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Problems of plenty

A bountiful wheat harvest for the second year in a row has strained storage capacity with the government, calling for a new approach to its price intervention policy. At the commencement of the official marketing season, wheat production is estimated at around 78 million tonnes. The Food Corporation of India already has 14 million tonnes of wheat as buffer stock which is more than thrice the prescribed norm of four million tonnes. Given the plentiful supply this season, it may well end up procuring another 20 million tonnes. Private trade, which was actively discouraged last year, may not be very enthusiastic to enter the market for a variety of reasons. For instance, the relatively high minimum support price (MSP) determined by the government — Rs.1,080 a quintal including bonus for 2008-09 — will be a dampener. Since traders are unlikely to buy at price levels dictated by the MSP, the FCI will necessarily have to step in to mop up stocks, taking its inventory levels above 30 million tonnes. This in turn would entail considerable carrying costs to the government, estimated at Rs.2,400 a tonne a year.

Export does not seem to be an option, even if the government were to permit it, since the wheat prices ruling in international market are too low to be viable. In fact, major wheat-exporting countries are offering to sell at prices far lower than the MSP. The government’s attempts to dispose of stocks in the domestic market also resulted in huge losses. In this piquant situation, distributing at least a portion of the stockpile at much below the current PDS prices, or even free, to families below the poverty line will make sound economic sense from the standpoint of poverty alleviation and creating a social security net, particularly in the context of economic downturn. Over the medium-term, there is a strong case for revisiting the MSP mechanism in its entirety. First, over the years, the distinction between the MSP and the procurement price has disappeared. Secondly, the MSP has invariably been marked up year after year and this unidirectional movement, as studies have shown, can create demand-supply imbalances. The way ahead is to devise a new system of price intervention that provides incentives to producers without distorting the market.

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