A-Z OF INDIAN FOOD SECURITY BILL/ORDINANCE
CONTROVERSIAL ORDINANCE PROPELS MARKET DISTORTION
(Neither a welfare measure nor a novel idea)
FSO (Food Security Ordinance) is devoid of elementary principles of economics. It is based upon virtually ‘free’ supplies of rice/wheat/coarse grain, while nothing is “free” in life and the world. Theoretically, if everything is provided free to all, work culture will disappear, production/supply of goods will vanish and the national economy will be defunct. There is no free lunch for ever!!
It offers “grains” and not “welfare” to poor man. Nine out of ten persons will want money/cash which they can spend at their discretion or as per their “choices” of necessities in life—be it education, healthcare, house, travel etc.
Neither is it a novel idea as drummed about. It is merely an extended version of TPDS ( Targeted Public Distribution System) except that prices of grains which are Rs 5.65/kg ($0.1) for rice and Rs 4.10/kg ($0.07) now are reduced by about 50%.
PDS is managed by the Central Government through FCI and state procurement agencies, which is a dysfunctional mechanism riddled with 50% leakages, corruption at the procurement and distribution centres, poor storage, lack of warehousing and burdened by costly bureaucratic set up. FSB/FSO will further exacerbate this.
Poverty also does not mean absence of common sense. Hence, low priced grains will be resold to make money in open market at better prices. Most of the paddy/rice is stored with millers, which can easily be manipulated by the millers, while being shown as stocks on paper only as experienced by the Government in previous years. Wheat has to be milled for flour—which can also be traded by the beneficiaries when the market price will be 10 times the subsidised price. The system is made prone to unscrupulous leakages. Policy makers then blame people for corruption, but the reality is that the policy making is bankrupt of solid and workable ideas!
Leakages confirmed by CAG and NSSO data
As per CAG report, 14 million tons of wheat and 16 million tons of rice (Total 30mill tons) were released for distribution under TPDS during the year 2009-10. While NSSO data states that the households reported actual consumption of PDS grains (rice and wheat) at 13.50 MMT. The differential quantity of 16.50 MMT (55% of the quantity released) remains unexplained, confirming large scale leakages from the system.
Not pro-investment but pro subsidy
I. Beneficial programs will be of productive investment rather than leaking subsidies. Assuming 6,00,000 crores or $100 billion is incurred in three years –—about $50 billion will be siphoned off by unscrupulous means without accountability.
II. Subsidy is a “pricing” policy—while CCT is a “monetary” policy. Pricing policy is consumptive with massive leakages. Monetary policy ensures direct delivery to beneficiaries and benefit of “choices”.
III. Unfortunately, UPA-2 is proudly claiming to have increased food subsidy from Rs 25000 crores ($4.2 billion) –five times to 125000 crores ($21 billion) as a social welfare measure, which is adverse for the economy-- worsening the fiscal deficit from 2.5% in 2008 to 6% in 2012.
Finance Minister urges for de- monopolising
On 20th May 2013, Finance Minister had asked Competition Commission of India to suggest the manner in which the state monopoly in grains can be corrected; private participation can be enhanced and that discovery of market price is not affected by Government policy. Even FM is not the same page with FSO in the real sense.
I. Central Government prides itself for fixing “MSP” for benefit of farmers, undertakes massive procurement of wheat and paddy/rice, provides subsidies and fiddles with export-import regime. States shower bonuses, decide about local taxation/movement, undertake decentralised procurement and enforce discretionary levy obligations etc. All these create market distortion.
II. These dual power centres with arbitrary interventionists’ powers substantially distort the market and crowd out private players. Market essentially is the continuous and collective intervention of millions of minds. All bureaucratic rules emanate from the tunnel view of officialdom and political compulsions/coterie, which miss the larger picture and become obsolete with every passing day. Streamlining ambiguities in trade of perishable commodities over the last 50 years is the call of the day.
III. Wheat and rice producing states can milk the Centre by discretionary levy of local taxation on grains even higher from the existing level of maximum 14%-15%. What if Punjab and BJP ruled states of MP and Chhattisgarh raise the taxes on wheat and rice to 25%?? And why should they not when they know the centre cannot implement FSO without their procured grains.
IV. Prices can be right if markets are right. If markets are misleading, then prices too will be distorted. FSB/FSO makes Government as the monopoly of grain trade. Market prices will be therefore distorted with round tripping and mismanagement. Markets “need “to be set right. But FSB/FSO puts parliamentary stamp in perpetuating flawed production, procurement and distribution policies.
Withdrawal of subsidies creates social unrest
V. It demeans human dignity and shambles the economy. It is easier to introduce subsidies or interventionist policies. But their subsequent withdrawal can create social unrest and be politically highly unpalatable as can be seen from the mess in which Thailand has made for itself under price pledging scheme.
All grains potentially marketable surplus
FSB/FSO makes all grains produced “potentially” marketable surplus. Farmers, under the open ended procurement scheme shall bring Wheat, Rice, and Corn to the state agencies which are obliged to purchase them at minimum support price. This price may vary between Rs.13.00 to 15.00 per Kg. The farmer is not under any compulsion to stock grains at his premises. Instead they can buy the same grain at ration shop under Rs.1-2-3 formula whose economic cost may be Rs.20 per Kg.
Super subsidy by states
State Government like Karnataka, Tamil Nadu, Andhra Pradesh, and Chhattisgarh are distributing Rice at Rs.1.00 per Kg. Under FSB/FSO, any extra quantities “currently” supplied by them over and above their present entitlement (say 90%-100%) will be made available by the Central Government subject to the difference of Rs.1.00 or 2.00 per Kg to be incurred by the State Government. State Governments are further encouraged to buy extra grains from the open market and supply to the targeted beneficiaries under Rs.1-2-3 formula. Subsidy of Rs. 17-18 per Kg will be borne by the state in such an operation. State Government will exploit the poverty program incentivized by the Centre further promoting recycling of grains, rent seeking and sleaze.