Column: Tame the killer inflation first

Written by Ashok Gulati | Updated: May 20 2014, 03:12am hrs
The expectations from the new Government are high. The challenge will be how soon, and how rationally, it can respond, laying down the ground for medium-term reforms in the sector. So, the best strategy would be to hit the ground running.

But what is it on which it should focus on in the first 100 days First and foremost would be bringing down food inflation to below-5% levels, which is possible. It may be worth reminding that during the earlier NDA rule, 1998/99-2003/04, food inflation, on an average, hovered around 4%; went to 6% in the UPA-I rule (2004/05 to 2008-09), and then, got out of control in UPA-II (2009-10 to 2013-14) at above 10%. This has been a killer, and UPA has been punished for that badlyby the electorate. So, it would be important for the new government to learn from what went wrong with UPA-IIs management of food inflation, and avoid those mistakes.

While a substantial part of the food inflation during the UPA-II period was imported, after the eruption of global food price crisis in FY08, on which the government had little control, the biggest mistake was to let loose the fiscal policy under the global fiscal stimulus plan of the G8 plus 5 countries. The fiscal deficit, which was hovering around 3% of GDP in FY08 shot up to almost 6% of GDP in FY09, and this had very adverse repercussions on food prices in the years to follow till date. Three items in particular drilled the hole in fiscal pockets of the finance minister: food subsidy, fertiliser subsidy and bloated expenditures under the MGNREGA. All these three together account for well above R2,00,000 crore in the interim budget for FY15. On top of this, there are additional pending bills (carry over) of food and fertiliser subsidies to the tune of at least R80,000 crore in FY15, as per the internal calculations of the concerned ministries. While the finance minister may have been right in his judgement in not signing on the blank cheques of these ministries, given their highly inefficient ways of doing business, along with the MGNREGA, the political leadership failed to usher in reforms in its operations for prudence. Out of a true expenditure estimate of roughly R2,80,000 to R3,00,000 crore involved in food and fertiliser subsidy plus the MGNREGA, in FY15, there is a potential saving of at least R60,000 crore to R70,000 crore without giving up the objectives, if the political leadership is bold and decisive, and acts smartly. This can be a game-changer to not only tame food inflation, but also to send out a signal that the new government means business with rationalised expenditures, and attain the same objectives at a much lower costs. How it can be achieved, I will explain here further. But before that, we must pluck the low hanging fruit to control food inflation.

What is this low hanging fruit India is in a very fortunate situation where it has more than abundant foodgrain stocks today, way above what is needed even to implement the ill-conceived National Food Security Act 2013. These stocks got accumulated not because of higher minimum support prices, as some experts wrongly believe, but because of (a) export bans on wheat and common rice during 2007-11; (b) high procurement taxes and commissions in Punjab, Haryana and Andhra, which have nearly driven the private sector out of business; and (c) high bonuses on top of MSP given lately by Chhattisgarh on paddy (22-23%) and Madhya Pradesh on wheat (10-11%), along with an expanded and effective procurement mechanism in these two states, which led to de-facto state take-over of grain trade. Thanks to these irrational policies, the government has become the biggest hoarder of grains, depriving the markets of sufficient grain supplies and driving up food inflation. Normally, when private sector hoards food items, government officials raid their premises and put traders in jail. But whom will they jail when the government itself is the biggest hoarder

In any case, the bulging stocks of grains with government is the lowest hanging fruit, which can be plucked as the government has its first business meeting. A minimum of 20 million tonnes of wheat and rice need to be offloaded in the open market at the last MSP plus 5% for all expenses, and it should be available at all FCI/state agencies depots all over the country. If the government can do this in the next 100 days, it can take the wind out of the inflationary tide even in an emerging El Nino and sub-normal monsoon year. This will be the first test of the new government.

But food inflation is becoming increasingly concentrated in high value products such as fruits and vegetables, dairy and meat, which more nutritious but perishable in nature. Their value chains remain fragmented, partly due to archaic mandi laws (APMC Act) which favour the commission agents much more than the farmer or consumer. The second test, therefore, is to change the APMC laws, de-listing fruits and vegetables and inviting private sector to build back-end infrastructure for aggregation, grading, packing, etc, of the fresh produce in rural areas to be procured directly from farmer-producer organisations. This will create millions of off-farm rural jobs, save on post-harvest losses, and create more efficient value chains giving a better deal to farmers and consumers alike, as also making Indian agriculture globally competitive. This will bring down food inflation of high value products. The government, therefore, should announce 50% capital subsidy to the private sector for building such back-end infrastructure, and the money for this should come from rationalisation of food and fertiliser subsidies as well as a reformed and pruned MGNREGA, which are essentially the white elephants of the dole model.

How does one rationalise these three big ticket items: food and fertiliser subsidies, and the the MGNREGA Very briefly, one should gradually move towards conditional cash transfers through UID technology platform (Aadhaar) to plug leakages and also to see who is getting how much from various government schemes. This will not happen overnight, but it can easily be done within the next two years, if the government is bold and decisive. There has to be direct cash transfers to consumers for food subsidy, starting with 53 cities of more than one million population, followed by farmer families, and then giving the choice to all those who want cash or grain. Only condition should be to send their children to school, and get immunization done. Food subsidy can be tied to girl child in the school and/or to the woman head of the family. Financial and banking infrastructure will have to be expanded fast to make it happen. Cash transfers at the rate of R100 per person per month for the next 2-3 years can still save the government the food subsidy bill by about 25-30 %, and more importantly plug the 40% leakage of the existing public distribution system, which is nothing short of an annual grain scam in the country.

Similarly, fertiliser subsidy should be given directly to farmers in cash on per hectare basis, in an inversely graduated scale with farm size, say R5000/ha for all farmers up to 4 hectare size, and R4,000 per hectare to those above 4 hectare size, subject to getting soil health cards. The fertiliser sector can be totally deregulated with free imports at zero import duty.

The MGNREGA needs to be pruned and should be be shifted to the water resources or forest ministry to use the scheme for re-charging ground water and/or rejuvenating degraded forests.

Savings from these three schemes, roughly, would amount to R60,000-70,000 crore per annum, which need to be ploughed back in to augmenting water availability in rural areas for irrigation as well as for safe-drinking. A new water development and management authority, should be the hall mark of the new government, if they mean business and want to bring prosperity in rural areas, accelerate agri-growth and tame food inflation.

The author is Chair Professor for Agriculture at the Indian Council for Research on International Economic Relations. Views are personal