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 The right recipe

 Arvind Panagariya 

WHEN I first read about the European “Butter Mountain” back in the 1970s, I thought this was possible only in the rich countries. But only a quarter century later, through excessive hikes in support-cum-procurement prices, we have created our own “Foodgrain Mountain” containing 62 million tonnes of wheat and rice.

 Today, granaries of the Food Corporation of India are literally overflowing, with almost half of the grain stored in the open, ready to be washed away by rain. According to a World Bank report, of the total stock held by FCI, 50 per cent is two years old and another 30 per cent two to four years old.

 The grand success we have achieved in boosting agricultural output is in danger of turning into an equally grand failure. While controls and government involvement in other parts of the economy have been gradually yielding to market-based policies, our food policy remains antiquated. The result has been continued massive subsidy to FCI and its army of employees and waste in stocking, transportation and distribution of foodgrains at the expense of the taxpayer and in the name of the poor who remain underfed.

 Three key assumptions dictated the current policy regime. First, given its limited export potential, India could not count on food imports as a viable option in the long run, making food security synonymous with production self-sufficiency. Second, the government had the responsibility to ensure food supply to consumers at reasonable prices and this could not be accomplished without its direct involvement in foodgrain trade. Finally, private traders were likely to exploit buyers through the exercise of monopoly power in the local markets.

 The first assumption led the government to adopt the minimum support price for farmers and a host of complementary policies aimed at encouraging the production of food grains. The second assumption led to an active procurement by the government at prices higher than MSP on the one hand and the creation of a massive public distribution system on the other. The third assumption led to draconian regulations on the storage, transport and processing of foodgrains at the local level via the powers conferred on the states by the Essential Commodities Act and supporting legislation. Among these regulations were restriction on inter-state movement of foodgrains and severe restrictions on the entry of private companies in foodgrains trade.

 Today, all three assumptions underlying our food policy have become invalid. The huge response exhibited by exports to the reforms of 1990s belies the export pessimism on which the ‘production self-sufficiency’ argument rested. At a time when the United States, China, and Thailand are annually importing food worth 46, 6, and 2 billion dollars, respectively, we cannot simply pretend that imports are not an option.

 Nor is the assumption that market and market-based instruments cannot be trusted to deliver food to the poor at reasonable prices valid anymore. On the contrary, FCI has proven yet again that centralised institutions rapidly run into diseconomies of scale. The former Soviet Union learned this lesson the hard way. We also know now that the efficient distribution of food to the poor at low prices does not require the government to do the job. Researchers at the Indian Statistical Institute estimate that less than 60 per cent of the subsidy reaches consumers currently.

 Finally, the fears that hoarding and speculation by private agents will lead to localised monopolies and exploitation of consumers have been proven unfounded. On the contrary, the ineptness of state governments has led to the adoption of restrictions on the movement of foodgrains that have fragmented markets with surpluses in some and shortages in other states. Likewise, restrictions on private entry have deprived the country of the benefits of modern management practices in procurement, transportation and distribution and of scale economies inherent in silo storage.

 Therefore, India needs to overhaul its food policy in virtually all its aspects. Five broad steps must be taken. First, we must recognise that food security is not synonymous with production self-sufficiency and that imports and exports are essential instruments of achieving this security. So, the support and procurement prices should be gradually replaced by the world price plus a modest customs duty. In turn, both imports and exports of food grains should be opened up to private agents.

 Second, the role of FCI should be limited exclusively to maintaining emergency stocks to meet unexpected shortages in specific parts of the country. This stock should range between 5 to 10 million tonnes and procured through competitive bidding. FCI should be taken out of all public distribution activities and therefore substantially downsized.

 Third, entry into the foodgrain trade should be freed up, with all agents permitted to operate anywhere they please. This means a total repeal of the Essential Commodities Act with local authorities forbidden from imposing ad hoc regulations. The FCI storage facilities in excess of 10 million tonnes and all its fair price shops should be auctioned off with state governments permitted to bid competitively as well.

 Fourth, subsidy to the families below the poverty line (BPL), identified since June 1997, should be given aid in the form of food stamps to be honoured like cash by all traders. Given the savings that the new policy will generate, assistance to the poor can be readily doubled without extra cost to the central government. I will explain why food stamps are a superior instrument in a future column.

 Finally, in areas where poverty is concentrated and private traders may not supply the market adequately, state governments may be given modest subsidy by the Centre to operate fair price shops. But to check the abuse and duplication of the current level of FCI involvement, this should be permitted only as an exception. As complementary measures, states may also be encouraged to run food-for-work programmes in these areas.

(Economic Times, Wednesday, March 27, 2002)