Leaky PDS and high subsidy will test FSB

Written by Sandip Das | Updated: Sep 4 2013, 14:40pm hrs
While food inflation has risen sharply in the last few months, the governments efforts to implement the Food Security Bill are expected to have a lasting impact on Indias agriculture sector. Commission for Agricultural Costs and Prices (CACP) chairman, Ashok Gulati, spoke to Sandip Das on a range of issues including the impact of the Food Security Bill (FSB) and the need for reforms in marketing of agricultural produce.

The prices of fruits and vegetables have shot up sharply in the last few months. What should the government do to keep the trend in check

While the overall food inflation is hovering around 12%, veggie prices are on fire. Vegetable prices were 46% higher this July than the last. While onion prices made headlines with a 145% increase, the prices of other vegetables were not far behind. Cauliflower is selling at R99 per kg in Safal outlets in Delhi while Himachal apples sell between R60-80/kg. This is simply perverse.

Monsoons do interrupt the smooth flow of supplies in certain parts of the country due to floods or excessive rains. But the reasons for high prices of vegetables run deepinto the fragmented value chains, the archaic APMC laws that give undue oligopolistic power to commission agents in mandis, the lack of investment in proper logistics (transportation and storages, including cold storages) leading to wastage, and the lack of processing of perishables and organised modern retailing. Unless we understand this, and act urgently to build efficient value chains, vegetable prices will remain volatile, sometimes touching the sky and at other times going through the floor. As a fire-fighting measure to contain the prices of onions, the government is already importing and selling at concessional prices. But beyond that, I dont see any serious efforts; this story will be repeated year after year, for one commodity or the other.

What measures should the government initiate to ensure food inflation does not climb further

We must note that cereals, which account for the largest share in the poor consumers thali, are also registering an inflation of around 18% (year-on-year comparison for July). The government was busy trying to get the food bill passed as this was happening. The food bill envisages selling at least 5 kg of cereals per capita per month at R1, 2 and 3/kg (coarse cereals, wheat and rice respectively), and the government granaries are overflowing (74 million tonnes on July 1).

Given that an average household consumes about 10.7 kg of cereals per capita per month, what is the point of giving 5 kg of subsidised cereals under PDS to the people when they have to face a market with high food inflation It is like giving food subsidy with one hand, and taking away a part of that (through high food inflation) with the other. The high food inflation of the last five years is the worst type of implicit tax imposed on the poor who spend almost 50-60% of their total income on food. Taming food inflation, therefore, needs to be the priority of any government that claims to care for the poor.

To take on food inflation, in the short run, the government could liquidate 10-15 million tonnes of wheat and rice in the open market (wheat at R1,350/quintal and rice at R1,900/quintal.). This could bring down cereal inflation from 18% to less than 8% within a month or two. This would also have an welcome effect on other food commodities and overall inflation, without compromising on the needs of FSB.

Second, the government could reduce import duties on most of the vegetables and fruits from the current rates of about 30% to, say less than 10%. On the export front, a 5% import duty could be imposed on rice and sugar to save on precious water and power usage, highly subsidised for irrigation purposes.

But in the medium to long run, we need to invest more in agriculture to raise food production faster than the rise in demand, build infrastructure and institutions to create efficient value chains, and promote food processing and modern retailing, both domestic and foreign, buy directly from farmer producer organisations to save on massive wastages and stabilise food prices at low levels.

What about the spike in prices of protein-rich items like fish, egg and meat Is there any way to curb it, especially since their consumption is rising fast

It is true that the demand for eggs, meat and fish is increasing fast with rising income levels. This trend is likely to continue for many years to come, and offers a great business opportunity for everybody in the value chainfrom farmers to processors and retailers. Poultry farming and pisciculture have been success stories in India. Lately, India has also emerged as the largest exporter of meat (buffalo meat). But despite this, on the imports front, we are overly protective. For example, in case of the chicken-legs, we have a 100% import duty, which can be brought down significantly in a calibrated fashion, which will help ease the pressure on meat prices. But we also need to promote our soya products as protein sources very aggressively , from flavoured soya milks to tofu to soya chops and so on. There is no other commodity which can be a good protein-source at such low prices as soya can be. But it needs product innovation to make soya palatable to Indian tastes and massive campaigns to educate consumers to make it a part of their diet.

How do you see this years well spread-out monsoon impacting food inflation and production

The rain gods have been generous so far and we have had above normal rainfall (+14% above the LPA). If we receive such rainfall in the remaining months of the season as well, we could have record agri-production in FY14, which should surely help ease food inflation.

Is there a case for giving the food processing sector a major boost so that consumers do not face price volatility with fruits and vegetables

Of course. This should be taken up in mission-mode. India processes less than 5% of its fruits and vegetables produce, way behind the south-east Asian countries where processing levels range from 20 to 50%. A processing revolution can ward off large wastages in fruits and vegetables.

What is your opinion on allowing farmers to sell produce where they get better prices Have the reforms initiated by the Agricultural Produce Market Committee (APMC) at the state levels made any difference to farmers realising better prices

Fruits and vegetables need to be taken out of the purview of the APMC Act. It is archaic and serves the commission agents interests more than that of the farmers or consumers. We must encourage farmer-producer organisations, and direct-selling by these organisations to those in food processing or organised retail. This will benefit the farmers and consumers alike. The government could support those who want to walk this line of farm-firm linkages.

With states such as Madhya Pradesh, Chhattisgarh, etc, providing extra bonuses over the minimum support price (MSP), is mono-cultivation becoming the norm impacting diversity in agricultural production

Yes. In Chhattisgarh, there is already a realisation that the prices being offered by the state are leading to mono-culture, which will harm the soil in due course. My submission to Chhattisgarh and MP is to give crop-neutral investment subsidies to farmers rather than extra bonuses on paddy and wheat, the supplies of which already exceed the demand at the national level. It is distorting the markets, and leading to a state-takeover of grain trade in these states. This is not good in the long run.

What are the challenges the government is likely to face if FSB becomes a law

The biggest challenges are fixing the leaky PDS, containing the food subsidy bills within manageable limits, keeping private trade in grains from dying out due to state-takeovers, and allowing the natural process of diversification in agriculture. Else, the prices of non-cereals will flare up and any perceived gains from the Bill will evaporate quickly.

Can FCI meet the stock requirements for implementation of the food security legislation

As of today, they (FCI godowns) are overflowing with grain stocks. So, there is no immediate problem. The issue will come up after 3 to 5 years, when we will have some implications of FSB being felt in agriculture, or even earlier if the country is hit by a severe drought. It is worth remembering that in the 2002-03 drought, grain production dropped by 38 million tonnes. That will be the real test of the FSBs sustainability.