INTERVIEW 29 Jan 2011
The deputy chairman of the Planning Commission says the food supply chain needs to be smoothened
Last year, around the same time, Montek Singh Ahluwalia and many other experts predicted that food inflation would moderate by 2011, following a good monsoon and rabi crop. 2010 saw a good monsoon and rabi crop. Yet food prices have remained stubbornly high. Ahluwalia, who also heads the committee on PDS reforms, talks to BW’s Anjuli Bhargava on all this and more.
Excerpts:
Excerpts:
Last year, about this time, three committees were formed to tackle inflation directly or indirectly. One was to look at ways of increasing agricultural production, another on the gap between farm and retail prices and the third was on streamlining the public distribution system. What happened to these?
I can speak about the committee I was heading. We have met twice and we are finalising the report now. We are focusing on the issue of public distribution system (PDS) reform and not on how much should be provided – National Advisory Council (NAC) wants one thing, the Rangarajan committee (on food security) another. What we are focusing on is the method of delivery of the subsidy. We are going to pose these options before the chief ministers and see if we can come to some agreement.
What are the options?
The PDS, at the moment, operates on the assumption that there are certain commodities for which you want to lower the price so that they are available at that price up to a certain quantity. That is effectively an income transfer to the recipient.
There are many ways of delivering this. The present way of delivery (state agencies uplifting grain from the Food Corporation of India) creates a very strong incentive to filter it. One, people filter it, and then simply claim it hasn’t come. But if you make the PDS a legal entitlement as envisaged by the Food Security Act, the grain will be delivered. The second way of filtering it is by adulteration. You just pull out 30 per cent of the rice or wheat and put in kachra. How do you prevent that? You would have to start policing every end of the transaction, and we know how good we are at policing.
The alternative is that we do not move the rice or wheat at subsidised prices. We move it at a market-related price. If the MSP of wheat is, say, X, we move it at a price quite close to X. So, then the incentive to pinch and sell it in the open market almost disappears. How do you deliver the benefit? Let all beneficiaries be given a smart card or any other electronic entitlement. They can use that in a PDS shop for credit against purchase of wheat and rice. This has the immense advantage that the money is going directly to the person so they know the kind of benefit they are getting. Secondly, the incentive within the PDS system to move out the grain goes down quite a bit. And when a shop owner knows that everyone’s card is credited on, say, the first of the month, he will actively seek out card holders and ask them to take their entitlements from his shop.
In principle, the electronic card should be usable across fair price shops. Today, your ration card fixes you to a particular fair price shop. Shopkeepers would compete with each other to deliver a product. I would go a step further and say that we can even notify other eligible commodities that can be made available through these shops. If a small farmer is already growing his own wheat and rice, but would like to have the subsidy to buy, say, vegetables, pulses and edible oils, there is no reason why you can’t authorise the fair price shops to allow them to use the card against these items also.
At what level has this idea been discussed so far and when can we expect a decision on it?
This will not go to the Cabinet. The fair price shops are run by the chief ministers so the idea is being discussed by the committee that I am chairing. Unless the states agree to it, we can’t change.
Internally, it matters a lot how you draft the Food Security Act. If you make it a legal obligation that you must give me wheat at Rs 3, that is very different from saying that you will provide me with a fungible subsidy that would enable me to buy the wheat at a certain price. The law must build this in as an option.
There are a lot of people who are unhappy with this kind of cash-for-food transfer because they feel that this is like saying we give every household that needs a subsidy a certain amount of money per month and then forget about it. That is not what we are saying. What we are saying is that we will procure through the PDS and you will have wheat and rice available through the fair price shops and the subsidised people can use the card to buy rice and wheat up to a certain quantity from these shops at a market-related rate. It is very different from a cash transfer and it delinks the subsidy from the item.
As far as the government goes, even the NAC has said let us experiment. I think there is an open mindedness about it. I don’t think we can immediately switch but I am very much in favour of this kind of experiment. But for even that to happen, the law must facilitate it. What I am saying is that if the law says I must give you wheat at Rs 2 or 3, then I am not going to give you any cash credit.
Does the Prime Minister have a view on this?
Well, I have discussed it and he has not instructed me not to explore the idea. But the Prime Minister will obviously take a view based on consensus. And I don’t think there is any consensus on it. Many chief ministers don’t like it because the subsidy will come directly from the central government. I think this will have to be taken on board by the Centre.
Is there now any agreement on the number of people below the poverty line (BPL)?
We have a Planning Commission estimate of an average is 37 per cent (rural is slightly higher and urban slightly lower). If the country does not like it, we are free to increase the number. But as things stand, the Planning Commission is the only body that formally indicates the percentage of people who are BPL.
We had set up a committee under Professor (Vijay) Tendulkar to take a look at the poverty numbers. And the Cabinet has now approved it is a new estimate of poverty. Look, you can always raise the poverty line. It is not our view at all that if you are above the 37th percentile you deserve no support. You still deserve support for education, health and production-related activity. My personal view is that if you are above the poverty line, you don’t really need a food subsidy.
If you are asking me the question how many people are going to be covered under the PDS under the new Food Security Act, the government will never do less than this but it could always do more. We have suggested a margin of error of 10 per cent (and this is what we have suggested to the NAC also), so the 37 per cent becomes 41 per cent. What the NAC has suggested in their priority group is 41 per cent. But, of course, they want to go beyond that. They believe that some kind of lower subsidy should be given to up to 75 per cent of the population.
I don’t want to be in this controversy that the newspapers are building up. Rangarajan committee has taken a very sensible line. They have said you should limit the subsidy to what you are likely to procure. If you legally commit to more than that, you will be forced to import. And it will be politically disastrous and economically very questionable if you import at a price which is higher than the price you pay your own farmers, which is clearly not the intention.
What is the agriculture minister’s view on some of these matters?
Well, that you will need to ask him directly. But let me put it this way. The Rangarajan committee is an inter-ministerial group but the members included the member secretary of the Planning Commission, chief economic advisor Kaushik Basu, the secretary of the ministry of agriculture, the food and civil supplies secretary. Now, the government has to take a view. We have to see whether the NAC takes a view on the Rangarajan committee.
What do you think went wrong with food prices? Despite a good monsoon and decent rabi crop, food prices have tended to remain high - contrary to what all experts predicted around the same time last year.
Last year, the big problem was cereals and we were pretty confident that cereal prices would moderate, and quite frankly those have moderated. Rice prices are below what they were a year ago and wheat prices are just a few percentage points higher.
What we did not anticipate is this very unusual spike in certain vegetables, particularly onions. I think this is due to unseasonal rains and this is a three-month crop. You may well ask why unseasonal rains in one part of the country should affect the overall crop. There was a basic supply shock, and I think it reflects the fact that we don’t have adequate amount of cold storage and we don’t have a very good distribution system.
I don’t want to be in this controversy that the newspapers are building up. Rangarajan committee has taken a very sensible line. They have said you should limit the subsidy to what you are likely to procure. If you legally commit to more than that, you will be forced to import. And it will be politically disastrous and economically very questionable if you import at a price which is higher than the price you pay your own farmers, which is clearly not the intention.
What is the agriculture minister’s view on some of these matters?
Well, that you will need to ask him directly. But let me put it this way. The Rangarajan committee is an inter-ministerial group but the members included the member secretary of the Planning Commission, chief economic advisor Kaushik Basu, the secretary of the ministry of agriculture, the food and civil supplies secretary. Now, the government has to take a view. We have to see whether the NAC takes a view on the Rangarajan committee.
What do you think went wrong with food prices? Despite a good monsoon and decent rabi crop, food prices have tended to remain high - contrary to what all experts predicted around the same time last year.
Last year, the big problem was cereals and we were pretty confident that cereal prices would moderate, and quite frankly those have moderated. Rice prices are below what they were a year ago and wheat prices are just a few percentage points higher.
What we did not anticipate is this very unusual spike in certain vegetables, particularly onions. I think this is due to unseasonal rains and this is a three-month crop. You may well ask why unseasonal rains in one part of the country should affect the overall crop. There was a basic supply shock, and I think it reflects the fact that we don’t have adequate amount of cold storage and we don’t have a very good distribution system.
India has the least well-organised farm-to-retail network in East Asia. We don’t have enough organised/modern corporate interest in this. And one of the main reasons why we don’t have that is this horrendous Agricultural Produce Marketing Committee (APMC) Act which says that farm produce can only be sold in a mandi. So, if I have a big retail outlet or I have linked up with a big retail outlet, I cannot tie up individually with farmers easily. Unless you amend this Act, I can’t tie up directly with you and tell the farmer, you don’t go to the mandi, I will buy directly from you and transport directly (which would reduce wastage).
Today, what is happening is that they are giving them year by year exemptions. Some of the larger retail chains that are marketing fruits, vegetables and other agricultural produce get a year-to-year licence to do this. Who will invest a large sum of money if you are dependent on a yearly licence which you may or may not get?
How it works today is that the commission agents takes the produce to the mandi and sells it on behalf of the farmer (the farmer never even knows what price he is getting). In mandis, the nature of price discovery is very opaque. The agent pockets the difference and typically he is also lending money to the farmer so he deducts all that and the farmer gets very little.
In some states, they are permitting contract farming where the retail vendor ties up directly with the farmers and buys their produce (which is of certain specified quality) at a certain price. They often give farmers the seeds or even pesticides and so on, which improves productivity. But who is going to invest in a cold chain infrastructure, refrigeration, storage and transport on a year-to-year basis?
That’s why I have suggested that state governments exempt horticultural produce – fruits and vegetables – from the APMC. More so, because these are perishable. I mean, if I have to sell my rice in a mandi, it can be handled. Rice can be stored and sold in a mandi. But in the case of fruits and vegetables, if they are badly handled, they deteriorate massively. We have been talking about this for a while, but we don’t seem to be able to get it done due to resistance from state governments. Some like Nitish Kumar of Bihar have abolished the APMC.
How has the UPA I and UPA II fared on agricultural reforms?
Well, I would say that they reflect gradual progress. All our reforms represent gradual progress. But let me list for you what has been done during this government’s tenure. Many of these reforms lie in the hands of states so we can only encourage them, set out model bills and so on.
But one of the things we have done is increase the pace of investment in agriculture. The rate of agricultural investment as a percentage of agricultural GDP has gone up during UPA I and II. We have put more money into rural agriculture-related infrastructure, which includes irrigation and rural roads. The Pradhan Mantri Gramin Sadak Yojana is doing well and it is a reflection of this emphasis.
Then, the food security mission — where one is trying to increase agricultural production from the North-east to get the next burst of food, whereas Punjab can move into more high-value agriculture — is working well.
We have introduced a new scheme called the Rashtriya Krishi Vikas Yojana, which actually gives the states a lot of flexibility. It says here’s the money, you tell us what your agricultural priorities are and use the money for that whereas the other schemes restrict use of the funds.
But has the money been used?
Yes, it has. You can ask the question how well but it has been used. Of all the schemes, this is the one the states like the most.
In addition, we have tried to encourage contract farming. We have tried to get them to amend the APMC. The domestic retail chains have been encouraged but it is not on the scale for a quantum transformation.
When we talk of the second green revolution now, what do we mean?
Well, it means different things. The first green revolution was based on heavy use of chemicals and pesticides to a certain type of seed of which people now take a dim view. It is desirable to move away from chemical-based production.
Second, earlier it was very water intensive. Now it means a sustainable green revolution without such heavy use of water.
We are not talking about the quantum of production?
We are. When the NDA-led government was in power, agriculture production was growing at 2 per cent. By the end of the next year, we think agricultural production will be growing at 3.5 per cent. We want to achieve 4 per cent.
How do you see inflation panning out? For the first time it seems to be affecting everyone - the rich and the poor.
I think, in general, inflation is on its way down except for the spike. But you are right. There’s no doubt that now everyone is feeling it. Certainly for fruits and vegetables, milks, eggs and protein-rich foods, prices are high and rising. But don’t forget that this is a reflection of the growing purchasing power. But when I talk to cooperatives, they say, for instance, farmers are bringing less milk. And when you ask why, they say he is doing well; he is earning money through NREGA anyway; one of his sons has migrated to a city, and so they are drinking the milk at home. They are feeding it to their own children. What this means really that you need a production response on milk, eggs, fruits, vegetables and so on.
How do we do that?
That is, in a way, the second green revolution. We cannot keep flogging rice and wheat. Unfortunately, the vast majority of chief ministers are not driven by the conviction that if they get their agricultural policies and reforms right, they will benefit over 50-60 per cent of their electorate. They are much too focused on subsidies, handouts and so on.
(This story was published in Businessworld Issue Dated 07-02-2011)
