Tejinder Narang, ET Bureau Feb 2, 2012, 05.01AM IST
The charter of the proposed National Food Security Bill (NFSB) is reminiscent of the socialistic era from the 1960s through the 1980s where the state decided how much a person needed and at what price that should be made available, irrespective of the cost of production. That model of nationalisation of grain trade collapsed with the demise of the Soviet Union. Though the intent of NFSB is laudable, its foundation is neither based on sound economics nor does it take into account hazards of implementation.
For one, NFSB is an extension of the polluted distribution system - a realistic interpretation of the official public distribution system, or PDS - granting almost 65% population the right to access rice, wheat and maize at a minimum of 3-2-1 per kg, respectively, through central and state agencies. What is the basis of the 3-2-1 formula? Why not distribute all grains free? Why is the state encouraging parasitical tendencies for consumers on one side and promoting manipulative cravings for trade on the other side? The current BPL price of rice and wheat is 6 per kg and 4 per kg, respectively. Net additional subsidy for these two cereals is, again, (6 - 3 =) 3 and (4 - 2 =) 2 per kg, and, therefore, 'net subsidisation', per se from the existing base is marginal - but the critical concern is the ever-expanding spread between the economic cost of grains and 3-2-1 formula.
The current economic cost of wheat and rice is about 24 per kg and 16 per kg, leading to a net loss, or difference, of 21 per kg and 14 per kg. This spread will increase as the minimum support price (MSP) is hiked annually. Multiplicity of ration cards at the local level will thrive and rise exponentially. Beneficiaries of 'food security' will become retailers of these subsidised grains rather than consumers in the open market as most farmers and labourers in rural areas retain part of their agro-produce for personal consumption. Another channel of middlemen will become active aggregators for these rural retailers who will dispose subsidised grains either in the market or recycle them to state procurement agencies. A bulk of the benefit will accrue to a string of middlemen - a system that policymakers have been attempted to demolish (via FDI), but will be reinforced through this food security Bill.
Even if the Centre intends to buy additional 10 million tonnes of grain for NFSB, states such as Uttar Pradesh, Bihar, Chhattisgarh and West Bengal will remain bereft of any procurement at MSP due to lack of a viable mechanism. Procurement of these crops is predominantly done in Punjab, Haryana and Andhra Pradesh despite paucity of scientific storages. If the intention is to mop up grains in these states by engaging large corporates such as ITC, Adani, Pepsi, Hindustan Unilever and others, banks will first need to liberally finance them. Secondly, the purchase protocol will involve payment to farmers first followed by reimbursement from FCI or controller of accounts, and that would pose challenges. Corporates could be saddled with large arrears due to insufficient availability of funds in 'head of accounts', lack of compliance with procedures, complaints of payment below MSP, audit objections and so on, thereby constraining liquidity.
The availability of grains in the open market will shrink by extra procurement on government account as envisaged to the extent of 10 million tonnes. Logically, it should result in inflation, but no, it will be deflationary on account of much lower quotes offered by the intermediaries selling massive quantities of pilfered grains. It will be difficult for a genuine trader to survive when pushed to the brink by the 'subsidised forces'. They will be pressured to enhance bargain in the 'component of diversion'. Will government then set up a vigilance force to regulate that activity? The Lokpal Bill will be saddled with additional responsibility to track possible corruption under NFSB.
Historically, after almost every six years, India imports wheat due to poor agro climatic conditions. So far, import has ranged between 6-8 million tonnes and that can now cross 10 million tonnes when buffer norms and security reserves are revised upwards. Since India announces its import requirement well in advance, it will be a golden business opportunity for Cargil, Glencore, Louis Dreyfus, Toepfer, ADM, Concordia and others to sell wheat of Russian/Australian/EU/Argentinian origin at elevated prices on Indian shores with little storage capacity in the interior. The need to import corn due to its inclusion in NFSB cannot be ruled out. Multinational corporations all over the world will be thrilled to strategise by exploiting the urgency of Indian sovereign demand.
State intervention in cereals is likely to induce severe imbalance in the production of oilseeds and pulses, resulting in substantially outsourcing of imports in the coming years. The current level of India's import of edible oil is around 10 million tonnes and pulses three million tonnes. Import intensity will intensify at higher prices creating inflationary pressures, and net beneficiaries will be MNCs such as Bunge and Wilmar, in addition to the countries of origin like Malaysia, Indonesia, Brazil, Argentina, etc, for oil, and Myanmar, Australia and Canada for pulses. India will then be an active consumption market for such basic necessities of food. Vegetable production too may be affected - pushing food inflation further.
The NFSB is a political master-stroke, but its economic viability and detailing of delivery could pose challenges. These have to be factored in before it is made a law.
