Writing on the Wall - Ashok V. Desai
I have often written about the gigantic corruption programme created by Congress governments, which walks on two legs: the public distribution system and the public works scheme, namely the Mahatma Gandhi National Rural Employment Guarantee programme. Riddled as they were with enormous leakage, the two could not be discarded by the Congress because they were its primary weapons against the Bharatiya Janata Party's sectarian appeal. It could not even countenance any change in the programmes because it would have deprived corrupt supporters of benefits.
Now, however, the Congress is defeated and the BJP is in power. It has continued both the programmes. Its faith in them seems to be less strong: it has provided only a modest sum for the Mahatma Gandhi National Rural Employment Guarantee Act and raised minimum support prices only a little. There is a chance that it will be less loyal to corruption, and more open to reform. So I would like to report on a study of the PDS published a couple of months ago by Marta Kozicka and her colleagues from the Bonn Center for Development Research. What they have done is to formulate models to work out the effects of the government's wheat and rice policies. But before I turn to their work, it is worth stating some of the basic facts, gathered from the works of Ashok Gulati.
Despite its active, long-standing food policies, India is one of the world's worst performers. Its food supply per capita in 1961-69 was 15 per cent below the world's, and was higher than in China and in Nigeria. In 2001-07, it was 17 per cent below the world's, and both the countries had overtaken India. Its protein supply fell from 82 to 77 per cent of world average.
India's food subsidies, which were 0.4 per cent of gross domestic product in the early 1990s, have settled around 0.8 per cent in recent years. In addition, it gave subsidies on fertilizer, power and irrigation; these together came to 15 per cent of agricultural GDP or 2.7 per cent of total GDP in 2009-10. It also restricted foreign agricultural trade, and so prevented Indian farmers from dominating the world rice market even though prices in India were much lower than those abroad. If foodgrain controls were dismantled, India could refashion its agriculture and emerge as a major agricultural exporter.
Government procurement takes an important share of production, but not a dominating one. Of the 90-odd million tons of wheat, the Food Corporation of India buys roughly 30 million tons. Of the rest, farmers keep roughly 25 million tons for themselves, and sell the rest in the market. So at least as much wheat goes into the open market as passes through the FCI. Of the 110-odd million tons of rice, farmers keep about 30 million tons, and the FCI takes about 25 million tons. So about a half of the output is sold by farmers to the market - a much higher share than in the case of wheat. Although the FCI takes about a third of wheat output and a quarter of rice output, the price elasticity of both with respect to the procurement price is high, presumably because the farmers can be sure of getting the minimum support price and are therefore sensitive to it. That may make a government unpopular if it dismantles the system; but there is still a case for reforming it.
If the MSP rises relatively to the wholesale price in the market, a 1 per cent rise in the ratio of the prices would increase procurement of wheat by 0.39 per cent and of rice by 0.27 per cent. (These are not own price elasticities; they have been estimated by Gulati and Sharma at 1.37 per cent for wheat and 1.1 per cent for rice.)
The government raised issue prices to below-poverty-line, above-poverty-line and other entitled families much less than general prices; as a result, the real issue prices fell by a half or more between 2001-02 and 2013-14.
Of rural households' grain consumption, they grew 25 per cent of the rice and 37 per cent of the wheat; the rest was bought in the market. This gives us an idea of the decline in subsistence farming, and serves as a check on the figures of output disposition I gave earlier.
Rice production has exceeded domestic consumption for long; that has forced the government to export or allow exports. It became more liberal towards exports from 1995-96 onwards; consequently, 2-3 million tons were exported annually, but faced difficulty because procurement policy kept domestic prices above export prices. This changed in 2007-08, when international prices shot up and exports became profitable. Then both government and private exports of rice increased; in 2012-13 they reached 10 million tons. Wheat shows the same pattern, though the volume of exports is smaller. In both, the government maintains a general ban on exports and relaxes it when stocks bulge too much. That is a poor way of managing exports if one wants to get a good price or build up a stable market. However, basmati production rose from 1995-96 onwards in response to the lucrative European market. It is less subject to policy interference, and 8-10 million tons are exported every year.
The government grain operations are expensive; Vijay Paul Sharma of the Indian Institute of Management, Ahmedabad has quantified them for rice. The economic cost of wheat to FCI was Rs 2418 a quintal - almost twice the procurement cost of Rs 1250; for rice, the extras were much less - Rs 537 on procurement cost of Rs 1285. Of these extras, 44 per cent went to buy gunny bags, and 25 per cent was paid to mandis; 15 per cent went into sales and purchase taxes, 10 per cent to transport, and 4.3 per cent was paid to workers to load and unload the bags in mandis. We do not have a similar breakup for wheat. But its extra costs are much higher; presumably, the government andmandis of Punjab make a lot of money out of wheat. One indicator of the differing levels of corruption is storage loss, which is 2 per cent for rice and 10 per cent for wheat. Governments and mandis are local, State-enforced monopolies which make food a lot more costly for our poor.
To sum up, the entire world has mechanized grain handling. India has not because it compels traders to pack grains in gunny bags. This inefficient handling adds considerably to our cost of grains. Second, we have statutorily given local monopoly in agricultural products to mandis, which they use to make huge profits. It is time to introduce free trade within the country and abolish these monopolies. Finally, our state governments and municipalities make a lot of money out of grain traders. The Finance Commission keeps raising their share of Central revenue without ever asking for better behaviour. The least it should insist on is abolition of all taxes that restrict the free movement of agricultural goods across the country. The prime minister has often promised new reforms. Here is a place where he can start: he should persuade the state governments to integrate the country. If he does it, he will be remembered for long as a reformer.
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