WHEAT/RICE BUFFER NORMS WRONGLY TARGETTED AT 53 MILLION TONS
This is not an opportune time for upward revision of “grain reserves” or “buffer norms” of wheat / rice stocked under the supervision of Government. Timing of such a correction and its quantum has to be linked to implementation of Food Security Act (FSA) that stands deferred for a year or so. Thus, the responsibility of dealing with FSA and hiking the buffer norms rests with next Government after 2014 General Elections. This shall also include status of readiness of the State Governments for complying with FSA. Many state Governments are pursuing their own versions/schemes of food subsidies.
The possibility of future postponement of FSA or any modifications cannot be ruled out. FSA has not helped either UPA nor will it to BJP. There are no penalties if implementation of FSA is delayed while postponement of hiking buffer norms will help rein cereal inflation.
Propelling food inflation
Prudence demands that any action that propels inflation higher should not be entertained by the Cabinet or its committees. During last six months, whole sale cereal inflation is about 11%-- Rice inflation is 15%; wheat is at 7%. The current stock levels with FCI/Agencies are about 45 mts on 1st December 2013 –that is about 20mts more than required.
Any formal indication to State Governments of Punjab, Haryana, Andhra Pradesh, Chhattisgarh, Madhya Pradesh, Rajasthan that Centre will be procuring more wheat/rice in coming months will incentivise bonuses by the states for political populism, suck in more grain for FCI/state agencies, crowd out the private players, precipitate higher fiscal deficit and therefore will be super- inflationary. Upward revision of buffer norms and economic welfare, as of now, are conditions of self-contradiction.
Perhaps, Food Ministry is attempting to avoid any criticism for hoarding excessive inventory that it failed to dispose of excessive holdings due to lack of workable solutions either via OMSS tendering or exports. Urgency of revision of reserves is not the easy way out for justification of hoarding grains.
38-40 mts max limit will suffice
Total requirement of wheat/rice by Government under FSA is 61-62 mts. The existing band of grain reserves “floats” within 21-32 mts each quarter, including strategic reserves of 5 mts. The tonnage suggested by Food Ministry after FSA as “reserve range of 32- 53 mts” on quarterly supply/demand basis, is about 21 mts higher. This is an estimated increase of more than 50%, which defies all norms of reasonableness. Even the CACP (Discussion Paper) recommendations of about 42 mts, 47 mts , 52mts basis reserves of one, two and three months respectively are very liberal after accounting for doubling the strategic reserves from 5 to 10 mts. At the most strategic reserves can be pegged to 7.5 mts.
Basis annual offtake of 61.2 mts, monthly requirement is 5.1 mts under FSA. Taking three months as the “reserves”—(5.1x3)15.3 mts; three months of “demand” of 15.3 mts and 7.5 mts of strategic reserves, this adds to (15.3+15.3+7.5) is 38.1 or 38 mts maximum under FSA. This can then be configured at best to 38- 40 mts on quarterly input / output basis.
Empirical mapping of 38-40 mts may not be precise but quantity of 53 mts is completely out of the hat. At average economic cost of Rs 25000/mt of grains, excess inventory of 13—15 mts will be worth Rs.32500-37500 crores, most of which will rot.
A maximum buffer limit of 53 mts also amounts to virtual nationalization of grain trade. Apart from inflation, this will kill the private market and trigger “unnecessary” imports at a much higher cost on Government account. Once higher volume of buffer norms are approved, it becomes very difficult to cut them down too. A re-review of the buffer norms on practicality rather than a theoretical consideration may be undertaken. There is no point in the Government, this or future, to tie itself into knots by expecting that there will be an imminent disaster in overall production in any single year.
Prioritise storage space for buffering
Availability of storage space for grains with Government is yet another case of massive confusion. As per FCI web site, FCI/State agencies/ Central Warehousing Corporation/Private Entrepreneur Guarantee and Covered and Plinth (CAP) scheme has storage capacity of 46 mts. Food Minister claims 74 mts as stocking capability with Kaccha and Pucca CAP. Incredible it is that Food Ministry is recognising both Kaccha and Pucca CAP as an acceptable storage –that is grain stored in open ground covered with half torn plastic sheets.
Let the funding be first prioritised for hygienic warehousing than on quantum of acquisition/buffering of grains, which lack safe storage. Upward revision of norms should be based upon economic rationale and then it must be synchronised with workability of FSA. Any immediate correction should be put off for the time being.