Indian governments do not periodically amend or change laws, rules, institutions, procedures, etc, responding to changes in the operating environment. This has made our governance dependent on old and creaky foundations.
The Administrative Reforms Commission periodically reviews administrative structure, procedures and internal processes of government. Many of the recommendations remain unimplemented. Similar reviews of the police, armed forces, catastrophes like terrorist acts, etc, are meticulously reviewed but the recommendations remain largely on paper. Bibek Debroy, in the first-ever study of laws as they apply to commerce and the economy, had suggested changes but many of his suggestions are unimplemented.
This multiplicity of government ministers and departments, with each protecting its turf, and little coordination, is at the root of many problems. It gets worse when individual ministers and bureaucrats exercise great discretionary powers and at times siphon off government money by giving away national resources to private parties (as with land, fuel, telecom spectrum, iron ore, etc).
An important consequence is that the government is unable to offer a set of policies to deal with any situation. The country has suffered from two years of high inflation, especially of food articles. RBI has unsuccessfully tried to moderate it by controlling money supply and raising interest rates. Government continues to pile up deficits in its budgets. But the situation cannot be resolved merely by cutting deficits.
Over the last two decades, high economic growth has brought many people out of poverty. Their consumption standards have improved and many have switched over to some extent to vegetables, fruits, meats, eggs, etc. However, government has continued with the policy of minimum support prices (MSP) introduced in the 1960s to encourage production of food articles, rice, wheat, etc. The MSP of rice and wheat has been raised by 70% in five years. These price signals, combined with policies like free electricity, no restrictions on ground water extraction and use, have led to overproduction.
At the same time, the government has been procuring these grains for distributing to the poor through the public distribution system (PDS). Instead of procuring grains at prices somewhat below the market, the government has procured them at the rising MSPs. This has led to a huge glut of stocks with the government. With at least a third of the procured grains stored in the open, wastage on this account is enormous. This grain is partly used to feed those who are below the poverty line. There is massive handling, transportation, storage and distribution. Ration cards have to be issued to the deserving, and grains delivered to retailers. Each step in the process has massive leakages and theft.
The PDS was introduced after the Bengal famine and during the Second World War. After Independence, it was to act as a safety net for the poor. But it covers many more ?above the poverty line? than below it. Many really poor do not get cheap grains at all. There are millions of bogus ration cards. Alternatives to physical handling have been worked out but vested interests in the government prevent any change. Further, the PDS prices are well below the rising MSPs. The government has to shell out increasing amounts on account of these ?food subsidies?, a good part of which supports the undeserving. According to a recent report, the MSP of wheat and rice shot up by more than 70% in the last five years, resulting in a subsidy burden of over R50,000 crore.
The government is now reviewing the Central Issue Price (CIP) of foodgrains supplied to 13.26 crore above poverty line (APL) families through the public distribution system, last revised in July 2002.
The problem does not stop there. Since the MSP and PDS were introduced, the world and India have moved to liberalised trade regimes. This has meant that export and import of food articles is globally big business. International prices are many times at levels above domestic MSP. The Indian farmer loses on that account since he does not get the benefit of high export prices. Yet when exports by traders take place, they are at subsidised Indian prices and to a great extent used for animal feed in foreign countries. Farmers get fertilisers at subsidised prices and their overuse or improper use has led to considerable damage to soils. Agricultural markets are distorted by government controls and prices are not a result of free market interplays.
We have a combustible mix here of populist PDS prices, poor targeting of households that are poor, producer support through MSP, disparities with international prices, massive leakages of government funds in the process of procurement and distribution, artificially induced overproduction of rice and wheat in relation to demand, and export curbs. We must separate these various strands and deal with controlled prices for the poor, differentiated from prices for the farmer. We must substitute physical distribution in PDS with alternatives like cash vouchers for targeted poor households. We must allow agricultural markets to function without government interference so that market-determined prices are available to farmers.
Agriculture and foodgrains are just one example of the confusion in which government has landed itself because of continuing with outdated policies, systems and institutions. They make Indian governance increasingly inefficient and unable to deliver to citizens in relation to what government spends.
The author is former Director General, NCAER, and was the first Chairman of CERC