)
Following food inflation rising to 9.5 per cent in May, the government has announced a series of moves to address the matter. These include asking states to crack down on hoarders and allow farmers to directly sell fruit and vegetables to consumers. It is likely the Centre will release additional rice for the public distribution system.
With a sub-normal monsoon looming, the government is worried about spiralling food inflation and its debilitating impact on the nascent economic recovery. The anxiety is understandable, as food inflation has hovered at about 10 per cent through the past seven years. Here is a list of five reforms the government must consider to address the issue:
Calibrated rise in MSP
In the first five years of the last decade, the minimum support price (MSP) for common paddy was increased from Rs 510 a quintal to Rs 560, a rise of about 10 per cent. However, in the second half of the decade, the MSP saw growth of about 75 per cent. In the case of wheat, while the MSP rise in the first half of the decade was a mere Rs 30, the second half saw an increase of Rs 450. Other food items for which the government fixed MSP saw a similar trend.
Crops for which the government sets an MSP account for a third of the primary article basket in the Wholesale Price Index (WPI); food inflation has a weight of 47.6 per cent in the Consumer Price Index (CPI). Any MSP-led increase in the prices of agricultural commodities, therefore, pushes up WPI and CPI in general, and food inflation in particular. Recently, Reserve Bank Governor Raghuram Rajan had said, "Since minimum support prices are intended to be a floor for market prices, and have sometimes directly set the market price when increases have been substantial, for key crops, the rate of price inflation seems to relate to the increase in MSP in recent years." He, therefore, advocates "limiting the pace of MSP increases".
APMC reform
If limiting the pace of increase in MSP will moderate the prices of wheat, rice and pulses, comprehensive reforms in regulated markets, also known as mandis, might arrest the price spiral for fruit and vegetables, another key component of food inflation. Mandis owe their genesis to the Agricultural Produce Marketing Committees (APMC) law, put in place by state governments to ensure the interests of farmers are protected and trade in agricultural items follows an order. There are 7,246 mandis in India and the average area served by a mandi is 450 sq km. These mandis control almost the entire wholesale trade in agricultural goods.
In the past, there have been attempts to reform the APMC law. For a better system, the central government had formulated a model APMC Act in 2003. It permitted private and corporate bodies to set up a marketing network and demolish the well-entrenched mechanism of middlemen and arthiyas. And, it allowed private mandis. But the approach of state governments has been partial-adoption of some of these provisions. Less than 10 per cent of trade in agricultural commodities takes place through private mandis. Some states have allowed contract farming, while others have allowed direct purchase from farmers. But comprehensive reform of the APMC legislation is yet to take place in any state. Several attempts to delist fruit and vegetables from the purview of the APMC law, too, have yielded very little.
Aditi Nayar, senior economist at rating agency Icra, feels "a mechanism to build consensus with state governments for introducing appropriate amendments in APMC Acts is also crucial, particularly with a view to reducing middlemen and allowing contract farming".
PDS reform
A 2005 Planning Commission report had arrived at a rather alarming conclusion that for every four rupees spent on the public distribution system (PDS), only one reached the intended beneficiary. It had estimated 57 per cent food grains didn't reach the targeted beneficiaries. Since then, the situation has improved somewhat. But the leakage, according to authoritative estimates, is yet to fall below the 40 per cent level.
India has a network of about 478,000 fair price shops, catering to the needs of 400 million people. They distribute, among other items, wheat, rice, sugar and kerosene oil. Such a vast network of fair price shops would have done wonders to moderate the prices of essential commodities. However, a leaking system has only added to the ballooning food burden without addressing the issues it was aimed at.
Food security legislation
The negative impact of the food security law enacted last year, on burgeoning subsidy bill, has been widely documented. What is even more worrisome is the impact it will have on the evolution of the country's agricultural sector. The share of the expenditure on cereals in overall food expenditure declined from 41 per cent in 1987-88 to 29.1 per cent in 2009-10 in rural regions and from 26.5 per cent in 1987-88 to 22.4 per cent in 2009-10 in urban areas. However, the new food law will ensure there is excessive focus on production and procurement of low-value food items such as rice and wheat at the expense of high-value produce. Will this not depress the already depressed agriculture sector? Even if there is a slight shift away from fruit, vegetables, pulses and other high-value items, it will stoke food inflation further. CRISIL chief economist D K Joshi, therefore, prescribes any review of the food security law "should make it more focussed and targeted", even if that means reducing the percentage of intended beneficiaries from the current 67 per cent.
Investing in back-end infra
According to estimates, the value of fruit, vegetables and grains going waste due to inadequate infrastructure stands at a staggering Rs 44,000 crore a year. The country has 6,300 cold storages, with an installed capacity of 30 million tonnes (mt), against the required 61 mt. How can a country battling persistent high food inflation afford to have such a large amount of fruit and vegetables going waste? "Inadequate storage of infrastructure and cold chains leads to substantial wastage of perishable items; small, short-lived supply disruptions cause large price spikes, such as the sharp rise in vegetable inflation in August-November 2013," says Aditi Nayar.
PDS REVAMP
- 478,000 No. of fair price shops
- 400 million No. of beneficiaries
- 40% of estimated leakage
- Rs 44,000 crore Estimated annual loss due to wastage of fruits, vegetables and grains
- 30 million metric tonnes Installed capacity of cold storages
- 61 million metric tonnes Required capacity of cold storages
