The government’s reported proposal to create a Rs 4,000-crore fund for disbursement to states for combating inflation is fundamentally flawed, and of course ill-conceived. The move, under consideration by a committee of secretaries, envisages using the fund for providing interest-free loans to states for the procurement, storage, transportation and retail marketing of essential items, including foodgrains and edible oils, to the poor at reasonable prices. State governments, which would be required to contribute a minimum of 25 per cent to this non-Plan scheme, are supposed to release these funds to their civil supplies corporations, marketing federations and other similar agencies for implementing the programme.
Coming at a time when elections to some key state assemblies are round the corner and the Lok Sabha polls are only nine months away, such a populist initiative can be expected to provide some political mileage to the ruling dispensation. But, viewed other than through a political prism, the whole proposal seems badly conceptualised in several respects. For one, many states may not be enthusiastic about participating in this scheme in view of the mandatory 25 per cent monetary contribution that they have to make, while even the Central contribution is in the form of a loan that has to be repaid. Another scheme with the similar objective of providing cooking oils to the needy at a discount of Rs 15 a kg, launched recently by the agriculture minister, Sharad Pawar, has also not found favour with many states. There is, therefore, every possibility that the new programme will remain confined largely to the states which are already supplying foodgrains to the poor at highly subsidised prices, such Rs 2 per kg for wheat and Rs 3 for rice, as these states can use the additional funds for partly offsetting their financial burden. Should that happen, the additional benefit to the poor would be nil. It is also futile to expect that the proposed mechanism for the procurement and handling of essential goods will be more efficient than the problem-ridden public distribution system (PDS), which is known to be especially ineffective when it comes to the districts where you find large concentrations of poor people.
The more fundamental flaw is that the scheme has been configured in a manner that will defeat its very purpose. Unlike the PDS, for which stocks are procured by the Centre (read the Food Corporation of India) through a system of minimum support prices, the new scheme will require state governments to procure materials through commercial purchases. When supplies of essential commodities are already under pressure, the entry of state bodies as bulk buyers is bound to tilt the demand-supply balance and drive up prices further, instead of pulling them down. Where a commodity like wheat is concerned, the market is already facing a serious supply crunch on account of the government mopping up the bulk of the marketed surplus soon after the harvest. For effective inflation management, especially at a time when global commodity prices are ruling high, availability needs to be augmented through higher domestic production and not just by re-distributing the available stocks.
There is also the point that doling out Rs 4,000 crore will adversely affect the Centre’s fiscal position, especially in the wake of the waiver of agricultural loans and the escalation in the bill on account of food and fertiliser subsidies (the latter alone is reported to be running ahead of Budget estimates by about Rs 60,000 crore, or 1.3 per cent of GDP). The government would therefore be well advised to consider the effectiveness of the proposal, as also the likely fiscal cost, before deciding to go ahead. If the whole thing has been badly conceived, even the hoped-for political pay-off may not materialise.