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Students Corner - A Decade of Economic
Reforms in India - A Review

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Another issue that has assumed significance in the recent period is the large food stocks and their macro implications. It may be recalled that in order to ensure food security to the vast population of the country, an elaborate system of public procurement and distribution of foodgrains was evolved as a part of a conscious strategy. As per this strategy, the Food Corporation of India (FCI) was established in 1965 and a detailed price support mechanism was formulated. The system, despite various infirmities, worked reasonably well till the late 1970s. Since then, primarily due to the expansion of production possibility frontier under the Green Revolution, domestic production of foodgrains started to keep pace with the requirement of public distribution system. With the emergence of successive "normal" monsoons during the 1990s, the prevalence of a distorted price mechanism resulted in large accumulation of food stocks with the official agencies during the second half of the 1990s. Two major issues that have come to the forefront of public policy debate in this regard are: What are the factors behind the burgeoning food stocks? And, what are its macro-financial implications for the economy? This sub-section takes a look into these two questions.

Burgeoning food stocks with the official agencies can be attributed to an increase in procurement, a reduction in off-take or a combination of both. A number of factors like distorted price incentives for agricultural products and shift in consumption pattern have added to this phenomenon.

Price interventions by the Government by way of Minimum Support Prices (MSP) have resulted in some distortions in cropping pattern. One of the major factors influencing the cropping pattern is the income accruing to the farmer or expected income from cultivating a crop. Generally, low yield rates of pulses and coarse cereals among foodgrains generate lower income for farmers than rice and wheat. Moreover, the price support operations have been skewed in favour of rice and wheat, which have benefited significantly by the elaborate procurement operations in conjunction with the rising MSP. On the other hand, coarse cereals and pulses do not seem to have been procured by the public sector agencies on a comparable scale. Furthermore, in contrast to that of rice and wheat, the cost of production of coarse cereals and pulses has been generally higher than the MSPs during the period 1983-84 to 1997-98. This makes the cultivation of rice and wheat more attractive than pulses and coarse cereals. The higher relative yields of wheat and rice further increase the assured income per hectare (in terms of MSP multiplied by the per hectare yield). The increasing MSPs and higher yields in wheat and rice, thus, accentuate the difference in expected income from coarse cereals/pulses vis-à-vis wheat and rice. The rising MSPs and higher procurement of rice and wheat coupled with unattractive assured incomes from cultivation of pulses and coarse cereals have, thus, induced farmers to cultivate rice and wheat more than other foodgrains crops.

Protectionist atmosphere for foodgrains production coupled with various restrictions on imports and exports, generally led to higher domestic prices of rice and wheat. In contrast to the partial rigidity in the Indian prices of rice and wheat in the 1990s, there was a sustained decline in international prices. Increasing domestic prices of rice and wheat in the face of declining prices of the same in the international market have shielded farm incomes from international price volatility, but adversely impacted on the price competitiveness of Indian exports of foodgrains, and led to increasing dependence of farmers on procurement operations for market clearance.

The wholesale price of rice in India during 1993 to 2001 was on an average lower than that in Thailand for the same period. The average wholesale price of wheat in India in this period was slightly higher than the US Soft Red Winter (SRW) variety, but lower than those of US Hard Red winter (HRW) and Canadian varieties. If the current downtrend in international prices of rice and wheat is cyclical, they are likely to rise above Indian prices, thus, making Indian rice and wheat competitive. Even if there is a secular decline in international prices, the Indian prices can still be competitive, provided, the Aggregate Measure of Support (AMS) by the US and European countries is reduced to WTO compatible levels.

The increased cultivation of rice and wheat in the 1990s supported by the consecutive good monsoons, has played an important role in large-scale procurement. However, as mentioned earlier, increase in support prices, mainly due to the change in methodology of including the "statutory minimum wages" instead of "actual wages" paid in computing the cost of cultivation, coupled with lack of international competitiveness and restrictions on international trade of foodgrains seem to be the main causative factors underlying increasing procurement. The system of compulsory levy procurement and the restrictions on movement of foodgrains under the Essential Commodities Act, 1955 also contributed to increasing procurement operations. The ever-increasing MSPs of rice and wheat and the compulsory procurement coupled with the protectionist atmosphere, ensured market clearance for rice and wheat and thereby created a vicious circle of increasing MSPs - higher procurement - larger cultivation of rice and wheat-increasing production and generation of higher marketable surplus - lack of export competitiveness -increasing procurement further.

The off-take of foodgrains in the 1990s was generally low. This was partly due to limited open market operations because of higher price for low quality foodgrains that were made available through PDS, which also led to lower off-take by the actual PDS beneficiaries. Altered consumption pattern of the population due to improving income levels and lacklustre export performance also explain the decline in off-take through PDS. Inadequate institutional arrangements for quick and timely delivery in areas of greater need and linking delivery to specific requirements were also contributing factors.

Rise in Issue prices and Targeted Public Distribution System

Consumer prices reflected in the Central Issue Price (CIP) have witnessed a rise since the inception of TPDS. The TPDS was introduced in 1997 in order to achieve better targeting of subsidies. Under the TPDS, a dual price mechanism for the APL (Above the Poverty Line) and BPL (Below the Poverty Line) consumers was introduced. The full economic cost of foodgrains was recovered from the APL consumers, while foodgrains were sold at half the economic cost to the BPL consumers. Successive increases in MSPs of rice and wheat and attendant increase in economic cost of foodgrains necessitated an increase in CIP for APL consumers, which resulted in narrowing the gap between open market prices of foodgrains and the CIPs. This led to a drastic reduction in off-take under TPDS (Government of India, 2002b). For instance, the off-take under TPDS declined by 29.5 per cent to 12.0 million tonnes in 2000-01 from 17.1 million tonnes in the previous year.

Shift in Consumption Pattern

Apart from the increasing CIPs, the changes in consumption pattern towards milk, eggs and meat, as against cereals, partly caused the decline in off-take. Recent studies, based on NSS data on consumption expenditure, show that there has been a decline in the share of food in the total expenditure among both the poor and non-poor, despite relatively lower prices of cereals (Bhalla et al, 1999; Meenakshi, 2000).

Thus, domestic off-take has been low vis-à-vis the procurement of the foodgrains, resulting in the problem of growing stocks. The implications of the mounting food stocks are manifold. Apart from price implications that emanate from MSP, it adds to storage and maintenance costs in presence of limited off-take, thereby imposing high fiscal costs in the form of food subsidy. To the extent the burgeoning food stocks are financed by preferential food credit, they have monetary implications as well.