The world is witnessing food price turbulence again. A bad drought in Russia, rising demand in the US and developing countries, and Pakistan’s blighted crop prospects after its floods are keeping prices of commodities such as cereals, sugar, oil and meat high. The Food and Agriculture Organization’s monthly food price index is heading north.
India is not immune from this problem even at the best of times. For the week that ended on 11 September, food prices (as measured by the Wholesale Price Index) rose by 15.86%. Given the robust demand for foodstuffs, a time of price volatility calls for a careful look at the “design” issues surrounding food supply management. At times, even huge food stocks are not able to arrest rising food prices. The fault lies in how food is released to traders by government agencies such as the Food Corporation of India (FCI). This problem is apart from FCI’s high carrying cost of foodgrains. But this is not the problem at hand.
For example, under the open market sales scheme (OMSS) a fixed quantity of grain, usually in multiples of 10 metric tonnes, is sold to traders, flour mills and other buyers when supplies are short or there is price volatility. But a combination of price rigidity, terms of sale and the quantity sold under OMSS defeat its purpose. One reason for this is the large volume in the hands of individual buyers. This leads to perverse economic incentives. Often, the grain sold under this scheme winds up back with food procurement agencies because of price differentials (the price at which it is sold and the prevailing market price). This has been observed many many times in states as diverse as Punjab and Uttar Pradesh. Chief economic adviser Kaushik Basu recently suggested that if the number of buyers is increased and the quantity sold to each buyer reduced, or the price fixed but the amount of grain that can be bought kept flexible, these problems can be overcome.
This makes for a sensible menu of options. But it needs careful implementation. And if, for some reason, changes are required to suit local conditions in different states, the economic logic behind these ideas should not be lost sight of. Left to bureaucrats, even the best laid plans can go awry.
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