Can UBI, black marketeers raise prices of onion, dal, food grain artificially? Here is a big surprise

After getting UBI transfers, everyone will prefer purchasing food grains and cereals from the market, raising their prices. Also, by hoarding food grains, as they have been doing for onion and dal products, black marketers can increase prices artificially

Can UBI, black marketeers raise prices of onion, dal, food grain artificially? Here is a big surprise
UBI talks about giving unconditional cash transfers to all the citizens of a country to ensure a minimum standard of living.

Sitakanta Panda & Santosh Kumar Dash

The media and public discourses in advanced countries have been all agog about the idea of universal basic income (UBI) due in parts to rising unemployment, automation and income inequalities. UBI talks about giving unconditional cash transfers to all the citizens of a country to ensure a minimum standard of living. In India, however, it is being debated for quite some time for a different reason—it is lapped up as an antidote to poverty. For decades, India’s poverty alleviation programmes were based on targeting the beneficiaries, which resulted in both inclusion and exclusion errors, due to ubiquity of corruption and political clientelism. Some people say a good approach to overcome this drawback is about finding out who deserves welfare entitlements in lieu of who does not. The 2017 Economic Survey parrots similar lines when it argues that India, instead of having de jure universality, should have de facto UBI, which effectively removes the top 25% in terms of income in the population from availing this benefit. An aside: one of the advantages of UBI is it will reduce the incumbent politicians’ power to influence voters by announcing new welfare schemes just before the elections!

Though merits and demerits of UBI and the mode of its implementation have been discussed a lot, one critical issue has hardly received any fair attention, namely the potential impact of UBI on the ongoing public distribution system (PDS). Being a beneficiary of PDS, the mainstay of which is the BPL ration card, is the gateway to various government freebies and welfare benefits. PDS has also been a food security vehicle for the rural and urban poor, as well as providing minimum support prices to farmers. The question is, whether UBI will replace all the existing welfare schemes and, in particular, PDS? Although the Economic Survey does not have any discussion on macroeconomic implications of UBI, it admits that replacing PDS will increase market prices of cereals (p.189).

Let’s begin with this. The government procures agricultural produce from farmers immediately after the harvesting season through the Food Corporation of India (FCI) for maintaining buffer stock for the purpose of food security, ensuring price stability, and providing food grains to the poor by freely disbursing and/or selling through PDS ration shops at affordable prices. Therefore, if UBI comes at the expense of closing down PDS shops, what will happen to the large-scale buying of agricultural produce? The fact that government intervention in the food grains market has been substantial, its withdrawal may have palpable repercussions on food prices, farmers’ welfare and food security.

For example, according to RBI’s Handbook of Statistics on Indian Economy, the government has procured rice and wheat to the tune of 34.14 and 28.08 million tonnes (MT), respectively, in 2015-16, while disbursement was 31.82 and 31.84 MT, respectively, during the same period. The buffer stock required for these two grains on (annual) average were 11.25 and 17.24 MT, respectively, for the same year. It is worth noting that buffer stock regulations and prescribed quantities regularly vary from quarter to quarter. So, if the government only buys food grains directly from farmers to meet the buffer stock norms and stops buying the residual 23 MT rice (34.11-11.25) and 11 MT wheat (28.08-17.24), then where will farmers sell the rest of the agricultural produce and how?

Farmers may end up distress-selling to local middleman who will appropriate a good amount of rent. Local middlemen will act as a local monopsonist (a situation involving one buyer and a lot of sellers). Several newspapers have reported that due to delay in procurement (or lack of warehousing facilities or if procurement centres do not function well), the distressed farmers sell their produce to local middlemen at a price below the minimum support price (MSP). They sell it early so as to repay the debt taken from local moneylenders who often happen to be middlemen themselves.

Middlemen exercise their bargaining power in two ways. First, when the farmer does not repay the debt on time, they raise interest rates, and second, knowing that government agencies buy tardily, they offer to purchase grains at prices below MSP. The local middleman works like a monopsonist. One may argue that if the local middleman offers lower prices to farmers, then such kind of middleman from other areas should come in, or some new middlemen should emerge on the scene. Unfortunately, this is not happening in many parts in the country. Had it been the case, we would not witness distress-selling in many regions. Also, middlemen from other areas might face entry barriers (the local middleman might obstruct). Further, even if they are able to enter the interlinked credit market, farmers in an area may not trust these new guys to sell their produce to them. So, if UBI results in government reducing procurement, the market power of local monopsonist may increase. Farmers will end up being a loser in any case. We think a sensible idea would be a ‘gradual withdrawal’ of the government from the public procurement system until an alternative system emerges whereby farmers are able to sell their produce in the open market at fair prices. Till then, the government should continue to buy food grains from farmers even after the possible introduction of UBI and sell grains in the open market after procuring directly from farmers.

Now, the question arises, what will happen to MSP and its role in price stability? The role of MSP has been both a boon and a bane for our economy. While it ensures price security for farmers, it is also inflationary in nature. Governments in power have used it as a tool of electioneering to appease farmers or voters by raising MSP as polls near. The government, aided by the Commission for Agricultural Costs and Prices, has announced MSP for 23 agricultural commodities. These include seven cereals, five pulses, seven oilseeds, and the rest four are commercial crops. If the government stops procuring because of UBI, what would be the rationale for declaring MSP? The government may declare MSP, but if it does not buy enough grains from farmers, MSP would be practically redundant. Please note that MSP also influences farmers’ choice in deciding which agricultural goods to produce and how much. So, if MSP becomes redundant, then we need to think about these issues as well.

Now, what will happen to the price of agricultural products after the introduction of UBI? We think it will be inflationary for two reasons. First, after getting UBI transfers, everyone will prefer to purchase food grains and cereals from the market. As a result, prices of food grains and cereals will rise, which, given their weight in the consumer price basket, will put upward pressure on consumer price index. Second, by hoarding food grains, as they have been doing for a long time for onion and dal products, black marketers can increase prices artificially. Now that the market knows the government pays for citizens’ basic food grains in reality, black marketers will be tempted to hoard. If this turns out to be the case, then, at the margin, the common citizens will be worse off due to inflation as they will be able to buy less goods than they were availing from ration or PDS shops. Consequently, citizens may demand higher UBI cheques over time to ensure the real benefit remains the same. A way out could be that the government should adjust nominal UBI payments for inflation from time to time, much like it revises its dearness allowances for employees. The severity of these issues have not been debated till date. Post-PDS solutions must be carefully thought out in the public policy arena.

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