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LATEST NEWS UPDATES | Urgent action called for to run down 75-million tonne grain heap-Ashok Gulati

Urgent action called for to run down 75-million tonne grain heap-Ashok Gulati

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published Published on May 10, 2012   modified Modified on May 10, 2012
-The Economic Times
FCI
Grain stocks with state agencies are likely to cross 75 million tonnes some time in June 2012, while covered capacity to store is less than 50 million tonnes. The rest would be under CAP (with pucca or even kachcha plinths) exposed to potential large-scale damage. An early and rational policy decision is required to reduce the stocks by at least 7-10 million tonnes to avoid high costs of carrying and embarrassment of rotting grain in the coming monsoon season.

For the first time in the country's history, grain stocks with public agencies are likely to cross 75 million tonnes. This gives a great sense of achievement and satisfaction to many. But when they see a sizeable part of this stock getting soaked and damaged in rain, it may take away their cheer and replace it with headache and disappointment. The reason is simple: of this 75 million tonnes, not more than 50 million tonnes can be kept under covered storage. While the quality of even covered storage at many places is questionable, the key issue staring us in the face is what will happen to the remaining 25 million tonnes that would be stored under CAP. How much of this would get damaged is anyone's guess. If we have to overcome this problem, we must first understand how we have reached this situation, and what should be done to solve it in the short, medium and long term.

How did we arrive at this situation?

There are four key reasons that have led to this situation, and it is important to understand those for any rational policy decision, else the short-term solution may turn out to be only a temporary fix.

A benign nature, with good monsoon in the last four out of five years, has increased food grain production from 231 million tonnes in 2007-08 to 252 million tonnes in 2011-12. But demand for cereals is not increasing as fast, as dietary habits are moving away from cereals to protein-rich products and fruit and vegetables.

Export controls on wheat and rice for four years - wheat exports were banned in February 2007 and opened only in September 2011 - combined with good harvests has led to accumulation of stocks (see accompanying graphic). The capacity to store (with public agencies) has not increased commensurately.

Some state governments, most notably Madhya Pradesh, have announced a bonus on wheat to the tune of 100 per quintal for the last three years, which has driven private sector out of the market and increased state procurement from less than two million tonnes in 2009-10 to more than six million tonnes (expected this year). Quite a bit of it is being kept even on kachcha plinths. Rajasthan has also followed this example this year and its procurement levels this Rabi Marketing Season, 2012-13, are estimated to be 194% higher than those of 2010-11, without any corresponding preparation on storage front. The spurt in procurement levels in Madhya Pradesh and Rajasthan is evident from the graphic.

Also, states like Punjab and Haryana have levied high rates of statutory levies on the marketing of wheat and rice: 14.5% in Punjab and 12.5% in Haryana. This has displaced private traders from the market and, literally, there is a state takeover in grain trade in these states.

Policy options: What is the way out?

If we keep export window open, rice will keep getting exported. In 2011-12, India is expected to export 6.5-7 million tonnes of rice, becoming the second-largest rice exporter. It may repeat the same performance in 2012-13, thus taking care of excess rice stocks. But wheat is not exportable today as Russian and Ukrainian wheat last year pulled down wheat prices.

Therefore, the real challenge is of reducing excess wheat stocks, which will be lying under CAP and exposed to potential damage. The following options may be worth considering:

The cost of carrying (storage and interest only) this extra stock works out to 20% of the minimum support price (MSP) of wheat. If one adds to that the potential damage of at least 5% of grain kept in the open (poor CAP conditions), the total cost would add to at least 25% of the MSP. This whole 25%, or a part of it, say, 20%, can be given as an incentive to state governments to take away wheat, and distribute through additional allocations under PDS at a price that is 20% below the MSP, but above the current issue prices under PDS.

This would be a subsidy-neutral solution. But if the states don't lift at this price - they may feel that they can sell only at existing issue prices - then the finance ministry has to see how much additional food subsidy it can absorb in this year's budget. It should be realised that the first right on this grain should be of the poor in the country, and if it can be achieved without unduly putting an extra burden on the food subsidy bill (as the fisc is already in a precarious situation), then this would be the most ideal solution. The only thing that needs to be guarded is that this extra grain released through PDS is not recycled back to the FCI. So, the best timing would be from July 1, when procurement operations almost cease.

The first option can be combined with open-market sales of wheat at, say, 15% below the MSP. This would save the cost of carrying, storage and damage, and, in fact, help in lowering the subsidy bill. To ensure that it is not recycled back to the FCI, the government can get it converted into atta (wheat flour) and put it across all Kendriya Bhandars and district headquarters and, of course, in the open market at below the existing market prices. This would help bring down atta prices in the open market, rein in inflation and help lower the upcoming food subsidy bill.

The third option would be to export wheat by giving some suitable incentives (up to 15% of the MSP) to exporters in a WTO-compatible manner, say, through freight subsidy and by waiving off all statutory levies. If the rupee keeps depreciating the way it is, even this 15% incentive may not be necessary. This can help only in the short run. But to ensure that this problem does not recur, we must attack its root causes. And for that, we need to ensure the following:

The central government should clearly advise states such as Madhya Pradesh and Rajasthan to not give any commodity-specific bonus, which distorts the all-India market and drives out the private sector. It would be better if these states used an income policy or preferably an investment policy (say, to promote irrigation) to help the farmers, which is crop-neutral. If this does not work, FCI may have to think in terms of limiting its purchases from such states.

Last, but not least, it is time to rationalise statutory taxes and levies on primary commodities such as wheat and rice. Unduly high statutory levies in some states (14.5% in Punjab, 12.5% in Haryana and Andhra Pradesh, compared to just 3% in Gujarat) have not only hampered the efficient functioning of all-India market but also driven out much of the private sector from these states. This must be corrected either by ensuring that no state puts statutory levies more than, say, 5% of MSP - and compensating the revenue loss of those states through some other means - or asking FCI not to pay any levies more than 5% of MSP, or accepting CACP's recommendation of announcing MSP inclusive of all taxes and levies. This would go a long way to get the markets right, contain the subsidy bill and bring back private players in the grain markets, and reduce the burden of carrying large stocks with government agencies such as FCI, which are not equipped to handle 75 million tonnes, despite their best and honest efforts.

But in the long run, if India really wants to physically handle 75 million tonnes or more through its public agencies, for its leaky public distribution system - which I personally feel is a suboptimal policy choice - it has no option but to invest heavily not only in modern storage, but also in modernising agri-markets and logistics. There is acute shortage of railway wagons at the time when grain needs to move from one state to another.

Sustainable food security through public agencies cannot be achieved at a low cost. A delay in liquidating the current excess wheat stocks will pose a major problem of procurement of paddy in October later this year, and severely harm the interests of the farmer.

(The author is chairman of the Commission for Agricultural Costs and Prices.)

The Economic Times, 10 May, 2012, http://economictimes.indiatimes.com/opinion/comments-analysis/urgent-action-called-for-to-run-down-75-million-tonne-grain-heap/articleshow/13074182.cms?curpg=1


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