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Cereal prices soar as the government stockpiles grain

Cereal prices soar as the government stockpiles grain

In April, government's granaries had a stock of 59.6 million tonnes of foodgrain, mainly wheat and rice, which was almost three times the stipulated buffer needed to meet shortages.

A problem of plenty: The government has abundant cereal stocks A problem of plenty: The government has abundant cereal stocks
On a recent Friday afternoon, the conference room in the New Delhi office of the Earth Sciences Ministry was bursting at the seams with journalists. Struggling to make his way into the room, S. Jaipal Reddy, Earth Sciences Minister, joked that one would think a sensational political development had led to the congregation. It was actually the season's first official forecast of the south-west monsoon.

The monsoon is expected to be normal. "In terms of forecasts, we are more confident than the previous year," said Laxman Singh Rathore, Director General of Meteorology, India Meteorological Department. The south-west monsoon accounts for about 70 per cent of India's annual rainfall and has a big impact on the production of rice and maize.

Even as Rathore was taking journalists through the mechanics of his forecast, another meeting was underway in Delhi to deal with a crisis. A crisis of plenty. Executives of state-owned Food Corporation of India were meeting agriculture ministry officials as their granaries were overflowing even as last winter's wheat harvest was still flowing in. FCI largely buys rice and wheat from farmers at government-set prices and stores it for subsequent distribution.

Indeed, south-west monsoons have been normal since 2010, the reason why granaries are brimming over. But ironically prices of cereals such as rice and wheat are escalating, defying the general trend of softening inflation.

Cereal inflation was 4.64 per cent in March 2012. In its latest reading, March 2013, inflation was 18.36 per cent. In April, government's granaries had a stock of 59.6 million tonnes of foodgrain, mainly wheat and rice, which was almost three times the stipulated buffer needed to meet shortages.

"Excess procurement is leading to an artificial scarcity," says Madan Sabnavis, Chief Economist at credit rating agency Credit Analysis & Research Ltd, explaining that the scarcity is driving cereal inflation. Elevated food prices have a spillover effect on the rest of the economy, making monetary easing difficult for the Reserve Bank of India.

A few years of high minimum support price (MSP) - floor price at which government buys all the wheat and rice offered by farmers - has led to the massive procurements. This, however, has not been followed through with regular releases into the market.

"Markets are totally distorted," says Ashok Gulati, Chairman of the Commission of Agricultural Costs and Prices, the government body which recommends MSP.

Indeed, the MSP for farmers has been steadily rising. For paddy, the MSP increased from a level of Rs 1,000 for 100 kilogrammes in 2009/10, to Rs 1,250 in the last season. For wheat, it increased from Rs 1,080 for 100 kg to Rs 1,350 in the ongoing procurement.

"Foodgrains sector is bound by MSP," says P.K Jha, Additional Secretary in the consumer ministry's Department of Food and Public Distribution.

Typically, the central and state governments between them buy around half the rice and wheat stock sold by farmers. Procurement of foodgrains, which was 56.7 million tonnes in 2010/11, increased to 63.3 million tonnes the next season. "Stock in the market is important, not the total stock," says V.S. Vyas, an economist with the Prime Minister's Economic Advisory Council. The council has been urging the government to increase market supply.

The procurement is largely carried out in a few states, while rice and wheat are sold across the country. There is then a case for procurement to meet the cereal demand across the country, but stockpiling is the real problem, say experts. "If you don't have a roadmap of distribution, you are stuck," says Himanshu (uses only one name), an economist who teaches in New Delhi's Jawaharlal Nehru University.

There are no clear reasons for the stockpiling. The main conduit for distributing the grain is ration shops that make up the Public Distribution System (PDS). The finance ministry has been wary of adding to the food subsidy bill by pushing more grain through PDS as it has proved politically impossible to increase the issue price of grain over the last 11 years. While the grain has been sold at the same issue price, the cost of procurement has increased on account of escalating MSP and storage cost.

The problem does not look like it will end soon. In the last year of the United Progressive Alliance (UPA), few expect a change in the MSP policy. "We are not going to see the situation changing till 2014," says Himanshu.

However, Himanshu and officials are hopeful that the passage of the Food Security Bill in Parliament will force the government to offload its stockpiles through the PDS. Once grain begins to flow into the market, cereal inflation may begin to taper in the short to medium term. In a strange twist, the Food Security Bill is beginning to look like this year's food inflation buster.



The Reserve Bank of India has made three monetary policy announcements in 2013 and it has cut interest rates by 25 basis points (one basis point is one-hundredth of a percentage point) in each one of them. Governor D. Subbarao's policy speech on May 3, however, conveyed a sense of futility about the central bank's ability to spur economic growth. "Recent monetary policy action, by itself, cannot revive growth," he said. Evidence increasingly points to the need for the Union and state governments to pull their weight in reviving sentiments and boosting economic growth. RBI's approach to loosening monetary policy through either interest rate cuts or infusing liquidity started in January 2012. However, the impact on the economy has been muted.

The economy is expected to grow by five per cent in 2012/13, according to statistics ministry's estimates. The RBI expects it to expand 5.7 per cent in the current financial year, lower than the finance ministry's projection of 6.1-6.7 per cent. "It (monetary policy) needs to be supplemented by efforts towards easing the supply bottlenecks, improving governance and stepping up public investment," said Subbarao. The slowdown in growth and softening oil prices have reduced the threat inflation posed to the economy. However, RBI remains wary of food inflation. Subbarao identified food price pressures and upward revisions in minimum support price to farmers as factors that could undermine the efficacy of monetary policy.

Published on: May 07, 2013, 5:49 PM IST
Posted by: Surajit Dasgupta, May 07, 2013, 5:49 PM IST