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Kaushik Basu’s home truths

Kaushik Basu’s home truths
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First Published: Fri, Sep 10 2010. 10 23 PM IST
Updated: Fri, Sep 10 2010. 10 23 PM IST
The government has been pulled up by the Supreme Court for allowing foodgrain to rot in its godowns while the poor go hungry. The judges have ordered the food to be distributed free. In response, the Prime Minister has said it’s impossible to supply free food to the 37% of the population below the “poverty line”. Who’s right, the politicians or the judges? Kaushik Basu, chief economic adviser at the finance ministry, has in this paper said that it’s perfectly possible to feed everyone in the country and the problem is the faulty food procurement and distribution system.
But first, here are some facts. On 1 April, the stock of wheat and rice with the government was 202% of the minimum needed under the buffer stock norms, at a time when price rise was forcing the poor to cut back on food. Basu points out scathingly: “If the reserves are never to be used, they may as well not be there.” Not that the government hadn’t tried releasing foodgrain—in December, when inflation was at 20%, it decided to release some stock, but at a price higher than that at which it had obtained them, plus a mark-up for transportation and storage costs. Basu drily notes, “There are no surprises in the fact that there was no demand for the wheat thus put on sale; the sales in Delhi were actually zero. Evidently, the strategy used for releasing foodgrain has scope for improvement.” He argues that if the grain is priced so high that it finds no takers, it’s equivalent to selling it at zero price—the fiscal deficit goes up even more. Here’s the author at his acerbic best: “In the case of India, the release has fallen well short of procurement. The statement by a senior member of this government that, when it comes to hoarding, it is the government of India that leads the pack is not off the mark.”
Basu says we need to have a buffer stock of foodgrain so that we’re not arm-twisted if we have a food shortage. But with 67% of the wheat meant to be delivered to the poor going elsewhere, we need a better policy. Such a policy will need to fulfil two objectives: price stabilization and helping the poor. Basu says the government should buy more grain during a good harvest and sell more grain when there’s a drought. That way, food prices will be kept in check when the harvest fails. He says the minimum support prices must be adjusted so that they are lower in good years and higher during lean periods. He also says the best results will be obtained by the Food Corporation of India releasing the foodgrain in small batches to many traders.
How best to target people below the poverty line? Basu is all for using food coupons that will replace the current system of fair price shops. He argues that “since the stores get full price from the poor and, more importantly, the same price from the poor and the rich, they will have little incentive to turn the poor away. Further, the incentive to adulterate will also be greatly reduced since the poor now have the right to go to any store with their coupon”.
Basu points out that we have, in the name of caring for the aam aadmi, created a system where neither poor consumers nor poor farmers benefit. Worse, the present system creates wrong incentives that “hold back large segments of the population in agriculture, who actually deserve to move out to industry and manufacturing”.
Write to simplyeconomics@livemint.com
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First Published: Fri, Sep 10 2010. 10 23 PM IST