Govt, not traders, to blame for food inflation

Retail food inflation has persisted at 10 per cent per annum while cereal inflation is around 15-17 per cent.

Wheat constitutes about 45 per cent of the grain consumed as flour in the country. Its MSP is Rs 1350/quintal while it costs up to Rs 1800/quintal — 33 per cent higher -- in wholesale markets in most of non-wheat producing areas of southern India. And, 24 million tonnes of excess wheat — after accounting for buffer norms — is languishing with Central agencies as of October 1, 2013.

This is clearly an absurd state of affairs, and the blame for it should be laid squarely on the door of the Government, rather than on the various actors in the food processing and distribution chain. Yet, it seems the government has sought to do the latter.

The Food Minister, at the AGM of Roller Flour Millers’ Federation, stated the following: That our public distribution system (PDS) suffers from 35-40 per cent leakages; millers must abstain using diverted grain; the rise in food inflation is attributed to the hike in minimum support prices (MSP); and the problem of high prices may be resolved by easing norms for tender sale of about 8.5 million tonnes of wheat to bulk buyers and one million tonnes to small private traders (without tenders) from depots of Food Corporation of India (FCI) in different states.

The above is a blend of facts and misplaced expectations. Right pricing by FCI — the national trader — is critical for reducing prices. The leakages are a result of the arbitrage possibilities between the open market sale price of the FCI and prices under the Food Security Act (FSA).

PROCUREMENT AND LEAKAGES

Some players in the distribution chain will resort to hoarding, just as other bonafide users will tap into the so-called diverted grain. The fault then lies with the system that creates dual prices, and not with the users of “diverted” grain.

A policy of open-ended procurement of grains by Central agencies up to 45 per cent of marketable surplus and 98 per cent of market arrivals has crowded out private trade.

If there are leakages from accumulations in the bucket, then the designer and manufacturer are to be blamed, rather than those who pick up the leaking grain.

Should a factory make a bucket with a bigger hole next time, it becomes liable for severest punitive action. The analogy holds true for leakages from our PDS, under the FSA.

The primary motivation for leakages comes from the flawed subsidising of about 90 per cent for wheat (or Rs 15/kg).

Seepages (now 40 per cent as per CACP estimates) are bound to swell due to greater arbitrage possibilities between open market sale scheme (OMSS) of about Rs 17.50/kg for non-wheat producing southern states like Andhra Pradesh, Kerala, Tamilnadu, Karnataka, against Rs1-2-3/kg under FSA. .

The diversion starts from the storage/delivery/despatch gates of FCI and then to transit handling; depots of state governments; FPS (Fair Price Shops) sale outlets and finally when grain comes to the market for conversion into flour.

The cost of grinding the grain at the chakkis may also be settled ‘in kind’ in rural areas. The roller flour millers are excluded in all these stages .

The diversion cannot be blamed on flour millers; it is a systemic, policy-induced problem.

MARKET PRICES

Roller flour millers are in the business of converting bulk wheat into flour in a competitive market. They require reasonable profitability on the investment and efforts made by them.

They can source wheat both from the market and the Government. To suggest that the millers may buy only high priced grain available from FCI depots is not a palatable proposition.

Rather, the pricing of open market sales of wheat should be revisited. Tenders for sale of wheat at OMSS at Punjab/ Haryana have flopped.

Now, more tenders are to be issued from other States at Rs 1500/quintal plus rail freight ex-Ludhiana (Punjab) that is about Rs 1750/quintal in southern states. Uttar Pradesh wheat also costs about the same in southern states.

Since FCI/agencies are the single largest buyer/hoarder of wheat, its market releases can push the market up or down.

If the Food Ministry is really concerned about reining inflation then it must consider pricing wheat in southern states at about Rs 1600/quintal (inclusive of transport cost) to put an end to despatches from Uttar Pradesh.

Remember, MSP for 2013-14 is Rs 1350/quintal and 2012-13 is Rs 1285/quintal. Setting prices right for flour millers is doable in the interests of controlling price rise.

(The author is a grains trade analyst.)