“Foodgrains Policy and Management in India: Responding to Today’s Challenges and Opportunities”
Citation: Ganesh-Kumar, A., A. Gulati and R.
Cummings Jr. 2007. “Foodgrains Policy and Management
in India: Responding to Today’s Challenges and
Opportunities”. Report submitted to the International Food Policy Research
Institute, Washington D.C. PP-056, Indira Gandhi Institute of Development
Research, Mumbai.
Executive
Summary:
Indian
public foodgrains management, perhaps still motivated
by the experiences of the 1960s to attain and maintain self-sufficiency in foodgrains to achieve food security, has outlived its’
usefulness. The government successfully used foodgrains
price stabilization as a major policy instrument when it embarked on promoting
the Green Revolution. However, times have changed: policies and public agencies
that may have been appropriate forty years ago are not necessarily optimal
today. Private markets and institutions have strengthened significantly – or
could be strengthened significantly – and should be entrusted with many of the
functions that parastatals, or other government agencies, have traditionally
performed. Holding on to old practices delays reaping the benefits that
changing current policies have to offer.
1)
Indian
foodgrains policy can be traced back to World War II,
when a series of food price control conferences were held by the colonial
British administration in response to a sharp rise in foodgrains
prices. The Bengal Famine of 1943 accelerated the scope of public intervention.
2)
Today’s
foodgrains policy had its origins in 1965 when the
need to disseminate high-yielding varieties and ensure low-priced food to
consumers led to the creation of the Food Corporation of India (FCI) and the
Agricultural Prices Commission (APC). Unprecedented consecutive severe droughts
in 1965-66 and 1966-67 necessitated massive emergency food aid imports and
subsequently expanded the scope of the FCI to include monopoly control over
imports, mandatory levies on rice, and preferential credit and transportation
access to the public sector.
3)
These
actions, combined with successful dissemination of Green Revolution varieties
supported by committed government development investments (and we stress the
importance of government commitment), significantly improved food security in
the country and paved the way for today’s successful development.
4)
Even
as supply of foodgrains improved and the country
turned self-sufficient, demand has not been keeping pace, due both to a decline
in the share of expenditure on food and to the dietary diversification towards
non-grain food items, both of which are to be expected with rising income
levels.
5)
Simultaneously,
there has been a sea change in the overall economic policy environment, both
globally and domestically. Following the Uruguay Round of trade negotiations
and the setting up of the World Trade Organisation the global trade regime is
far more liberal today.
6)
India
too has liberalised its trade policies significantly, both as part of her
international commitments but probably more on her own as part of the overall
economic reforms that the country has embarked upon. Underlying these reforms
is recognition of the role and importance of market forces and the private
sector, and the need to reduce and re-orient government’s role in order to
achieve a higher, sustainable, and more-inclusive growth rate.
7)
While
trade policies became liberal, domestic foodgrains
management continues to remain the same, dominated by public intervention. Over
time, the costs of the stabilization policies and the institutions implementing
the policies have risen and the benefits have declined. The costs for
procuring, distributing, and buffer-stocking foodgrains
have sky-rocketed, reaching Rs.262 billion in 2005/06. Increasing budget
demands for price stabilization are crowding out investments in areas of higher
economic return.
8)
Yet
the government continues to offer price support at a level that guarantees high
returns for wheat and rice. Guaranteed high returns for wheat and rice and
their assured procurement discourage diversification – the alternative – for
which both production and price risks are high. The dominance of the public
sector discourages the development of the private marketing sector which can
promote diversification.
Experiences
of Punjab and Andhra Pradesh:
9)
The
Punjab provides one example of the benefits and costs of the public market
intervention (and subsidies) from which lessons can be learned. Spurred by
industrious farmers and benefiting from extensive irrigation (90 percent of
cropped area compared to 40 percent for all-India), high fertilizer use (double
all-India average), high tractor density (104 per thousand ha compared to 22 at
all-India level), abundant roads (twice the all-India density), good markets
(during harvest, farmers can typically find a purchase centre for foodgrains within 8-10 kilometers, by far the best market density in
the country), and increasing communications (especially cell phones and
computers), the state has increased wheat and rice production. Despite
comprising less than 2 percent of the country’s area, the Punjab contributed
over 20 percent of national wheat production and over 10 percent of national
rice production in 2003-04 and a significant portion (57 per cent for wheat and
38 percent for rice) of grains to the central pool for public distribution.
However, costs have skyrocketed (during 1996-2000 the difference between the
minimum support price (MSP) and C2/full costs averaged 36 and 26 percent
respectively for wheat and rice), water and fertilizers are being used above
economic levels, yields are stagnating (rice) or slowing perceptively (wheat),
and environment deterioration is growing. The degradation is largely due to
early sown paddy cultivation, groundwater levels are falling at a rate of
almost one-quarter meter per year in the central zone; large areas are being
lost to salinity and water logging, especially in the south-western cotton
zone; fertilizer, especially nitrogen, is being used at levels exceeding
recommendations, contributing to imbalances among nutrients (too much N
relative to P and K), micro-nutrient deficiencies are becoming more serious
(48% of necessary zinc), and the result is low marginal returns to fertilizer
(2 kg of grain to one kg of fertilizer) – thus, the sustainability of
agriculture is being threatened. All incentives are stacked in favor of wheat and rice which cover over
three-quarters of cropped area and account for 85 percent of gross value of
crop output. It is not yet a crisis situation. But incomes will stagnate in the
near-term. In the longer-term, changing demand and deteriorating environment
will lead to progressively decreasing incomes.
10) Andhra Pradesh, a rice surplus state,
provides another example of benefits and costs of the public market
intervention (and subsidies) from which lessons can be learned. AP contributes
roughly 10% of the rice production in the country. Rice production in AP is
concentrated in the coastal regions and in some parts of Telangana, where
abundant water resources are available and extensive irrigation facilities have
been developed. Water availability enabled spread of High Yielding Variety
(HYV) seeds, and with strong support from the government, rice production rose
from 7 million tons to about 12.5 million tons between
1980-81 to 2000-01, mainly due to a 50% rise in yields during this period.
Though rice yields in AP are about 45% higher than the national average, cost
of production remained comparatively higher in AP than in Punjab, Uttar
Pradesh, and all the eastern states. As a result, profit margins from paddy
cultivation are one of the lowest in the country. With the gap between the MSP
for rice and C2 costs in AP being negligible, clearly the paddy producers in
the state did not benefit much from the MSP. Nevertheless, AP accounts for
between 15-19% of the total rice procurement in the country. With an increase
in the number of regulated markets, and about 40% of FCI’s storage capacity
being located in the state, the entire supply chain in rice is dominated by
government agencies. As a result nearly 70% of the marketed surplus in Coastal
Andhra and about 35% in the Telangana region is sold to government. Studies
have found that it is this assurance of procurement rather than the procurement
price per se that influences farmers’ decision to sell rice to the government.
The dominance of the government, armed with a whole host of self-serving
regulations and preferential access to credit and rail transport services, in
the supply chain has inhibited private sector participation in grain management
in the state, even though available evidence points to cost-efficiency of the
latter.
Historic
rationale:
11) The historic rationales for the
all-pervasive public intervention in foodgrains
included a) limited market integration across space and time, b) protecting
farmers from the risks inherent in promotion of new technologies, c) limited
institutional infrastructure to deal with volatile world foodgrains
markets, and d) severe foreign exchange constraints. Underlying increased
public intervention was distrust of traders to curb perceived speculative
activities.
12) None of these conditions, which
earlier justified aggressive public intervention, hold good today.
Infrastructure, roads and communications, have improved over time. Studies show
that foodgrains markets are integrated in the
long-run and disintegration, when occurring over the short-run, is associated
with government -imposed movement and storage restrictions. Given that
high-yielding varieties now cover almost all cropped high-potential area under
wheat and rice, it is difficult to argue that price supports are required to
promote such varieties. World wheat and rice markets are now larger and more
robust; international price volatility has become relatively small. And India
has accumulated large foreign exchange reserves, many times the amount needed
to import any conceivable shortfalls in demand. Clearly it is now time to allow
the private sector to carry out the tasks of procuring and distributing foodgrains, and re-orient public intervention towards where
it is acutely needed.
Simulation
studies:
13) Studies that examined the potential
impacts of trade reforms show that India is unlikely to lose in any big way
from liberalizing its trade regime, whether done unilaterally or as part of a
multilateral effort. If anything, there could be some small welfare gain at the
national level, and significant gains for unskilled labour in the form of
higher wages and cheaper consumer goods. As these studies do not capture
dynamic efficiency gains from trade reforms arising from re-allocation of
resources across sectors, the overall gains from trade reforms are likely to be
much higher than what these studies predict. The other major message from these
studies is that comprehensive domestic reforms that boost investment and
productivity have far greater positive impact on welfare and growth than trade
reforms alone. This only highlights the need to dovetail domestic policies with
a liberal trade regime.
14) Counter-factual simulations using a
multi-market spatial equilibrium model suggest that replacing the existing
public procurement-stocking-distribution system with one combining (a) a fully
liberal on international trade regime, (b) a targeted public distribution
system (TPDS) that excludes the non-poor, (c) eliminating levies on rice, and
(d) reducing procurement and stock limits to a level required for the TPDS,
will lower prices, making net wheat and rice producers worse off (assuming
farmers continue to grow wheat and rice rather than diversify to high-value
commodities which would give higher incomes) and net consumers better off. These effects vary across
states depending on the demographics, concentration of poverty, and
agricultural specialisation. Overall, the results suggest that reforms will
lead to a redistribution of income from non-poor to poor, and from surplus
states to deficit states, even as urban households everywhere gain from lower
prices.
International
experience:
15) Lessons also can be learned from other
countries. Indonesia reinforces the argument that public price stabilization
policies combined with strong government commitment toward development can lead
to success. However, that country is also an example of where public
intervention, without adjustment, has out-lived its usefulness. The
Philippines, on the other hand, has under-achieved in its economic development
efforts despite having an active foodgrains price
stabilization program, largely because of erratic and declining public
commitment. Bangladesh, although perhaps benefiting from favorable circumstances, has utilized the
private market with great success in its’ price
stabilization efforts.
Reforming
food policy:
16) The changing scenario demands a much
different role for government in the future than it has exercised in the past.
Food security is much more than foodgrains
availability alone and more than the responsibility of a few surplus states
like Punjab or Andhra Pradesh. Economic forces, led by market demand –
domestically and globally – if allowed to operate, will drive the road to
diversification. The private sector will provide the leadership. Increased
incentives can contribute to “get prices right”. Strengthened institutions can
change the rules of the game in addition to the organizations in which they are
embedded, for example prices will never truly be effective allocators of
resources if markets are not effective, so the challenge is also to “get
markets right”. Increased investment can provide the physical infrastructure
and technologies to create and move inputs, services, and commodities.
17) In the changing environment, it is as
important to specify what government should not do as well as what it should
do. It is equally important to present policies as a package in order to
provide tradeoffs to gain the necessary political
support. The role of government, therefore, should be to provide 1) public
goods – particularly infrastructure and research – and 2) policies to
facilitate, guide, and monitor an inclusive process so that the pace of
transition accelerates and benefits are distributed widely.
18) Unbundling the government objectives
and instruments / institutions for public intervention is required to improve
the efficiency of the current system of foodgrains
management and to enhance the government’s capacity for meeting its
distributional goals for welfare improvement.
19) The key to successful reforms of the
food management system is to decouple the government’s consumer welfare
objectives from producer protection objectives. Holistic reforms of the
existing welfare programmes are required not just to ensure better delivery of
safety nets to the poor, but also to enable critical reforms to the current
system of public intervention in foodgrains markets
along the entire supply chain. Producer interests should be protected not
through public price stabilization programmes, but by allowing a free play of
market forces. Accordingly:
a)
The
Targeted Public Distribution (TPDS) should be strengthened and it should cater
only to the poor. Over time, the current system of consumption subsidy in the
form of physical entitlements should be replaced by a system of food coupons
that would allow the poor to purchase their food requirements from the market
itself at prevailing market prices. These coupons may be of a certain value,
which could be periodically adjusted in line with price movements so as to
offer a real income transfer. This move would reduce the need for large scale
public intervention in procuring, storing and distributing foodgrains,
and enable downsizing the scale of public intervention in foodgrains
markets. Eventually, employment generation programmes and innovative income
transfer programmes should replace consumption subsidy programmes for the poor,
since income transfers are welfare superior to commodity specific consumption
subsidies.
b)
Private
marketing should be strengthened through reform of the Agricultural Produce
Marketing Committees (APMC) Act, abolishing the Essential Commodities Act
(ECA), permitting direct purchases from farmers, eliminating movement and
storage controls, facilitating warehouse receipts, strengthening futures
markets, and opening imports and exports to the private sector.
c)
Decouple
MSP as protection against price risk (support prices) from using it to augment
income. The MSP should be set at A2/paid-out-cash-cost levels to mitigate
farmers against the risk of precipitous fall in prices.
d)
Market
prices should be stabilised based on transparent rules in an open economy
environment (i.e., free of movement, storage and trade restrictions) somewhere
within a band bordered by c.i.f. and f.o.b. prices by using a variable tariff
policy consistent with World Trade Organization (WTO) rules (within the bound
rates).
e)
When
domestic prices tend to reach the upper (c.i.f.) level of the band, tariffs may
be lowered enabling greater imports and also buffer stocks may be released,
both of which will help lower the prices.
f)
When
domestic prices tend to reach the lower (f.o.b.) level of the band, tariffs may
be increased to curtail imports and additionally the government may also
procure grains at market prices to boost demand.
g)
Futures
markets for grains are an useful institution that can
give guidance about the future direction of change of the band itself; that is,
whether there will be secular rise or fall in the band. It is, therefore,
important to integrate tariff-setting in line with the movements in the futures
prices. Institutional arrangements for monitoring the price movements and
carrying out tariff changes would have to be developed.
h)
As
long as the lower level of this band (including tariffs) remains above the A2
cost levels, all public procurement of foodgrains for
safety net policy needs and / or for buffer stocks should be at market prices.
i)
The
MSP at A2 cost level should become operational only when the lower level of the
band, even after raising the tariffs to the maximum permissible bound rates,
goes down below the A2 cost level. Even during such instances, the trade regime
should remain liberal as quantitative restrictions on imports would not be
WTO-compatible. Since arbitrage opportunities then arise, it is essential to
restrict support price only to bonafide / registered
farmers and exclude traders from benefiting from the arbitrage opportunities.
It is, therefore, essential to design a system for registering rice and wheat
farmers at the beginning of every sowing season, along with details of area
currently sown and past yield levels. It must be recognised that the MSP at the
A2 cost level is essentially a “price insurance” and
the system of registration (which could involve a small fee) should be seen as
an act of purchasing insurance.
j)
Improve
the efficiency of FCI (in part, by making it compete with the private sector on
a level playing field) and progressively down-size it as well. Downsizing FCI
should be effected in the current surplus states such as Punjab where FCI
operations have ceased to bear any benefits and instead re-orient FCI
operations to the eastern states where public support for market development is
direly needed. Public procurement along lines described above for meeting the
TPDS requirements, as well any buffer stock requirements, should be from the
eastern states that have immense potential and cost advantages in rice
cultivation.
k)
Bring
about organisational and other institutional changes within the FCI (and other
government agencies involved in procurement) that would facilitate FCI
officials to procure / offload grains on a commercial basis at a (non-MSP)
market price, adjust tariffs, etc. which would vary from time to time, without
fear of being subjected to criminal prosecution. A market committee involving
prominent persons of repute and knowledge and a professional staff with
analytical capabilities may be formed, which would meet on a regular basis to
monitor movements in prices and the action to be taken (similar to the market
committees of the Federal Reserve of the USA to monitor interest rates).