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BW Businessworld

An Extortion Racket

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One wishes wheat were that cooperative. South Indians, used to rice, were confused when they first saw wheat in the 1950s. India was short of foodgrains, the government of India had got a gift of wheat from the United States, and it was sent straight from ships to ration shops. South Indians thought it was an inferior kind of rice. They boiled it and ate it. Actually, wheat can be eaten boiled; the British sometimes eat it as a salad. But to be eaten boiled, it has to be uniformly tender. Otherwise some of its grains may remain hard, and eating such half-cooked wheat will give one a stomachache. So nowadays, even the most uneducated south Indians eat pancakes made of wheat, which north Indians call rotis or chapatis, and Gujaratis call rotlis. They do not make these flat round things straight out of milled wheat. They usually remove chaff-milled skin of wheat — from the flour by shaking it until the lighter chaff rises to the top and can be skimmed off. The flour that remains is whiter and finer; the flat round things made from it disintegrate more easily in the mouth, and have a somewhat different taste.
In the belief that it is thereby giving the country “food security” and protecting poor people from starvation, our government buys up much wheat and rice and gives it to Food Corporation of India, one of its most corrupt daughters as proved by Kirit Parikh before he became a government servant. It distributes some of the grain through ration shops, which are supposed to sell it only to “poor” people possessing ration cards at low prices. Quite a good deal leaks into the open market, and politicians and traders illegally earn the fat margins between the ration and the market price.

The market gets the difference between farmers’ surplus and what the government buys off from it. This surplus is quite large in rice, since the country grows more rice than the government can sell through its ration shops and generally more rice than the country can consume; the difference is exported. In wheat, though, what is left for the market is less than what people are prepared to buy.
Since the government buys from farmers at prices much below the market price, FCI could make huge profits by selling its wheat in the market. But as I said, wheat cannot be eaten; it has to be turned into flour. So FCI sells to wheat millers. The government would like to maximize its own profits, so it makes FCI auction the wheat it sells to millers. It would like the smallest miller to get a chance, so it has forced FCI to auction the wheat in lots of 1,000 tons. But an auction would deprive FCI officials of bribes. So they delay issue of tenders; and once the wheat is auctioned, they delay its delivery. The bribes they can get depend on the difference between the tender price and the market price. So FCI officials keep watching the market prices, and try to auction wheat when market prices are high.
The government has given up the power to regulate wheat imports. So if FCI starves the millers of wheat, they simply get a shipload or two from Australia. When it arrives, market prices come down, and FCI officials are back to square one. The net effect is that the bribe rates are much below FCI officials’ asking rates, FCI is not managing to sell all the wheat it could in the open market, and imports are greater than they would be in the absence of the government’s wheat purchase operations.
One solution would be for the government to dismantle the public distribution system, which enriches politicians and intermediaries more than it benefits the poor. Precisely for that reason, it will not happen. The next best solution, which the government should consider, is for it to stop privileged purchases from farmers, and to buy the wheat it needs for the public distribution by tender every month; it will then get the wheat at the lowest price.

The author is Consultant Editor of Businessworld.
ashok dot desai at gmail dot com
(Businessworld Issue Dated 17-23 March 2009)

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