Agriculture minister Sharad Pawar is fond of random walks. In the past seven days he has made two diametrically opposite statements on a subject that concerns all citizens. Last Wednesday, he argued against the government purchasing grains from the open market. This, he said, would adversely affect consumers due to an upward price spiral. Yet, the very next day, the minister advised state governments to buy grain for the public distribution system (PDS) from the open market.
Whimsical behaviour on the part of politicians is an accepted fact. In this case, it’s a different matter. After bumper crops for two years, the inability to fulfil buffer stock norms (40 million tonnes) is baffling. How did this happen?
Of an estimated 74.89 million tonnes (mt) of wheat produced this year, the government could gather only a measly 11.3mt. It imported another 1.3mt at greatly inflated prices.
It does not require a great deal of policy analysis to figure out what needs to be done. Had the government shown some flexibility in procurement pricing coupled with greater geographic spread in such purchases, the problem would not have arisen. Instead, it focused on north Indian markets. Here, private players paid up to Rs1,200 per quintal of wheat to lift the lion’s share of stocks.
The government remained rigid on pricing to the end. Instead, it chose to import nearly 1.3mt of wheat at prices ranging from $325 to $390 a tonne. The gap between these prices and the Minimum Support Price (MSP) is anywhere from Rs480 to Rs740 per quintal. It also showed non-application of mind. There were clear indications for the past year or so about the hardening of wheat prices, yet the government showed no procurement price flexibility. In this context, the ban on wheat futures was a costly mistake as it prevented the correct anticipation of market prices.
The crop year 2007-08 is likely to witness the same spectacle again. The first advance estimates for 2007-08 peg wheat production at 75.5mt. At the same time, the Commission for Agricultural Costs and Prices has announced an MSP of Rs1,000 per quintal for wheat. Once again, it’s too little and too late. Wheat prices worldwide are hardening due to poor production and the government is going to be in a tight place once again.
The argument that a higher MSP is bad news for government is a red herring. It spells bad news when purchases are concentrated in North India and the produce moved to eastern and southern India. Then, and only then, does it add to storage, transportation and distribution costs. If purchase at higher MSP is spread to other parts of India, not only will that spur production, it will also greatly reduce costs.
Farmers respond to price signals and those in Bihar and elsewhere are no different from those in Punjab. The High Level Committee on Long Term Grain Policy had in 2001 recommended such steps. This is unlikely in the foreseeable future. There is strong resistance to these steps. A coalition of transporters, officials, bankers, storage space owners and others stand to lose too much in shifting to a localized system of production and distribution.
For public sector banks, food credit is an important lending activity. Because there is a significant gap between borrowing and payment of the principal amount, ever-increasing interest payments are usual. Food management agencies, in turn, have no idea on a real-time basis of economic costs of the commodities they store. The storage space is often lent out by powerful politicians who have secure rentals from government agencies even if such space is used or not.
The disappearance of grains from markets is not due to hoarding but because government had no imagination in solving an emergent situation.
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