This levy reduction order will make open-market rice cheaper; food inflation will be moderated; quality improvisation will take place; exports prices will be lower and non-basmati rice export will be incentivised. The pressure on the Food Corporation of India (FCI) and the state governments for creating storage space will lessen.
In the kharif marketing season (KMS), commencing October 1, 2013, and on till July 21, 2014, FCI procured 31 million tonnes (mt) of rice in two different modes11 mt was sourced from Punjab and Haryana as custom milled rice (CMR) while 20 mt was purchased as levy rice from other states. Under CMR, paddy is procured by FCI/state government agencies from farmers at MSP and thereafter processed into rice by FCI after tolling charges are paid to millers. Under the levy rice system, farmers sell paddy to millers at MSP, and then millers sell a fixed percentage (now fixed at 25%) as levy to states as per predetermined prices of rice.
This existing system (CMR plus
30-75% levy rice) has led to over procurement, overstocking, wastage/deterioration, excessive involvement of central funds and higher food subsidies. The reduction in levy, to 25%, will correct the systemic deficiencies. The accompanying chart indicates an excess availability of about 10 mt in the market if the 25%-levy order is enforced. One can surmise that the food ministry is now targeting a procurement of about 21-22 mt in 2014-15, down from 31 mt in 2013-14. At an acquisition cost of R24,000/metric ton (FCI website), the procurement of 31 mt amounts to a whopping R74,400 crore. The corresponding savings accruing from the fall in government procurement by 10million tons will be R24,000 crore.
Since Chhattisgarh, AP, Odisha and Telengana are the most affected regions, small rice millers in these states may protest against such directions because they are denied assured purchases by the states. Small units will now have to undertake marketing directly for whatever quality they process or sell through exporters or undertake export directly. Millers with outdated processing technology may have to modernise for meeting market expectations/specifications. As the intention is to eventually abolish the levy system, the Centre may have to get over the resistance exerted by these stakeholders.
Another argument given, that the farmers will be denied the MSP if they have to deal with private millers, carries little merit. India produces about 160 mt of paddy (equivalent to 106 mt of rice), while only 47 mt of paddy (31 mt of milled rice) is handled by FCI/government agencies. The fact is that the sale of 113 mt of paddy is bargained for directly by the farmers. Thus, the debate on this issue is not maintainable. If, in any given year, there is widespread procurement of paddy below the MSP, the Centre can authorise an ad-hoc intervention to stabilise the price at the MSP level, as is done in the case of maize.
About 2.5 mt (40%) of India's non-basmati rice is shipped out of Kakinada, a port in Andhra Pradesh (AP). AP requires evidence of servicing levy (currently 75%), or release certificates (RC), from its Civil Supplies Corporation before authorising export shipments. In June-July2014, exporters of non-basmati rice could not obtain such release certificates as the AP government was not willing to accept compliance of levy obligations of millers from the newly-created state of Telengana. This resulted in loss/erosion of profit, owing to the purchase of expensive rice from Chhattisgarh and payment of demurrage on the vessels. Buyers either deferred future business or looked at Thailand. By lowering levy obligations to 25%, such instances can be avoided. The threat of Thailand or Vietnam lowering their quotes of non-basmati rice and affecting Indian exports too gets minimised. Indian rice prices may soon fall because the expectation of extra supplies in the near future will prevail in the market.
The author is a grains trade analyst