Shrink FCI, use more futures, warehouse receipts

Written by Sandip Das | Updated: Jun 5 2014, 06:53am hrs
The new NDA government will have to deal with the complex and critical challenges faced by the agricultural sector. Ashok Gulati, Chair Professor Agriculture, Indian Council for Research on International Economic Relations (ICRIER), and former Chairman of the Commission for Agricultural Costs and Prices (CACP), spoke to FEs Sandip Das on measures the government must initiate to rejuvenate the critical sector.

What should be the key thrust areas in the food and agriculture sector for the Narendra Modi-led government

First and foremost, the new government needs to tame food inflation. It should announce its strategy in this area and in the next 100 days, bring food inflation to below 5% levels. We have already suggested three steps in this regard: liquidate the 15-20 million tonnes of excess grain stock with the Food Corporation of India (FCI); reduce import tariffs on food products, especially fruits and vegetables, dairy and meat and fish to much lower levels (10-15%) from their current ones, as high as 100% as in case of chicken legs (cut pieces); and contain fiscal deficit.

On the agriculture front, the key challenge is not only to raise land productivity but also water productivity and simultaneously build effective value chains, especially for perishable commodities, and thereby avoid large wastages.

What should be the government policies towards the sharp rise in food and fertiliser subsidies

I dont know what the governments plans are in this respect, but the time has come to bite the bullet. Currently, food subsidy is budgeted at R1,15,000 crore and fertiliser subsidy, at around R68,000 crore. However, we are told that the pending bills on account of food subsidy alone are roughly R49,000 crore, and for fertiliser subsidy, a further R38,000 crore. Together, they amount to R2,70,000 crore.

I feel that reorienting these subsidies towards conditional cash transfers, made directly to beneficiaries through the Aadhaar route, could save at least 30% of the current total, if not more. These huge savings can be achieved without sacrificing the ultimate objectives of helping poor consumers or farmers. And these savings can then be ploughed back in agriculture through investments, say, in the water sector. This will raise productivity and give long-term food security at affordable prices. But this cannot be achieved overnight, given that several poor people may not have bank accounts and financial infrastructure may be weak in remote areas. However, a beginning can be made, starting with the large cities, and then going to farmers. If this can be achieved in the next 1-2 years, it can deliver rich dividends.

Can the government reorient the focus of mega programmes such as the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) and various irrigation schemes

Yes. Currently, MGNREGA is more like a dole under the rights approach. We need to turn it into a development project, be it for constructing low-cost housing in rural areas or toilets and sanitation facilities, or recharging ground water through check dams, or rejuvenating our degraded forests. It must be an integral part of such development projects. The change from dole to development can give productive and sustainable employment to people.

As you observed during your tenure as CACP chairman, the minimum support price (MSP) for grains has already reached a very high level, and any further increase would push food prices. What should be the approach of the NDA both in the long- and short-term

Our MSPs for wheat and paddy are not very high in relation to comparable countries in the region. Take, for example, wheat. Our MSP of R1,400 per quintal turns out to be roughly $233 per tonne at an exchange rate of R60 to a dollar. In Pakistan, MSP of wheat is around $280 per tonne and in China $388 per tonne. The case is similar for paddy when we compare with Thailand, Indonesia, the Philippines, China, etc. In China, for example, MSP for Indica rice is about $445 per tonne and for Japonica rice at $494 per tonne, while in India our MSP for rice (converted from paddy) is around $325 per tonne.

Prices are determined by forces of demand and supply in an open economy environment, i.e. when exports and imports are both open. Indian agriculture cannot and should not remain insulated from global markets. Only wide swings in global markets have to be watched and tariffs tweaked to contain large volatility. Having said this, I think much of the adjustment in MSP is already carried out, and now, if the global prices remain calm and stable, and if domestic costs of production do not rise abnormally, further increases in MSP can be contained.

The BJP, in its manifesto, has announced unbundling of FCIs operations. What would be your view on the issue

The time has come to shrink the role of parastatals like FCI, a remnant of the scarcity era of mid-1960s, as is the MSP regime. But in order to do this, a complete reorientation of the entire food security complex is neededfrom open-ended procurement to stocking and distribution through highly leaky PDS, many issues need tackling. This would need some brainstorming within the government. My take is to use best international practices, like conditional cash transfers in case of food subsidy, developing a warehouse receipt system and futures markets for farmers, keeping exports and imports open, allowing private trade to stock as much as they like and creating a unified market for the whole country. Then you can think of shrinking the functions of FCI to simply keeping a strategic reserve of, say, 15-20 million tonnes, instead of 80-74 million tonnes that it held from July 2012 to July 2013. Just unbundling of FCI will not take you far enough in the reforms process.

How should the government sell the excess FCI stock in the market Should the grain be sold below procurement cost

FCI can offload excess grains through an electronic auction, with a minimum reserve price of, say, MSP at which the grain was bought plus 5%. The high levies and taxes in certain states (like 14.5% on wheat in Punjab) need to be brought to less than 5% (Gujarat has 3.5%), especially when the Food Security Act promises to give wheat and rice at R2/3 per kg.

Should the new government, as part of converging activities of ministries, merge the food, water resources and fertiliser ministries to create an agriculture ministry

That would be a dream come true and it can help avoid all inter-ministerial turf wars that often delay the decisions for months, if not years. I would strongly advocate merging of food and agriculture, which was the case earlier, and also bring in the department of fertiliser, irrigation and food processing under one roof.

What are your suggestions on crop diversification in the Green Revolution states And on the recently-launched Green Revolution in eastern India

In the Punjab-Haryana belt, we need to bring down area under paddy by almost a million hectare to save the fast-depleting water table. Any crop other than common rice (basmati can continue), consuming lesser water should be welcome. Preferably, the choice should be market-driven. But Punjab farmers and policy-makers got addicted to the MSP system over the years, and they may want the government to assure purchase of the produce. But they need to look at Gujarat, where agriculture is commercial. From cumin to cotton to castor, it is all market-driven and agriculture has grown in the state at almost 10% per annum during 2001-02 to 2011-12 compared to less than 3% in Punjab.

Please identify the thrust areas for agricultural research, particularly in the context of revamping the Indian Council of Agricultural Research (ICAR)

I think ICAR needs to switch gears in terms of augmenting productivity, not just in terms of land alone, but in terms of water as well. Biotechnology, drought resistant seeds, water-saving farming practices, bio-fortification, precision farming to attend to the needs of micro-nutrient deficiency are some of the areas that need to be developed further.

What initiatives can the government take to further boost agricultural exports

Keep the trade policy stable and open. In FY14, India exported agri-produce worth $42 billion vis-a-vis imports of only $17 billion. This is a resounding success for Indias competitiveness in agriculture.