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The paradox of poverty amidst
plenty, which has been so characteristic of the Indian economy over
the 1990s, seems especially marked with respect to the foodgrain sector
at the moment. Last year had witnessed record foodgrain production,
especially of wheat and rice. But, measures designed to reduce the budgeted
food subsidy had led to substantial increases in the prices of foodgrain
in the Public Distribution System (PDS) (chart 1a & 1b). This caused PDS offtake
to fall (chart 2) and food stocks held by the public sector to grow
(chart 3), at the cost of availability in the market. Also, as a result,
foodgrain prices increased at double digit level for yet another year,
despite the record production (chart 4).
Chart 1a >>
Chart 1b >>
Chart 2 >>
Chart 3 >>
Chart 4 >>
And, far from being reduced,
food subsidies actually increased, precisely because higher administered
prices led to much higher stocks, increasing the costs of holding these
(chart 5). While the knock-on effect of higher PDS prices on market
prices is well acknowledged, what is not equally understood is that
under current circumstances this is also likely to increase, not decrease,
the food subsidy. Such subsidy cuts are therefore totally counterproductive,
hurting both consumers and the fisc, as had been pointed out in this
column shortly after last year's PDS price hike (Macroscan, February,
9th 1999).
Chart 5 >>
However, such is the intellectual
lethargy in North Block that, faced with a situation when food subsidies
had increased when they had expected a reduction, the Finance Minister's
advisors could offer no other solution than to increase PDS prices further,
by linking these to the Food Corporation of India's economic cost of
grain procured. Somehow, political antennae in government were also
in sleep mode, so that this proposal got incorporated into Budget 2000-2001.
At that point the NDA allies had called foul, but they could not go
beyond their populist instincts and question the government on how a
further hike in PDS prices this year would reduce the subsidy bill,
given that these subsidies had actually increased following last year's
price increases. Probably because of past humiliation on account of
rollbacks, Finance Minister Yashwant Sinha also chose to make this an
issue on which he stuck to his guns, to much kudos from the pink press,
but of course with necessary political concessions elsewhere.
One of these concessions to
allies was to increase the Minimum Support Price (MSP) for wheat from
Rs 550 per quintal to Rs 580 per quintal, totally against the recommendation
of the Commission for Agricultural Costs and Prices that there be no
further increase in the MSP. This Commission, which has been overruled
on the matter for three years in a row, appears now to have become totally
irrelevant as far as wheat pricing is concerned. Indeed, again contrary
to the Commission's repeated exhortation that MSPs be announced before
sowing, the announcement this year was made only after the budget in
February, by when the grain was near harvesting.
Thus, the populist announcement
of an enhanced MSP did nothing towards encouraging farmers to produce
more. But it did have two other effects. First, it encouraged
larger diversion of harvest arrivals from private trade to government
agencies, and, as a result, wheat procurement during April-June 2000-2001
reached a record, crossing 16 million tonnes (chart 6). Secondly, with
the budget having linked PDS prices automatically to the economic cost,
these increased with the higher MSP.
Chart 6 >>
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