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 Sharad Pawar, Union Agriculture Minster has said that India is hoping to import more than 1.5 million tonnes of wheat from the international market. The need for import is to build up a buffer stock of wheat in anticipation of future shortage. In the last five months, the government has amended the Essential Commodities Act prohibiting hoarding of wheat beyond six months and has freed wheat imports to enable 5.5 million tonnes of wheat to be imported. The imports have been slow to come by on account of a global slump in wheat production. Several news media reports have quoted sources on the fact that domestic wheat production has not grown in the last 10 years to keep pace with population growth.

It is important to understand the underlying nature of the problem and associated economics to fully appreciate what the government is doing here. Why is this important ? From a Right of Center Economic Agenda perspective it is our tax rupees at work here, making it all the more imperative to understand how those tax rupees are being spent and if they are indeed delivering on their promise.

First a word of appreciation on the RTI act and the Department of Food and Public Distribution for making available online its very comprehensive annual report, which lays out in black and white the nature of the beast. Offstumped has analyzed the report and has found some interesting tid-bits.

The main elements of the Central Government’s food management function are procurement, storage and movement of foodgrains; public distribution and maintenance of buffer stocks. Additionally the Central Government also indulges in policies around production, procurement and issue prices of foodgrains, quality control, imports and exports, behaviour of market prices.

Over the years recognizing the wastefulness of a Centralized bureaucracy at the federal level  procuring food grains for distribution through the PDS, the Government in 1997-98 introduced Decentralized Procurement of food grains. with a view to effecting savings in the form of reduction in the outgo of food subsidy, enhancing the efficiency of procurement and PDS and encouraging local procurement to the maximum extent thereby extending the benefits of Minimum Support Price or MSP to local farmers. To date only 11 states have signed up to this.

While all of this sounds reasonable, the devil is in the details. Specifically around how the Government buys food grains and how it sells them and of course all that goes in between buying and selling.

Government undertakes to purchase all wheat and paddy of prescribed specifications offered on sale by the farmers at the notified Minimum Support Price, thereby ensuring them a stable market for their produce.

Wheat and rice are issued from the Central Pool to State Governments/UTs at uniform Central Issue Prices (CIP) for distribution under the TPDS. The CIPs of foodgrains issued under the TPDS are fixed below the economic cost.

The Central Government bears a huge subsidy burden on this account, especially for making available foodgrains at highly subsidized rates under BPL category. To understand this first hand let us look at the actual numbers

The government bought rice at 570/- and 600/- Rs per quintal and sold it to BPL families at Rs 565/-.

The government bought wheat at 650/- Rs per quintal and sold it to BPL families at Rs 415/-

Now remember the economics is here not just about subsidizing food for BPL families as would be expected in a socialist political environment like India. The same political parties which swear by socialism and pro-poor policies also swear by pro-farmer policies. So at the other end of the political spectrum you have the farm lobby to keep happy by continually increasing the MSP and hence buying at a higher price. So in effect the Central or State Governments run by political parties that swear by socialism are terrible middle men because they buy at a higher price, sell at a lower price and are terribly inefficient in how they go about doing it. Well thats just half of the story. Coming to the issue at hand of why the Government is importing wheat and why that is a big issue ?

Food stocks are maintained by the Central Government to (i) meet the prescribed Minimum Buffer Stock norms for food security; (ii) for monthly releases of foodgrains for supply through the Public Distribution System/Welfare schemes; (iii) to meet emergent situations arising out of unexpected crop failure, natural disasters etc; (iv) for market intervention to augment supply so as to help moderate the open market prices.

So the Government apart from playing middle man between Farmers and Below Poverty Consumers also is playing the role of a distributor by maintaining a buffer of safety stocks. The current crisis that the media and the agriculture minister are blowing hot and cold over, is not that you cant go and buy wheat tomorrow or that there is less to wheat to sell. The crisis is about the Government wanting to stock up more anticipating it may not have stocked enough. The question is how much should the government be stocking up, what reasons determine this buffer size and to which of the above 3 purposes does the government feel the buffer would be inadequate.

Questions to which the annual report doesnt really provide much elucidation. It however makes quite clear that an overriding factor in determining the buffer size were the needs of the many Government run, Tax payer sponsored dole programmes including but not limited to:

Targetted Public Distribution System (TPDS)

Sampoorna Gramin Rojgar Yojana (SGRY)

Sampoorna Gramin Rojgar Yojana (Special Component) & other welfare schemes.

Mid Day Meal Scheme (MDM)

National Food For Work Programme (NFFWP)

So what does all of this cost the tax payer.

Food subsidy is provided in the budget of the Department of Food and Public Distribution to meet the difference between the economic cost of foodgrains and their sales realization at Central Issue Prices for TPDS and other welfare schemes. In addition, the Central Government also procures foodgrains for meeting the requirements of buffer stock. Hence, part of the food subsidy also goes towards meeting the carrying cost of buffer stock.

Who is the beneficiary of all the Tax Rupees that go towards this food subsidy ?

The subsidy is provided to FCI, which is the main instrument of the Government of India for procurement and distribution of wheat and rice under TPDS and other welfare schemes and for maintaining the buffer stock of foodgrains as measure of food security.

Since decentralized Procurement was introduce the 11 States/UT namely Madhya Pradesh, Uttar Pradesh, Chhattisgarh, West Bengal, Uttaranchal, Tamil Nadu, Andaman & Nicobar Islands, Orissa, Gujarat, Karnataka and Kerala difference between the economic cost and the Central Issue Prices is passed on to the State as food subsidy.

So what we have here is a situation wherein the progressive socialist intentions of the Central Government translating into a large subsidy that actually goes towards a Government owned Enterprise and some state governments. In 2006 this subsidy was estimated to be 20,467 crores. The Central Government has gone on record talking about the steps it is taking to proactively contain this subsidy and therein lies the catch to the day's predicament on wheat imports. Of all the measures taken by the government to contain the subsidy we have:

Liquidation of excess stocks leading to reduction in carrying cost.

So there you have folks the Catch-22. The Government buys at a higher price, sells at a lower price, stocks up to avoid having to sell at a higer price, and then realizes that it has to pay the seller to eat the loss, and then realizes it is paying the seller way too much and thus explores if it can not stock up, and then which is today discovers that it probably has not stocked up enough so now it goes out of its way to buy at an even higher price abroad and the vicious circle continues ..............

So what is the way out here ?

Well here is a radical alternative from Offstumped, keeping spirit with the Right of Center Economic Philosophy.

Eliminate the Food Corporation of India or completely privatize it

Decentralize Procurement and Distribution completely, in fact go beyond the current state level to the local level.

Let Local Communities be responsible for food security of their community residents. Let them determine which of the center/state sponsored schemes make most economic sense based on a first hand assessment of local demographics, economics and considerations

Rather than have a government run bureaucracy be responsible for compliance, audit, vigilance and all the attendant risks, write a cheque to the Local Communities and let them spend it to procure food directly from an open market.

In fact create a nationwide open market where producers and importers can sell and local communities can buy directly eliminating the FCI or the State Government as the middleman

What will this do. At the very least it will reduce the susbidy burden as the middleman's costs are eliminated completely. The difference in buying and selling price could also go down based on how competitive the open market is and how it adjusts to supply and demand. What is more because local communities have a first hand knowledge of their needs, the demand projections will be that much more accurate reducing the size of the buffer needed as distribution is far more efficient. Finally private food distributors will bring in technology and professional Supply Chain Management techniques to improve the overall efficiency of the supply chain thus further reducing losses which today are quite significant and add upto the economic cost.

The Vajpayee BJP NDA Government showed the economic sagacity to move towards decentralized procurement and opened the debate on subsidies. With an economist Prime Minister in Manmohan Singh the Congress UPA Government should further this by eliminating the role of a middle man being played by the Government while still achieving its progressive objectives. The debate on PDS has been made to be about socialism and caring for the aam aadmi which is anything but the truth. The debate is really about the Politician retaining the role of middleman to give out dole for votes. The progressive objectives of Food Security can be achieved without the Government playing middleman. It is time there is serious political debate on this.

Offstumped Bottomline: Food Security in a developing nation with a burgeoning population is a must. There is a Right way and a wrong way of achieving food security. A centralized bureaucracy acting as a middleman in a catch-22 situation is not the Right answer. Local Communities should be made responsible for their food security and should be empowered by the economic freedom to buy in an open market and benefit from competition. FCI should be make way for free enterprise in the area of food distribution powered by technologies like RFID and modern supply chain management. The role of the Government should be limited to funding local communities and maintaining a strategic buffer only for disasters and unforeseen world events.