The burgeoning official stock of foodgrains had in the summer of 2002 become a cause for concern. An incentive structure that encouraged farmers to opt for a paddy-wheat cycle made for a political economy that perpetuated a system where grain rotted and were eaten by rodents in rudimentary storage facilities. In consequence was the ever-mounting food subsidy bill (Rs 27,800 crore in 2003-04 BE). Perhaps more important was the opportunity cost of farmers failing to opt for cultural practices more suited to growing conditions and less dependent on fiscal support, and hence more competitive in the long run. In this context, mention must be made of the reported success in Punjab of officially assisted contract farming for a variety of non-grain crops, underscoring the potential for change.
In any event, developments during the past year seem to have laid to rest such concerns. Having reached 63 million tonnes (mt) at the end of June 2002, official grain stocks rapidly fell to 30.5 mt by the beginning of August 2003 ? a decline of 52 per cent. Stock of rice fell faster (by 63 per cent) than that of wheat (by 45 per cent). During the crop year (July to June) 2002-03, official stocks fell by 27.8 mt which neatly compensated for the decline by 26.6 mt in the estimated production of wheat and paddy in 2002-03 and an increase of 3.4 mt in net exports, from levels of the previous year.
Incorporating the fact that stocks had risen by 1.3 mt in 2001-02, apparent consumption of rice and wheat in 2002-03 thus stood at 436 grams per capita per day, nearly the same as in the previous year. Thus consumption in a year with a record harvest was the same as that in a year with the worst drought in decades. If this is not food security, than what is?
There are, however, some things in this success story that are hard to reconcile. These have to do with outstanding food credit, which has fallen only 29 per cent while physical stocks have halved. The official grain stocks procured and held mostly by the Food Corporation of India (FCI) are financed by the banking system and the credit is secured against the inventory and partially guaranteed (25 per cent) by the central government by virtue of an Act of Parliament.
Now, if the quantity of stocks comes down, so ought the outstanding credit also reduce, except to the extent of any increase in the unit value of grain. The valuation of the inventory for purposes of the credit is the lower of the direct cost of procurement and the weighted average issue price. The direct cost is the MSP (minimum support price) plus cesses, handling cost etc, which could be set roughly at 15 per cent of MSP. This is much higher than the BPL (below poverty line) issue price for wheat and marginally higher than that for rice. The APL (above poverty line) prices are of course much higher than BPL prices, while the latter are more than double that of the Antodaya Anna Yojana (AAY) issue prices.
What would be the appropriate price for valuation? Most of the off-take in the PDS (public distribution system) is under BPL and AAY, and we know that the direct cost is in excess of the BPL price. Now, if we were to apply the BPL prices for valuing the reported official stock of 8.07 mt of rice and 22.43 mt of wheat as on August 1, 2003, we obtain a number of about Rs 14,000 crore. Even if the higher APL issue prices were used, the valuation would be Rs 20,000 crore. As against this, the outstanding food credit as on July 25, 2003 was Rs 43,277 crore and as on August 8, 2003 it was Rs 43,251 crore.
We understand that grain off-take under PDS is on cash basis. Since inventory valuation is on issue price basis, any dues on account of subsidy will fall outside the scope of financing. With receivables thus precluded, what is one to make of the difference between the estimated valuation and the reported outstanding food credit, that of a not inconsequential Rs 23,000 to 29,000 crore?
The author is economic advisor to ICRA (Investment Information and Credit Rating Agency)