NO BONUS OVER MSP FOR WHEAT AND RICE---INDIAN GOVERNMENT DIRECTIVE TO STATES

My comments on “NO BONUS OVER MSP” carried by international rice portal ORYZA.

Click link below

http://www.oryza.com/op-ed/no-bonus-over-msp-directive-aims-overhaul-india-grain-sector

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THE ABOVE IS AN EDITED VERSION OF THIS BLOG

INDIAN GOVT. GRAIN PROCUREMENT TO BE RESTRICTED FROM STATES DECLARING BONUSES.

Tejinder Narang

Government of India (GOI) has recently “advised” state governments “not to declare” bonus on wheat and paddy. The central government or the Centre—an acronym for GOI-- cannot issue any “directions” to state Governments to refrain from declaration of bonuses.  But, if states do not abide by this advisory, GOI is not obliged for open-ended procurement of grains from that state.  Centre will buy what is needed or required. Any leftover or extras purchases from farmers will be the responsibility of the state Governments. The decision will be implemented from the marketing year2014-15 for rice (from October 2014 onwards) and 2015 for wheat (April2015). It is a progressive policy as it will enhance market availability, tame food inflation and supportive of export competitiveness of grains. Indeed a very bold step of Modi Government in reducing open ended grain procurement without caring for vote bank politics.

Implementation of such an advisory would be easier if the Centre and the states are controlled by the same party. But what happens when ruling parties are different in centre and states remains unclear. This could lead to political tension backed by farmers.

Then there may be instances—rare, but a possibility-- near the country’s General election time, when the Centre itself declares bonus over above the recommendations CACP (Commission for Agriculture Costs and Prices) while fixing MSP.  GOI itself needs to take a vow that it will not declare a bonus—when MSP is rationally recommended.

The current practice

During last 4 years, the very objective of declaring bonuses by states was to garner political patronage from the farmers. (See chart above). This is devoid of any economic rationale.  When the Centre notifies MSP of grains, then all parameters of cost and profitability are accounted for across the country. BJP ruled states like MP, Chhattisgarh, Rajasthan (for wheat), have been notifying bonuses to farmers from their own kitty, while extracting local taxes from GOI. (Ref chart below for taxes). Farmers are assured of elevated prices and procurement, give over-riding priority to rice- wheat production in preference to other crops. The centre ends up buying more than what is needed.

(There cannot be an absurd situation where GOI, out of the income tax collected out of taxpayers, is disbursing tax to country’s own state governments. The grain so procured is again subsidized from money coming out of central revenue and printing machines. Is it not a case of triple taxation? First personal/corporate taxation, then sales tax on grains, thereafter tax is drained when grain is subsidised. This amounts to deprecating the value of money/ savings and promoting poverty than to mitigate it.)

Chhattisgarh— an example, a bad case of bonuses

For example local tax on rice/paddy in Chhattisgarh is 9.7%. But it declared bonus of 23% (RS 300) over MSP (RS 1310) for paddy in 2013-14. (Bonus was Rs270 per quintal in FY12, Rs50 per quintal each in FY11 and FY10—which reflects the arbitrariness of the state Government to milk the exchequer). So Chhattisgarh pays only (23-9.7) =13.3% while balance is paid by the Centre.  Thus, thirty percent of electoral funding/facilitation in Chhattisgarh and 100% good will earned was enabled by the Centre---the then Congress/UPA government—a case of gross political mismanagement. In 2012-13, about 67% of Chhattisgarh rice production amounted to 93% of marketable surplus having procured by the state, leaving little for the private trade. (See chart below.) The same logic can be extended to other states.

Punjab’s tax on rice is 14.5%, Andhra Pradesh 19.5%, Haryana 11.5% and Madhya Pradesh at 4.7%. Local taxation on grains is uncalled for. Agro-economists have also suggested that those states who inflict more than 5% taxation on Centre should also be advised that GOI will not support open ended procurement in these states, even if “no” bonus is declared. Punjab, Haryana, Andhra could be hit with this diktat, but then where will the centre look for acquisition of grains? This is a catch 22 predicament.

Centre believes that a single GST (general sales tax) across the country may be the solution—but there appears to be no firm timeline for GST. But that may be next agenda on reform on food front.

Thus bonuses, local taxes, higher procurement leading to tightness in market availability and surplus liquidity with farmers are a deep malaise that contributes to food inflation.  

In nut-shell, “no bonus” advisory carries following implications

1    Balance and diversity- To wean Indian agriculture’s overbearing emphasis on wheat –rice production and suggesting/emphasising crop diversification. For example—if MP and Gujarat incentivize more wheat and rice production—they are compressing land usage/availability for oilseeds, pulses, vegetables, fruits and other items. At the same time humungous inventory is stuck with FCI/state Governments—a case of national wastage and natural resources too.

2    Dilution of FSA- The previous UPA Government ignored the excessive build-up of stocks of grains on the plea that Food Security Act (FSA) will require additional inventory.  FSA is deferred for the time being under one pretext or the other and the recent guidance to the states that bonuses will not be tolerated is an indirect reference to the prospective dilution of FSA.  

3    WTO compatibility--There is also a pressure from WTO on Indian Government to set its house in order on the food subsidies. The directional intent is to reduce wasteful subsidies/ leakages / storage space and comply with WTO guidelines.

4    More private sector--Indian Finance Minister stated in parliament on 18^th July 2014 that by “being pro- business also means pro-poor too”. This inter-alia implies that private trade in food sector will be encouraged as compared to overwhelmingly large state control of the entire grain sector.

These steps will also improve financial health—fiscal deficit-- of the Government. Larger market availability and diminished taxation will ensure greater export parity and lesser import of edible oil and pulses.