This is an article from Business Line ePaper appeared on 24th June, 2014
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IGHTING FOOD INFLATION- MUCH MORE NEEDS TO CHANGE
Tejinder Narang
A French proverb quips—the more things change the more they remain the same (plus ça change, plus c'est la même chose). In its earnest to tackle rising food inflation the new Government has taken a welcome initiative to delist fruits/ vegetables including onions (FVO) from APMC act, while all other measures are as usual-- short term firefighting actions of political expediency, repeated several times in past while long term reforms are awaited.
Government attributes spurt in food inflation to hoarding by traders. That is a standard cliché. During period of inflationary spiral, traders are labeled as “middlemen” in a disparaging manner who resort to unjust enrichment. Though PM is encouraging cohesiveness amongst all participants for speedy economic development, the system is still stuck in old mind set by keeping traders at an arm’s length. The fact is that FCI, on behalf of the Government, is the nation’s largest mandi and hoarder, year after year with nil accountability. As of June 2014, about 32 million tons of “excess” grains at average cost of Rs 25000/mt –total Rs 80,000 crores, is jammed therein.
Onions, Government, Traders
Reverting to FVOs, since action against de-hoarding is a state subject, the onus of tackling shortages/inflation gets transferred to states after the Centre suggests states to “act”. If States/ UTs carry out direct intervention through PSUs or agro federations/marketing boards for subsidised distribution of FVO items, this amounts to induction of another intermediary/layer who procures from private trade and then under-prices a commodity to consumers which can also be exposed to round tripping. Operational cost and losses of such official intermediaries (bound to exist in perishable commodities) get debited to state exchequers funded by common man. It is again more of Government and less of governance.
Elimination of traders was one of the major factors in this collapse of socialistic system in Soviet Union and East European nations. In a free economy, middle men or traders are logistical arteries of free flow of commodties that function 24 hours/ 365 days with utmost alertness because their own funds and profits are at stake. Traders are better connected with farmers than the bureaucracy. Medium size trading businesses have a limited capital and cannot afford to hoard FVOs with a very short shelf life, even if negative impact of El-Nino is perceived, as bullishness in coming months.
Government could have called a meeting of some of stakeholders (prominent farmer leaders/traders) for resolution of their problems/bottlenecks/disputes atNashik/Mumbai’s Vashi market/Delhi Azadpur depot, to ease the supply side. However Government resorted to closed door meetings without engaging instruments of action that matter in the market. By keeping trade out of retailing, points of supply side /sale diminish and last mile availability wanes. Inflation even in short term may not be reined as PSUs/marketing federations will take time to respond in procurement and distribution. Due to vigilance’s oversight, these agencies are rule bound and are slow to react in dynamic market.
Rice
Decision of releasing 5 million tons (mts) of additional rice to state Governments is a step forward for destocking FCI, though contours of release mechanism are hazy. Do states/APL beneficiaries require this rice? Moving 5million tons will require about 2000 railway rakes (carrying capacity of each rake is about 2500 mt). This is in addition to about 2 million tons rice distributed per month through PDS by FCI equivalent to 800 rail rakes or 27 rakes per day. Will such a vigorous movement be feasible? The devil is in the detail. If intent of release is implemented only then it will send a sentiment of bearishness in domestic market, otherwise not.
Furthermore, there is no open market sale (OMSS) price for rice as in the case of wheat as there are no bulk users of rice. Above Poverty Line (APL) release price is Rs 8/kg, while BPL release price is Rs 4/kg against average open market price of Rs 24-27/kg, while economic cost is Rs 29/kg and bare cost is Rs20/kg. Thus fixation of release rice for the market is critical.
If 5 million tons is disposed at APL/BPL values, beneficiaries will be tempted to trade @ Rs 10-14 per kg in illicit channels to create cash liquidity of Rs 3000- 5000 crores and that will further fuel inflation. Preferably Government sale price may be Rs 18-20/kg to offset risk of diversion back to FCI and to block generation of black money. Indeed a tough task for policymakers. Also, why hike MSP of paddy this year if food inflation is to be curbed?
Pulses &edible oils
Price sentiment of pulses and edible oils internationally is bearish. By announcing credit lines to the states, mandate to import is given in advance and that may firm up world markets of these commodities. Probability of unwanted imports on government account cannot be ruled out.
APMC act
The decision to exclude FVO from the ambit APMC act has been widely welcomed as it provides freedom to stakeholders to sell and buy. This should enable some respite on inflationary pressures but action from the states on this advisory will be watched.
But other mega reforms -- limiting procurement from states who give bonus on paddy/ wheat (like Chhattisgarh, Punjab, Haryana, Rajasthan , MP) and who levy heavy local taxes ranging from 5% to 14.5%; rationalising Food Security Act, building hygienic storage facilities and calibrating MSP judiciously and not politically (as in the case of sugarcane) also need immediate attention. If the present system of sometimes supporting producers/farmers and then subsidizing consumers continues, firefighting on food inflation will continue frequently and indefinitely.
