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BW Businessworld

Before The Rot Sets In

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India runs a Public Distribution System (PDS) that is second in terms of size only to China, though the latter runs it much more successfully. 

The objectives of the PDS in India are multi-fold. The primary objective is to make available a certain quantity of foodgrain, mainly rice and wheat, at lower than their open market prices to those who are below the poverty line (BPL), both in rural and urban areas, both in surplus and deficit states. Therefore, the scheme is referred to as the ‘Targeted PDS’. Incidentally, even people above the poverty line (APL) are provided such foodgrain, but the quantity is relatively less and the prices higher than those charged from the BPL category. 

The second objective is to help control or stabilise the open market prices of these grains (rice and wheat) by increasing their supply through releasing some quantity from government stocks. These stocks could be called normal or usual stocks of foodgrain.

The purpose of maintaining buffer stocks is, however, to overcome the problem of scarcity of foodgrain in the event of uncertain production, which still largely depends on the vagaries of the monsoon. Buffer stocks are thus a safety valve that is supposed to help the government deal with a scarcity situation and ensure steady supplies of foodgrain. 

The third objective is to stabilise foodgrain prices by reducing the intensity of fluctuations.

In view of its experience of the market scenario with respect to both the supply of foodgrain and their prices over a period of time, the government has arrived at certain norms to determine the minimum level of such buffer stocks on a quarterly basis, that is, at the end of January, April, July and October. For instance, the minimum buffer stock of both rice and wheat taken together for April is fixed at 21.2 million tonne (7 million tonne of wheat and 14.2 million tonne of rice). On the other hand, the total buffer stock for July is fixed at 31.9 million tonne (20.1 million tonne of wheat and 11.8 million tonne of rice). This is the maximum for any month during the calendar year. 
Another reason for the huge buffer stock is that state government off-take from the central pool has been low
(BW pic by Sanjay Sakaria)

Since India is an agricultural economy, in which the marketing seasons, supply and price of rice and wheat play a particularly important role, the reasons for differential norms for different months are obvious.
 
Overshooting The Target
However, over a period of time, the issue of maintaining buffer stocks has come to pose certain problems. Let me first deal with the issue of food subsidy, for which one has to begin with the discussion of the economic cost.

Now, the economic cost of procurement of rice and wheat comprises their procurement (that is equal to their respective quantities purchased multiplied by their respective procurement prices) and all post-procurement incidentals that include cost of transport, storage of stocks including the buffer stocks, and those incurred on distribution.

Now the PDS prices, which are known as the issue prices (the prices at which foodgrain is sold through the PDS), are always lower than the economic cost, say, per quintal of rice or wheat. Thus, the difference between the economic cost and the total sale proceeds through the PDS amounts to food subsidy. 

Recently, three things have been noticed, and they are somewhat disturbing. 

First,  during the 10-year period from 2001 to 2011, the quantity of foodgrain distributed through the PDS as a proportion of the net availability increased from 8 per cent to about 22 per cent, averaging to about 15 per cent. This means the rest of the foodgrain is distributed through the open market and stored with the government in the form of normal buffer stocks as well as buffer stocks. But this also means that the buffer stocks (for that matter the entire PDS as a whole) are not used as a major instrument of stabilising foodgrain prices. 

Second, it is interesting to see, of late, the scenario on the size of buffer stocks. The Economic Survey 2011-12 shows that the actual stocks with the government have been far exceeding the minimum buffer stock norms. For instance, in January 2008, the actual stocks (191.87 million tonne) were less by 813,000 tonnes. In July 2009, the actual stocks (43.80 million tonne) exceeded the minimum buffer stocks (21.2 million tonnes) by 22.60 million tonne, while in both July and October 2010, they exceeded by 26 million tonne each. What is alarming is that the total reserve stocks with the government in July 2012 is 80.5 million tonnes.
  • Actual food grain stocks with the government have far exceeded the minimum buffer stock norms

  • During 2001-11, the quantity of foodgrain distributed through PDS as a proportion of the net availability went from 8 per cent to about 22 per cent

  • A sizeable part of the food subsidy is incurred in maintaining the buffer stocks and does not constitute the direct consumer subsidy

  • Increasing procurement prices have inflated food subsidy

One reason for accumulating stocks far in excess (and at present, even larger) of requirements is low off-take of grains from the central pool by state governments. 

The third reason is that continuous increase in the procurement prices of rice and wheat, sometimes substantially, has been a major factor contributing to the ever-increasing food subsidy. And procurement prices are rising mainly to compensate for the rise in cost of cultivation due to costlier input. For 2011-12, the budgetary provision was Rs 65,000 crore, which was later revised to Rs 72,800 crore. But the actual food subsidy has reached the level of Rs 95,000 crore. 

In view of the above mentioned facts, what is disturbing is that a sizeable part of this food subsidy is incurred in maintaining the buffer stocks (including normal stocks) and does not constitute the direct consumer subsidy. 

What’s even more intriguing is that successive governments have failed to create adequate storage capacity for reasons best known to them. So it is not surprising that some of the stock that is stored in open godowns without proper arrangement rots and gets wasted. 
 
It was in view of this that the Supreme Court had directed the government to distribute some portion of the stock to the poor and vulnerable sections of society free of cost rather than allowing it to rot away.
 
It is ironical that in a country where about one-third of the people continue to live below the poverty line simply because they do not have adequate purchasing power to buy foodgrain, the government is confronted with a problem of how to reduce the buffer stocks and thus reduce their carry-over costs, and finally reduce the food subsidy. 
 
To sum up, the government must find rational ways and means to drastically restructure the entire PDS with a focus on the buffer stocks policy. Mounting food subsidy, ever-increasing size of buffer stocks and their poor utilisation, large-scale poverty and hunger in the country and implementation of the forthcoming national food security programme — all these indicators make it imperative that the government take decisive steps in this direction. The sooner the better.

The author is Member of Parliament (Rajya Sabha) and former member of Planning Commission.
 
(This story was published in Businessworld Issue Dated 27-08-2012)