Food security or economic insecurity?

If you ask a person to sell a product at $1 which he purchased at $10, he will outright refuse. He might consider selling it at $11 or $9, though. He will be outraged if he is informed that 50 per cent of his realisation will go to brokers or rent seekers. You don’t have to be a mind-reader or a professor of economics at Harvard or MIT to appreciate his position. It is just common sense.

The possibility of losing money worries rich and poor alike, except perhaps our political masters who compete with each other to espouse the populist food security policies with 90 per cent loss to the national exchequer through a system that is riddled with 50 per cent inefficiency.

If the argument is that the issue of hunger needs to be tackled, let the hungry — who form less than 2 per cent of the population — be fed. If the issue is to reduce poverty, then target those below the poverty line with an appropriate policy package that helps them earn livelihoods, through better education, better skills, and better infrastructure and markets. This will be five to ten times superior in terms of rates of return, and much more sustainable, contributing to overall growth and efficiency. Doles will drain the exchequer and slow down growth. We will all be caught in the “low level equilibrium trap” of a socialist or dole state.

India cannot afford the luxury of arbitrariness. If any country loses 90 per cent of its investment, it has to be recovered through direct and indirect taxes, and sale of assets. Alternatively, the country will have to print that much paper currency, which effectively means devaluing the currency. This erodes the value of all savings, making everyone poor or relatively poorer.

International paradigms

The former Soviet Union imported about 20 million tonnes (mt) of wheat in 1987-90 from the US due to domestic shortages. Superstores carried the lowest price tags even as products were absent from shelves. After the Soviet Union split up and the socialist system was dismantled in the 1990s, Russia, Ukraine and Kazakhstan have been collectively producing about 135 mt of foodgrains. They have challenged the supremacy of the US and other countries in agro exports for the last ten years.

Last year, Russia and Ukraine had a poor crop but there was no change in trade policy. Farmers were allowed to reap the benefit of the best available price in the market. Now, in 2013-14, they are back with a bang.

Take another example, Thailand, whose policy of procuring paddy from farmers much above the market price (around $500 a tonne), against a tradable value of $300per tonne, has crippled the economy. Today, they are stuck with over-priced paddy and no takers. Its rice exports have fallen by 40 per cent — from 10 mt to 6 mt.

Moreover, these exports are not from the paddy produced in Thailand but illegal flows at cheaper prices from Cambodia, Myanmar and Vietnam. The Thai government is facing a financial crisis, its sovereign rating is threatened, while its rice gets damaged, pilfered and resold. The Thai government is now prepared to dispose 18 mt old rice through tenders in a staggered manner, at a likely loss of about $5 billion. The reversal or unwinding of policy is unpalatable to farmers. They are blaming millers, traders and officials for siphoning off part of their payments.

Flawed Indian models

The Food Security Ordinance (FSO) and the subsidy models followed by Chhattisgarh, Madhya Pradesh, Tamil Nadu and Andhra Pradesh, are flawed. They amount to nationalisation of grain trade, with negative implications for the open market.

For example, Chhattisgarh notified a bonus of Rs 2,700/tonne (22 per cent) over MSP of Rs 12,800/tonne in 2012-13 as part of its election promise. MP announced a bonus of Rs 1,500/tonne (11 per cent) on wheat this year for the same reason. Whether it’s FSO or bonus, the intention is the same.

More foodgrains from other neighbouring States were diverted and hoarded. Recent media reports state that excess paddy stocked by the Chhattisgarh government at the premises of the millers have been damaged by heavy rains. The State government is unwilling to lift milled rice of questionable quality. Millers are not allowed to dispatch this rice to other states to make good their losses.

The prohibition of inter-state movement of rice is against the Essential Commodities Act (ECA). But one can neither proceed against the Union Government or States for hoarding.

The FCI and state agencies still have an excess of about 30 mt of foodgrains (after accounting for FSO) — about $11 billion — which can be instantly sold or exported at market prices to generate revenue and reduce the fiscal deficit. But the prospect of debiting losses and inviting comments from the CAG is holding back the Central Government. We are going the Thailand way.

Heal yourself

The TPDS (Targeted Public Distribution System) should now perhaps be Targeted Poverty Distribution System.

When our fiscal and current account deficits are both trending to 6 per cent of GDP, GDP growth is declining from 8 per cent to 5 per cent per annum, rupee is under pressure to devalue above 60 any time, FDI is vacillating, FII is flying out, and exports are not rising — it is a sure sign of sickness in the economy. When the country is becoming poorer and poorer, can the poor become richer?

( The author is a grains trade analyst .)