Deregulate food, fertiliser, sugar as well

Last week, the Government of India (GOI) took a bold and wise decision to re-notify deregulation of diesel prices. It is an attempt to reduce the nation’s fiscal burden, but it also indicates that the government is serious about getting the economy back on track.

Oil marketing companies (OMCs), at the discretion of the Government, will now increase or decrease diesel prices. To compensate their current under-recoveries of about Rs 9/litre, oil corporates will apply “small corrections” of 50 paise in monthly instalments. The “small correction” upped shares of oil companies next day and improved stock market sentiment.

The recent hike in rail fares, which were untouched for the last ten years, is also a step in the right direction. Over time, they should promote efficient use of scarce resources, cut down deficits, and thereby help rein in inflation.

RISING FOOD SUBSIDY

However, there appears to be a selective amnesia in the Government on raising food and fertiliser subsidies. The FCI has been allocated Rs 75,000 crore in the 2012-13 Budget, which may only cover 50 million tonnes of grains, while stocks are likely to touch double this tonnage (100 million tonnes), requiring a funding of Rs 1,50,000 crore. How will these extra allocations be made?

For wheat and rice, the policy prescription is to reduce prices and inflate demand. This goes against the ‘grain’ of the Centre’s fuel policy. No long-term export policy is in place for evacuating official inventories and resolving the problem of plenty. The trade fears export/import embargos on the slightest supply/demand mismatch.

Even Russia and Ukraine have refrained from banning wheat export this year, despite the 35 per cent drop in output. Higher domestic prices have compensated losses of farmers in these countries.

There is a lot of confusion over the implementation of the Food Security Bill (FSB). The criteria for identifying beneficiaries, and the mode and quantum of disbursal — whether via PDS or cash transfers, and how many kg per household per month is to be accounted — are loose ends that may not be tied up even before the 2014 elections. Storing and distributing about 70 million tonnes (mt) of grain to cater to 67 per cent of the population, is a gigantic exercise. About 46 million tonnes of built-in covered storage space is available, while plans to create additional warehousing have been on the blueprint stage for many years.

There also appears to be intense opposition to this Bill within the Government. The Ministry of ‘Food and Agriculture’ was split for this reason. Sharad Pawar was divested of the charge of Department of Food, and assigned only the Agriculture Department as he publicly expressed his reservations about FSB. K.V. Thomas was made Food Minister to expedite implementation of FSB.

The Chairman of the Commission for Agriculture Costs and Prices (CACP) has come out with a discussion paper, apprehending unsustainable financial liabilities on account of this Bill, amounting to Rs 6 lakh crore in the next three years. Members of the Planning Commission too have given dissenting opinions on FSB.

The direct cash transfer scheme is proposed to be linked to FSB, while the Bill before Parliament makes no mention of this.

If cash transfers are the preferred route, then open-ended procurement of foodgrains needs to be restructured and deregulated in a calibrated manner. But no one has given much attention to this.

The net result is that the Government has become the biggest hoarder of grains, which are stocked unscientifically, and therefore, with every passing day their quality deteriorates, and the fiscal deficit goes up! Opposition parties are mute spectators.

FERTILISER COST

The fertiliser industry has a subsidy component of Rs 95,000 crore this year, against a Budgeted sum of Rs 62,000 crore. This is yet another area with a wide gap between the cost of production/imports and the release/administered price of urea. While the pricing of phosphorus and potassium has been partially de-controlled, nitrogen is still heavily regulated. As a result, the situation has taken a turn for the worse.

Media reports also suggest that CACP has recommended to the Finance Minister to de-regulate urea pricing, while directly compensating the farmer on per hectare basis. This can reduce the fertiliser subsidy by about Rs 20,000 crore, while incentivising farmers to optimally use N, P and K, raising the efficiency of fertiliser usage, while cutting down the fiscal deficit.

SUGAR POPULISM

The Rangarajan Committee has suggested dismantling all controls on sugar, and aligning sugarcane pricing to pricing of sugar and first stage by-products. This is a rational proposition, but the politics of sugar in Uttar Pradesh is such that the State Government has announced a much higher ‘state advisory price’ (SAP) than what the industry can afford.

This will bleed the industry and damage the interest of farmers. The Centre needs to clean up the mess in sugar sector, from dismantling levy, to the release system, to export/import norms. These controls have not served any purpose but promoted rent-seeking, which bureaucrats and politicians both enjoy. If the sugar sector has to attain value addition in terms of ethanol and cogeneration, regressive interventionist actions must end forthwith.

The experience in other sectors, be it steel or cement or telecom, has shown that by de-regulating these sectors they have become more efficient. If streamlining of the fuel/diesel policy is meant to rationalise distortions, let a similar prescription be applied to food, fertiliser and sugar.

The author is a freelance commodity analyst.