India faces an incongruous situation. On the one hand, food prices—wheat and cereals, for example—continue to be high: Inflation, as measured by the Consumer Price Index, which has a higher weight for food articles compared with the Wholesale Price Index, stood at 11.62% in February. On the other hand, the country has a mountain of foodgrains: wheat stocks stood at 18.2 million tonnes (mt) on 1 January and are expected to touch the 14mt mark by 1 April. These are much higher than the buffer stock norms of 8.2mt and 4mt on the two dates, respectively. What is happening?
What is about to be witnessed is the beginning of another cycle of the government carrying large stocks of wheat and rice, procured at relatively high minimum support prices (MSP), followed by their subsidized export at much lower prices. The only people who benefit from this “administrative” inflation are the rich farmers and exporters. Poor consumers and marginal farmers, as always, continue to suffer.
In immediate terms, it is clear that the government simply is not doing enough to release more wheat to poor consumers, especially those who are below poverty line. But beyond this there are long-term issues that the Union government has not addressed. The reasons border on political expediency and lethargy.
In a recent paper in the Economic and Political Weekly, Ramesh Chand explains that so long as MSP was anchored to the actual cost of production, the fluctuations in the buffer stock and the net trade in wheat (exports minus imports), are mild. This was the case from 1980-81 to 1997-98. The years in which MSP deviated from the cost of production witnessed violent fluctuations, usually with a lag of one year. This was the case from 1999 to 2003 when India accumulated gigantic amounts of foodgrains. For example in 2002, the wheat stock rose to 33.5mt.
Chand argues that from 1996 onwards the government came under pressure to ensure parity between domestic and international prices. It succumbed due to pressure from farm lobbies. Political factors are at play in the current cycle, but they stem from a different cause: government incompetence in managing stocks. That, and not any flaws in monetary policy, is the cause for the high food prices in the country.
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