Food procurement policy

FOOD PROCUREMENT POLICY
The Indian government’s food procurement policy is geared to achieve the twin objective of serving consumers through price subsidy and supporting the price for producers.
The major elements of the food policy are:
Ø Procurement of grain at Minimum Support Prices (MSP).
Ø Maintenance of buffer stocks.
Ø Distribution at subsidized rates through the Public Distribution System (PDS).

The Government of India (GoI) allocates states to grain at Central Issue Price (CIP) for distribution to consumers. The Food Corporation of India (FCI), an agency of the GoI, handles procurement, storage, and transportation of grains to states. The state in turn distributes to consumers at subsidized prices of a network to more than 460,000 Fair Price Shops (FPSs). The ‘food subsidy’ comprises the cost of procurement incurred by the GoI net of sales realization (for rice, wheat and sugar) and the carrying costs for maintaining the central pool of buffer stock incurred by the FCI reimbursed by the GoI.

The policy is effective for rice and wheat in major surplus states. For wheat, the government offers to buy all grain that comes forth for sale at the announced MSP. In the case of rice, part of procurement is in the form of paddy at the MSP, which is custom milled at the rest, which is the major part, is procured as rice in the form of a statutory levy imposed by all major rice- producing states on rice millers/dealers. The levy percentage varies widely from 10 percent in Pondicherry to 75 percent in Haryana, Punjab, and Orissa. Rice millers are paid levy rice prices fixed by the state government. The Commission for Agricultural Costs and Prices (CACP) recommends levels at which the MSP should be fixed on several considerations. These include cost of cultivation, the overall shortage of grains as reflected by the trend in wholesale prices, and the need to keep in check the rate of inflation in the consumers’ interest.

Apart from supporting farmer’s prices the government’s policy of procurement helps supply grain to the PDS, the scheme to distribute subsidized grain to consumers. In order to reduce the budgetary costs of these schemes well as to direct subsidy mainly to the poor, the government shifted from a universal PDS to as Targeted PDS (TPDS) in 1997. However, in general the TPDS suffers diversion of grain to the open market due to lack of transparent and accountable delivery systems. The move by the government to decentralize the procurement and PDS operations to states is in part meant to rectify these problems.

CRITICISMS
The policy has come under criticism not only for increasing the fiscal burden that it causes but also for administrative inefficiencies and creating market distortions.
Fixing of the MSP to cover the full cost of cultivation imposes a heavy burden on the government’s finances. Although the MSP is fixed supposedly based on a cost – formula, the actual priced offered in practice is higher and influenced by high expectations of rich farmers represented by politically strong farm lobbies.
The high and rising MSPs provided by the GoI for wheat and more recently for paddy increased profitability of these crops and motivated farmers to shift greater areas to these crops from coarse cereals, pulses and oilseeds.
Moreover, the income transfers accrued disproportionately to large farmers confined mainly to surplus states.
The policy also led to an accumulation on buffer stocks of grains and the credit blocked in these stocks put pressure on interest rates and possibly crowded out more productive investment.
These adverse fiscal and environmental implications led to increased recognition of the need to reform farm support policies.

SUMMING UP
Ø Large shift to rice and wheat from cereals, pulses and oil seeds.
Ø Skewed income transfers
Ø Price distortions in the output market
Ø Environmental costs
Ø Accumulation of buffer stocks of grains
Ø Blocking of credit that puts pressure on the interest rates that crows out productive investments.

SUGGESTIONS
Ø Reduce the MSP
Recommendations were made to reduce the MSP so that it served as a price stabilization mechanism and not an income guarantee to farmers and to cover only the variable costs, namely the costs of inputs and wages (including family labor). The High level Committee on Long-term Grain Policy examined the cost effectiveness and liabilities arising from some alternative programmes to support farmers to lieu of the MSP scheme.
Ø Removal of both the rice levy and restrictions on grain trade
Among other things, the Committee proposed removal of both the rice levy and restrictions on grain trade, limiting their use to emergencies.
Ø Encourage private participation
In the last few years, the government initiated steps to encourage private participation. The role of FCI is proposed to be restricted to timely sales and purchases to maintain stability in food prices.
Ø Promotion of exports
As part of the new strategy, the government plans to promote exports through long term credit, removal of export restrictions, establishment of Agricultural Export Zones (AEZ), and transport subsidies for export of wheat and rice from government warehouses.

1) In order to take full advantage of growing exports, the exporters would need better ports and other domestic infrastructure facilities, which are currently very meagre.
Undertaking reforms in these areas would allow India to take on competition from major exporting countries such as Vietnam and Pakistan for rice and the United States for wheat.
2) Domestic marketing reforms also need to be undertaken so that there is one integrated market for food within India and restrictions do not prevent inter-regional flows in a timely and efficient manner.
3) The private sector should be allowed to operate more freely in the market and to trade and store grains based on its expectations from the market.
4) The public sector needs to play a facilitating role by providing the appropriate economic environment and creating a level playing field for private operators and traders.
5) Several government committees have recommended the abolition of statutory and non-statutory charges such as MANDI charges and purchase tax to reduce transaction costs and encourage free movement of grains domestically.
6) The high costs of maintaining public stocks can be reduced through encouraging private storage, which plays a complementary role to public storage.
7) Support price should not be fixed at unduly high levels. The level of the MSP should be such that it provides protection against distress sales during surplus situations and not a guarantee for fixed returns on the cost incurred.
8) The cost of operation of the FCI can be reduced by decentralizing procurement to local market, carrying out storage operations at state levels, and by avoiding cross-hauling of grain that takes place in the current centralized system.
Reforms to the GoI’s food procurement policy in these directions would help achieve in its twin objectives more efficiently.