Tuesday, July 27, 2010

How can foodgrains be "off-loaded"?

The persistently high food inflation has triggered off calls for more aggressive and direct government intervention in the foodgrain markets, especially by off-loading some share of the massive buffer stocks, in order to increase the supply and thereby lower prices.

Adding weight to this are reports that more than 10 mt of rice and wheat, stored in the open across the country by the Food Corporation of India (FCI), are at risk of (or already are) rotting. Of the 59 mt of grain stored by FCI and state agencies across India, 42 mt is in covered buildings, while the remaining 17.8 mt is stored in the open under tarpaulins.

Now, assuming the government decides to off-load these stocks, what are the channels to do so without any major market distortions? Unlike conventional open-market operations of the government in the financial markets, it is not possible to simply off-load massive stocks of food grains directly into the market, even accepting the distortion effect on the market prices. In the absence of trading in rice and wheat futures, the commodities market too lose relevance (it is a moot point as to whether manipulating this market can translate into lower market prices).

The only available channel for the government to off-load such massive quantities of stocks is the existing public distribution system (PDS). Here too, it can be done either by improving the efficiency of drawls (given the dysfunctional nature of the PDS in many North Indian states) or by increasing the allocations itself. Any improvements in the efficiency of PDS system is too complex an issue to be addressed immediately, which leaves increasing allocations as the only alternative. In fact, the proposal under the Food Security Act to distribute atleast 35 kgs of rice or wheat to BPL families at Rs 3 per kg in 150 of India’s poorest districts, is a good place to start.

But such actions would only cause small quantities to be released into the market and would not make any meaningful dent on rotting stocks or the larger issue of lowering prices. Further, it would take care of only food grains like rice and wheat, and still leave the major contributors to food inflation like pulses, oil-seeds, vegetables, etc unaddressed.

In this context, food-for-work programs, dove-tailed to the NREGS program (with some share of the wages given as food stamps), can be the most effective channel to off-load the massive food stocks and thereby bring down prices. This would enable the expansion of the scope of NREGS to more explicitly include infrastructure asset creation, besides wage employment assurance. Many much-needed infrastructure/community asset works that would other-wise have not been done, can now be covered under this. Moreover, from the experience of previous food-for-work programs, it can also have a depressing effect on food grain prices.

Another alternative would be to issue time-dated food vouchers, especially in rural areas. These vouchers could be redeemed through the regular PDS shops and other pre-defined/certified retail outlets. Though this would certainly carry the risk of market incentive distortions, if structured carefully and done in sufficiently large enough quantities it can achieve both the stock-disposal and price lowering objectives. And finally, there is the option of helicopter drops!

2 comments:

Anonymous said...

Is it not time to create another channel of reaching into the food market other than thru the PDS as insurance for the country ?

The Unique ID program is seeking to create a bunch of private centres to issue cards in the long run.

Do we need to create such depots in the public/private sector with prepackaged quamntities of foodstuff.

I think these are very much in the realm of possibility. We can build the system to ensure monitorability by having them in Tq/mandal HQs.

Food coupon administration can also made easy. I am sure we can reduce the waiting time at such centres if we plan carefully.

Comm/CS shd prob look at these options also.

gulzar said...

i am not sure whether the UID program's objective is likely to succeed.

fundamentally, it is difficult to run a two-price arrangement in a large economy like India. it becomes difficult even with a UID accounts linked transfers based single price market. i have blogged about the difficulties in detail at

http://gulzar05.blogspot.com/2010/03/why-pds-should-continue-to-remain.html

http://gulzar05.blogspot.com/2010/03/fps-and-private-vendors-for-pds.html

pre-packaging raises several practical issues. how do we regulate the standards of the packages - weight, types of items, quality etc?

i agree that food coupon administration can be made far more easier with interventions like bar coding etc.