Business Today

The coming grain glut

From shortage to surplus—bordering on glut—government actions and policies yet again play havoc with India’s food grain economy.

Shalini S. Dagar | Print Edition: May 3, 2009

As on April 1, The Food Corporation of India (FCI) was sitting on combined wheat and rice stocks of more than 35 million tonnes—well in excess of buffer or strategic reserve requirements. Worse, it is readying to buy around 20-24 million tonnes of wheat by May end. So, why is the FCI building up so much of surplus in its godowns? Especially since for every tonne of food grain that the FCI holds, it spends an average of Rs 2,100 as storage cost every year.

FCI, which buys food grains from farmers on behalf of the government, has no option. Instead of being a buyer of the last resort, which is its mandate, it has almost become buyer of the first resort. Farmers are queuing up at its gates to sell their produce—a symptom of things going horribly wrong with India’s agricultural markets. These symptoms were visible to the government for months, but it chose to do nothing. Not even in the face of a ballooning food subsidy, which stood at Rs 43,627 crore in February estimates, 33 per cent higher than the budgeted figure.

“To us, the glut was visible several months ago,” says Ashok Gulati, Director in Asia, International Food Policy Research Institute (IFPRI). He, and other experts, had been urging the government to remove restrictions imposed on private trading in agricommodities. Imposed in the wake of high inflation two years ago, these curbs include limits on the stock private traders can hold, ban on exports of agri-commodities and ban on futures trading in several produce. Even when they were implemented, the efficacy of such measures was questionable. Continuing with them as a glut became imminent was nothing short of engineering the crisis. Worse, food price inflation still stands in double digits, notwithstanding the surplus.

Not only does the surplus impose holding costs on FCI, but it may also lead to enormous wastage. FCI will either have to leave the procured wheat with state agencies and shell out additional carrying cost or store it in the open under plastic sheets. The mountain of grain sends out price signals to the market. Traders who burnt their fingers when the government clamped down on them aren’t ready to buy yet. S. Sivakumar, head of agri-business at ITC, one of the largest private buyers in the market, says: “Policy actions typically have implications far beyond the current season. Government actions of past two years crippled the ability of the private traders to participate in large volumes this year despite curbs being lifted.” The head of a major global trading company agrees: “We lost a lot of money due to the government’s actions and it has demoralised the trading community.”

Director (Asia), IFPRI
Ashok Gulati
Anyways, the government seems to have priced private players out of the market. The minimum support price (MSP) of major crops has risen by 30 to 90 per cent in the past two years. Private traders also have to pay sundry taxes that add about 11 per cent to their cost. The current MSP of wheat—Rs 10,800 per tonne—is not only higher than global prices, which means excess can’t even be exported without a subsidy, it’s also more than open market prices in some states.

If exports were allowed even a few months ago, the situation could have been better. Now, even that route will cost money as global prices slide down and Indian wheat becomes dearer than that shipped from overseas. Estimates show that the government will have to fork out a subsidy of $50-100 (Rs 2,500-5,000 at current rates) per tonne to make exports viable.

Another option was to give a big quantity of food grains through social security schemes such as the National Rural Employment Guarantee. Of course, political parties battling it out for General Elections 2009 have a more populist solution—wheat and rice at Rs 2-3 per kilogramme for families below the poverty line. Such prescriptions raise the hackles of experts like Gulati who believe that such populist measures skew the price scenario for the farmer to a very low level. A more efficient and sustainable option, of course, is food coupons for the poor, but that is on no political party’s agenda.

Meanwhile, as India subsidises production, consumption and even exports, the burden on the national exchequer increases. If the trends at the beginning of the financial year 2009-10 are anything to go by, the food subsidy bill will rise even higher. Spending is not only large, it’s inefficient. According to a recently released Global Hunger Index, India ranked 66 out of 88 countries, and has more people suffering hunger—above 200 million— than any other country in the world. Ultimately, policy foresight is needed. Simple it might seem, but it means tough political battles and the will to stay the course. Tall order? You bet, it is.

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