World – Coping with rising foodgrain prices
India needs to initiate a number of steps to manage the emerging situation.
After three consecutive good years, agricultural production has faltered in the last two years. There was a fall in production to the tune of 1.6 per cent in 2008-2009 compared to the previous year. This year, again, agricultural production is likely to be down by 2 per cent or more.
The deceleration in the growth of foodgrain production this year has particularly serious implications because it is mainly accounted for by a significant fall in rice production, and is occurring when world foodgrain output is likely to decline by 2.5 per cent.
India has sufficient stocks to tide over the current shortages, but unless the rabi production is substantially enhanced, there could be food shortages next year. This can be avoided by increasing production during the rabi season, which accounts for nearly half the cultivated area. The prospect for the rabi output has improved with the late onset of rain over large parts of India. There is, however, no certainty about the rabi output. In any event, in the current inflation-prone situation, immediate steps have to be taken to avoid any sharp rise in the prices of essential commodities such as foodgrains.
Although the prices of food items such as cereals, pulses, vegetables, fruits, eggs, and milk are all rising, the current rise is triggered by the rise in foodgrain prices that are already higher by 19 per cent compared to the same period last year. It is putting a serious strain on the food security of the poorer sections of society.
Macroeconomic policy measures — monetary or fiscal policy measures — alone will not prove adequate to contain this price rise. The fact that foodgrain prices had started rising significantly even when the rate of inflation was negative, indicates the need for sector-specific policies to influence the supply and demand of foodgrains in the short term.
A clearer picture on the supply side will emerge after a month or two when the final estimates of grain production are available. From all indications it seems there will be a major shortfall in the production of kharif rice and coarse cereals.
Even after taking into account likely gains in the production of ‘boro’ rice, the current year’s rice production is likely to be lower than the previous year’s, to the tune of 8 million to 10 million tonnes. With such a scenario, the psychology of shortages prevails in the market.
Measures have to be taken to augment supplies in the market. This could be done if the government inducts, through larger procurement, imports, or release from central stocks, an additional 7 million to 8 million tonnes of rice into the Public Distribution System (PDS) or into the open market.
In view of the current shortage in foodgrain production, too much reliance cannot be placed on additional procurement by public agencies. Even if they succeed in cornering larger quantities through procurement, that will result in crowding out the private sector from the foodgrain market. Imports could be the alternative, but that does not hold much hope as rice availability in the international market is not encouraging.
In this situation, the only viable alternative is for the government to release 7 million to 8 million tonnes of rice from Central stocks. This will discourage the private trade’s attempts to hoard, and dispel the psychology of scarcity.
The release of additional quantities of grain should be through the PDS; resort to open market operations should be avoided. In the present circumstances, the latter proposition could be risky. Over the period, there has been a distinct improvement in the PDS, particularly in the rice-consuming southern States of Tamil Nadu, Andhra Pradesh, Karnataka and Kerala. Among them they accounted for nearly 45 per cent of the PDS rice offtake in 2008-09. Attention should be paid to stop leakages from the PDS in the eastern and central States.
Simultaneously, the PDS demand should be contained without compromising the food security of the most vulnerable sections. Rice at Rs 3 a kg — or at a still lower price if the Central or State governments have made commitments under any poverty alleviation programmes — may be made available to BPL (Below the Poverty Line) families. However, the quantity of the foodgrains and the price at which it is made available to APL (Above the Poverty Line) households needs to be reviewed.
The price of rice for the APL should be closer to the market price, as it used to be. In the present circumstances there is no justification to supply foodgrains to APL families at one-third to half the market price. A system of universal PDS could be considered once the supply position becomes comfortable. Till then there should be targeted PDS for BPL and attention should be given to minimising errors of inclusion in, and exclusion from, the BPL category.
It is an opportune time to actively involve the State governments in the management of the food economy. The Centre by itself cannot cope adequately and effectively. The States should be given the primary responsibility in foodgrain procurement, storage and distribution, with the Centre taking the role of ‘lender of last resort’. In the past, whenever the proposal to shift the major responsibility for food management to the States was mooted, the States were found to be less than enthusiastic, for the simple reason that such a move was not backed by the resources required to manage the food economy. The States should be incentivised to perform the responsibilities entrusted to them, by extending financial support to carry out enlarged procurement operations, and for storage, warehousing and distribution of foodgrains.
The success of the measures to contain foodgrain prices will depend on coordinated steps being taken by the Centre and the States, on the one hand, and among the relevant State government departments (finance, planning, agriculture, civil supplies) on the other. The steering committee on agriculture in the Eleventh Plan has suggested that in order to ensure coordination among the States and the Centre to augment agricultural production, Zonal Production Commissioners may be appointed.
Similar arrangements should be made to monitor closely and concurrently food supplies in different States.It is equally important that effective arrangements be made at the State level to ensure coordinated action by the departments concerned with a high-level authority overseeing the food situation in the State and taking corrective action.
The steps already taken to maximise the production of rabi crops need to be accelerated. Emphasis should be placed on adequate and timely supply of seeds and fertilizers to the last man. This may be difficult in the case of seeds as adequate supply of quality seeds may not be available. Initially, attention should be paid to areas where there is larger potential. As a long-term solution, the defunct seed corporations in the States should be revived. The private sector should be given incentives to engage in quality seed production for cereals.In the case of fertilizers, incentives should be provided to the manufacturers of non-nitrogenous fertilizers and micronutrients.
Much will depend on timely and adequate supply of production credit. With the near collapse of the cooperative system, reliance has to be placed mainly on commercial banks. It has been found that though agricultural credit by commercial banks is increasing satisfactorily, the credit outgo to small farmers seeking loans of less than Rs. 25,000 is decreasing. This has serious implications for production also, as the borrowing capacity of the small and marginal farmers (who cultivate 40 per cent of the land) is not likely to be more than Rs. 25,000 each. The Reserve Bank of India should ensure that commercial banks adhere to the existing provision of 10 per cent loans to the weaker sections and that the marginal and small farmers are adequately represented within this limit. Also, these farmers should get their due share in the issue of Kisan Credit Cards.
Containing the rise in foodgrain prices is not a long-term agenda. Steps will have to be taken within the next few weeks, better still, within a few days.
(Dr. V.S. Vyas is Professor Emeritus, Institute of Development Studies, Jaipur. He is a member of the Economic Advisory Council to the Prime Minister. The views expressed are personal ones. He is at firstname.lastname@example.org)
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