Opinion
Riding back in time with Bharat Atta
Summary
- By entering the flour market, the Indian government seems to be regressing to its socialistic past
There’s more than a hint of deja vu with the launch of Bharat Atta in 2023. It’s as if the world’s fastest-growing large economy is suddenly regressing to a past socialistic pattern – one in which the state produced and sold Hindustan Salt, Hindustan Machine Tools (HMT) and Modern Bread. The government must draw a line beyond which it will not intervene in the economy, especially in the food sector, the distorting impact of which is well recognised.
Yes, ensuring food security for India’s large vulnerable population is essential. India took major strides towards this decades ago with the green revolution of the 1960s, measures such as procuring and maintaining enormous and costly stocks of foodgrains, and an elaborate public distribution system (PDS). To exempt its huge stocks of foodgrains from trade-distorting measures, India has fought off pressure from grain-exporting rich countries and wrecked consensus at multiple meetings of the World Trade Organisation.
The government runs a National Rural Employment Guarantee Scheme, essentially a dole, in which the requirement of manual work functions as a screening mechanism to weed out the non-poor. It ensures the poor have the purchasing power to buy grains from the PDS even in the lean season for farm work. The government has been distributing free grains at the rate of 5 kg (10 kg during the pandemic) per person per month to some 80 crore Indians (57% of the population). The prime minister recently announced at an election rally that this will continue for another five years. Is India so poor that more than half the population cannot buy food?
The scheme will cost some ₹2 trillion a year. The outlay for the rural employment guarantee scheme has been close to ₹1 trillion in the past couple of years. Now, the government has launched packaged wheat flour at a discount of ₹6-7 a kg to the market price. Are cookies, bread and noodles on the way, apart from Garib Kalyan kurta-pyjama?
If people have access to subsidised flour and free grain, many are likely to sell it back to the government under its procurement scheme for farmers. After all, how much grain can an individual eat?
What began as the Indian planning system’s desire to create strategic capability in a sector when private players were too small soon degenerated into mindless licence-permit raj that bred corruption, hindered innovation and progress, and stalled entrepreneurship by limiting access to capital and technology to influential industrialists.
In the era of Nehruvian socialism, Air India, owned by the Tatas, was nationalised and eventually run to the ground. It was handed back to the Tatas a year ago for a paltry sum, while taxpayers will continue to pay its accumulated debts. In the Indira Gandhi phase of socialism, banks, airlines and cloth mills were nationalised. This has not been reversed despite the Modi government announcing its intention to privatise nationalised banks several times. Car manufacturing and luxury hotels began in the state sector, while telecom was a state monopoly. BSNL, formerly Bharat Sanchar Nigam Limited, has received ₹3.22 trillion of taxpayer money in the past four years alone because it doesn’t even earn enough to pay salaries and pensions.
Liberalisation in 1991 reversed many of these mistakes, opening up most sectors to private entrepreneurship. The economy benefited from increased competition, innovation and market expansion, leading to a virtuous cycle of new investment, increased capacity and yet more entrepreneurship. Modern Breads was privatised.
But it seems we’re now back to square one.
When the government enters the market for flour, it does two things. Firstly, it fails to use the earmarked funds and administrative resources for things that the state alone can do to enhance systemic efficiency and productivity. These include better law and order, helping India achieve a more respectable ranking on the list of the worst countries for contract enforcement, and greater investment in high-risk sectors such as quantum communications that the private sector is unwilling to undertake.
Secondly, it undermines the existing trade in flour. Food-processing companies, large or small, will be hurt by this. Smaller operators could shut down, while large players may be able to absorb the losses for a while. The net result will be greater concentration and oligopolistic power in the market for wheat and flour.
The government should stop meddling in sectors in which private companies are eminently competitive. Its interventions in the farm sector should focus on restructuring the incentives that currently lead to overproduction of grain, underproduction of edible oil seeds, depletion of groundwater, erosion of soil quality, and production of crops far away from agroclimatic regions best suited to them. A prime example of this is sugarcane being grown in arid Maharashtra and not on the floodplains of Bihar.
A worthy intervention by the government in the farm sector would be to control stubble burning – a public good and a job that only the state can do. It should not cripple with irritational interventions markets that are working just fine.
