The yo-yo food economy

The yo-yo food economy

Abundant supplies of foodgrains have been India’s first line of defence against inflation. Currently, however, this situation of plenty has begun pinching government finances. A Business Standard report on Monday said food subsidy is likely to touch the Rs50,000 crore mark this year.

The problem is that of the high economic cost of these grains and their low issue price. The economic cost includes the minimum support price (MSP) paid to farmers, taxes levied by state governments on purchases by the Food Corporation of India and storage and carrying costs. The issue price is the price at which food is sold to families below the poverty line (BPL). The mismatch between the two has to be made good by food subsidy. The greater the gap between the two, the greater the amount of subsidy required. In 2008-09, the gap is estimated at Rs1,044 per quintal for wheat and Rs1,134 per quintal for rice.

This may suggest the wrong solutions for the problem. Reducing MSP for farmers or raising the issue price for BPL families is certain to have adverse welfare consequences. It is certain to push more families into poverty. Farmers with small landholdings, too, are dependent on government purchases for sustenance.

The problem lies elsewhere. India goes through a cycle of poor crops followed by food inflation every three or four years. This is followed by knee-jerk policy responses: MSP is raised, foodgrains export banned, private traders shunted out from trade, and large-scale wheat/rice imports. From shortage, it leads to a problem of plenty. Then come the calls for resuming exports and cheaper sales from flour mills and manufacturers to “recover" the money expended. By the time these steps are taken, the country is back staring at a shortage.

Admittedly, managing food security in a country as diverse as India is no mean task. But accurate forecasts of demand coupled with more careful management of buffer stocks should do the trick. But the problem is that of tailoring policy responses with such data. Unfortunately, as recent experience shows, the response has been that of relying on crude administrative measures. That’s where the failures have occurred and continue to occur.

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