How to reduce our rotting mountains of grain

India’s GDP growth has almost halved from 9.2% in 2010-11 to 5% in 2012-12. Major problems include a high current account deficit, high fiscal deficit, and lack of bank credit for small and medium enterprises. All three problems can be mitigated substantially by one single measure — reducing excess food stocks. So say Ashok Gulati and Surabhi Jain, chairman and joint director respectively of the Commission for Agricultural Prices and Costs, in a recent paper titled “Buffer Stocking Policy in the wake of National Food Security Bill.”

The government has for decades operated a public distribution system (PDS) of subsidized cereals. This has required a buffer stock whose size varies through the year, depending on the procurement season. Conventional norms required a stock of 31.9 million tonnes on July 1 each year, the end of the rabi procurement season.

This needs to be raised because of the new National Food Security Bill (NFSB), that aims to step up subsidized cereal supply (five kilos per month of wheat or rice) to 67% of the population. If the aim is to be completely self sufficient and not have any imports even in bad years, then a buffer stock of 46.7 million tonnes is required. Allowing for modest imports in bad years, a buffer stock of 41.7 million tonnes is enough, say Gulati and Jain.

However, the actual food stocks are estimated to touch a whopping 82 million tonnes on July 1, 2013. This may be revised down to 76 million tonnes since wheat procurement has been far less than expected this year. The NFSB will require subsidized grain sales to rise to 62 million tonnes per year. But actual cereal procurement has been much higher, which is government stocks have been rising inexorably.

Relative to buffer stock needs as calculated by the economists, the government has around 35 million tonnes of excess food stocks. This does not improve food security at all: food is needed in empty stomachs, not in overflowing godowns. Indeed, there is not enough godown space for current stocks, so much of it is stacked in the open under plastic sheets. Inevitably, millions of tonnes will be eaten by rats and other vermin, or spoiled by rain.

Moreover, holding such excess stocks ties up Rs 70,000 crore to Rs 90,000 crore of bank credit, say Gulati and Jain. This credit is not being used for any productive purpose — the excess stocks are a deadweight burden on the economy. But they mean that Rs 70,000-90,000 crore less of credit is available for small and medium companies that desperately need it. Excess stocks shift scarce credit from productive enterprises to dead mountains of rotting grain.

Whether or not this is formally acknowledged in budget documents, this borrowing for food stocks is really part of the fiscal deficit. Finance Minister Chidambaram is very anxious to bring down the fiscal deficit, and so has been squeezing capital spending, although this is much needed. Far better would a squeeze on food stocks.

Gulati and Jain talk of shifting stocks from the centre to the states, but that would merely reshuffle the problem and not end it. There is every reason to follow the second option of Gulati and Jain, to export a large amount of excess stocks. Last year, India exported around 10 million tonnes of rice and 5.6 million tonnes of grain, and even so stocks rose to a record high.

Clearly, a more aggressive export policy is warranted. Global food prices are still high, so additional rice and wheat exports of say 25 million tonnes would fetch at least $10 billion. This will have several positive consequences. First, the trade deficit will come down from current levels that are ringing alarm bills.

That in turn will reduce India’s dependence on dollar inflows, which has become dangerously high. It will tend to strengthen the rupee, thus curbing inflation and benefiting millions (as also the re-election prospects of the Congress Party). Some will say that the rupee needs weakening to encourage exports, but the currency has already fallen 22% in two years.

Gulati and Jain favour a switch from physical delivery of cheap grain to conditional cash transfers to beneficiaries. This will greatly reduce waste in inefficient government procurement and distribution. FCI employees are paid 7 to 8 as much as contract workers used by private traders. Much “food security” spending is actually tax payments to state governments like Punjab.

Gulati and Jain estimate that with a cash transfer system, buffer stock requirements will crash to just 10-15 million tones. This will hugely reduce the fiscal deficit and release funds for more productive investment in agriculture. That will be a much better route to food security.

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