Foodgrain stocks in the Central Pool in June 2019 stood at 27.6 million tonnes of rice and 46.6 mt of wheat; a whopping 74.2 mt in total. The surplus stock beyond the operational and strategic reserve requirement has risen to 22 mt of wheat and 16 mt of rice, with a total surplus of 38 mt, the highest ever.

Rising subsidy bill

Maintenance of these surplus stocks has placed an additional burden on the food subsidy bill. The FCI has met ₹75,000 crore of its expenditure last year through debt, which can only be repaid through enhanced food subsidy. The budget estimate for food subsidy for FY 19-20 is ₹1,84,000 crore, which does not have any provision for debt settlement. Clearly, this fiscal situation is unsustainable. High production and hikes in MSP with no changes in the central issue prices under TPDS has led to accumulation of stocks with FCI and a mounting food subsidy bill.

PDS quota

To offload surplus stocks, one proposal before the government is to increase the quota of grains distributed under TPDS from the present level of by, say, 2 kg per head per month. Given the delayed onset of the monsoon and the possibility of drought in some areas, this appears to be an attractive proposition. However, this has two consequences:

Higher quota and higher supply at the highly subsidised prices of ₹2 and ₹3 per kg for wheat and rice respectively will further depress the market prices for foodgrains. An already depressed market situation will become worse and more farmers will offer more grains at MSP, leading to higher accumulation of stocks. Those farmers who are not able to sell grains to government agencies will face decline in income.

Enhancement of the foodgrain entitlement by 2 kg per head per month is likely to lead to an increased food subsidy bill by around ₹25,000 crore annually.

Remedial steps

In order to create stability and better manage the grains market as well as contain the food subsidy bill, the following five measures need to be taken:

1. Encourage private trade to procure grains under a better designed “price deficiency” payment scheme where such procurement under MSP is compensated by the difference between a benchmarked market price and the MSP. This will prevent accumulation of government stocks.

2. FCI should actively participate in the commodity exchange as a seller for wheat and rice by creating sell position of wheat stock to be delivered in future date. The State government can buy in futures and distribute the grains at the issue price. This will increase the liquidity in the market and reduce market distortions.

3. With the general elections over now, it is an opportune time to introduce corrective measures in respect of the PDS issue price. While the economic cost of rice and wheat for FCI has increased to ₹25 per kg for wheat and ₹36 per kg for rice, the issue price ₹2 per kg for wheat and ₹3 per kg for rice has remained unchanged since 2013. These issue prices were initially valid for a period of three years. The issue prices for wheat and rice may be doubled to ₹4 and ₹6 per kg.

4. High MSPs of paddy and wheat have led to shifting of acreage into grains at the expense of other crops. MSPs for paddy and wheat should remain frozen for the next 3 years to reduce the existing market distortions.

5. A two-year crop holiday can be introduced for wheat and rice in a few States such as Punjab and Haryana. In lieu of production of rice or wheat, farmers should be adequately compensated to the tune of difference in their income realization from other crops based on their landholdings. Farmers would be free to produce any other crop and sell the same in the open market. This might attract farmers to produce cash crops which in turn may increase tax collections at State level.

The author is MD&CEO, NCML. Views are personal.