pulses through 2006-11 under the supervision of department of consumer affairs (DCA) of the food ministry. The government's intention to introduce such a scheme cannot be faulted: during 2005-08, seven million tonnes of wheat was imported at high prices, chana (chickpeas) values spiked from 21 to 33 per kg, exports of non-basmati rice was banned and the economic meltdown of 2008 spooked everyone. 

Can profit be skimmed from a policy conceived on the principle of loss, disguised as subsidy, for the larger objective of social welfare? For the government, a loss of 1,200 crore is notional. Had all agencies and PSUs been alert and vigilant, these notional losses could have been minimised. 

The possibility of skimming is beyond the realm of imagination. The moot point is whether subsidies are an outright loss or not. If subsidy is an euphemism for loss, then the government needs to shed all subsidised programmes for grain and fertiliser and abandon the National Food Security Bill that would aggravate the losses camouflaged as subsidy. Had this report been presented after 2-3 years instead of six years, either mid-course correction or exit from the scheme could have mitigated the losses. 

The CAG has pointed out that 1.5 million tonnes of pulses imported each year and distributed with 15% discount in the open market and at 10 per kg to state agencies through 2006-11 by STC, MMTC, PEC and Nafed under instructions from the DCA, did not stabilise domestic prices and caused a loss of 1,200 crore. 

It also says that wholesale and retail prices continued to diverge from each other despite subsidised imports, probably because of lack of effective distribution arrangements. It says that the tender route adopted for disposal of pulses in the local market led to cartelisation and, hence, was inappropriate. It also says that more yellow peas were imported than required. 

In June-July 2006, the government said that DCA should make available additional supplies of subsidised imported pulses, evolve a distribution mechanism and ensure stabilisation of prices in local market. A tall order indeed! Though additional supply can be arranged, the objectives of devising a new distribution system and price stabilisation were far-fetched. Under the present dispensation, markets discover prices. 

The distribution system of wholesalers, dal mills and retailers is well-entrenched and the creation of any new structure would reinvent the wheel. Official agencies could only attempt to supplement the market rather than supplant the bazaar. The obligations mandated by policymakers were a statement of desirable intentions. 

The moment government intervenes in any commodity, it flashes a signal of shortage and induces bullishness in that particular commodity. Subsidised imports over five years lent conviction that the supply of pulses would be scarce, flashing into a speculative rally. The rise in retail price is the result of interventionist policy, rather than the mechanism of intervention. 

The CAG comments on a delay in the availability of pulses in the domestic market. The pain of the financial meltdown of September 2008 hit PSU and private players equally. Commodities and pulses imported at higher prices suffered huge disparity in the local market, that not only aggravated losses and postponed lifting of pulses for reasons beyond control of any of the parties. 

Imported pulses come in raw form, to become edible as dal, it needs to be cleaned, milled, split, sorted and packed by a dal mill with recovery of 75%, at a cost of 2,500 per tonne. 

Wholesellers, dal millers and retailers have payment, lending and credit arrangements that are beyond the purview of PSUs. Apart from processing expenses, higher cost of rent and real estate, stores and malls determine the retail price. 

If private players indeed formed cartels for disposal tenders, it is tough for PSUs to detect them. Even if they did, they couldn't have stopped or deferred tendering. Else, they would have been blamed for delays in offloading imported stock in the domestic market. 

Import of yellow peas was encouraged by the government to partly offset demand for chana or chickpeas and other lentils due to their protein content being around 20-22%, similar to all pulses, while their landed price is 33% cheaper than chickpeas and 50% lower than other lentils. There is a definite cost-benefit relationship in pea imports. The government has been actively promoting the usage of yellow peas by media releases. What is wrong in promoting cheaper substitutes? 

The DCA also initiated another scheme in November 2008, for state agencies with a subsidy of 10 per kg, equivalent to 25% subsidy for lentils and 40% for yellow peas. Only 90,000 tonnes of pulses out of a planned import of 4,00,000 tonnes could be supplied despite the discounting. Even where state cooperatives and agencies operate, there is no evidence that their intervention softens market prices and they too deal with dominant trade channels and dal millers. Also, state governments are reluctant to accept schemes imposed by the Centre. 

In the absence of ad-hoc discounting, what would have been the intensity of price rise of pulses and its impact on food inflation? The CAG has undertaken an audit of a market that is essentially unauditable.