Economic Survey 2019-20 (Volume 1, Chapter IV, Part 4): Government Intervention In Foodgrain Markets

In the foodgrain markets in India, Government has sought to achieve food security while ensuring remunerative prices to producers and safeguarding the interest of consumers by making supplies available at affordable prices. In trying to achieve this, the state controls input prices such as those of fertilizer, water, and electricity, sets output prices, undertakes storage and procurement through an administrative machinery, and distributes cereals across the country through the PDS.

Foodgrain Markets: UPSC 2020 Prelims Pointers

  • The Food Corporation of India (FCI) was set up in 1965 under the Food Corporations Act, 1964 with the primary duty to purchase, store, move/transport, distribute and sell foodgrains and other foodstuffs.
  • The main objectives of FCI are (a) procurement of foodgrains from farmers at Minimum Support Prices (MSP) announced by the Government; (b) distribution of foodgrains to consumers through PDS, particularly the vulnerable sections of society at affordable prices; and (c) maintenance of buffer stock of foodgrains for food security and price stability.
  • Thus, it is mandated to serve the interests of producers and consumers alike.

Government’s Procurement of Foodgrains and Its Effect (Relevant for UPSC Mains)

  • The Government has emerged as the single largest procurer and hoarder of foodgrains.
  • Government procures around 40-50 per cent of the total markets surplus of rice and wheat emerging as the dominant buyer of these grains.
  • In some States like Punjab and Haryana, this share of purchase by Government reaches as high as 80-90 per cent.
  • A record procurement of 44.4 million tonnes of rice and 34 million tonnes of wheat was done in 2018-19.
  • Thus, the government, as the single largest buyer of rice and wheat, is virtually a monopsonist in the domestic grain market and is a dominant player crowding out private trade.

How Government’s Monopoly Disincentivizes Private Sector

  • Government’s monopoly disincetivizes the private sector to undertake long-term investments in procurement, storage and processing of these commodities.
  • These procurement operations largely support the MSPs that are designed to be indicative prices for producers at the beginning of the sowing season and floor prices as an insurance mechanism for farmers from any fall in prices.
  • However, the secular increasing trend in these prices have served to give a signal to farmers to opt for the crops which have an assured procurement system.
  • This also indicates that market prices do not offer remunerative options for the farmers and MSPs have, in effect, become the maximum prices rather than the floor price – the opposite of the aim it is intended for.

High-cost Foodgrain Economy

  • The current mix of policies of assured procurement (at MSPs), storage (through a monopolist administrative government organistion) and distribution under TPDS have contributed to building up of a high cost foodgrain economy.
  • It is evident that if foodgrain markets are opened for active participation of private players with Government as an equal player (and not as a monopsonist in procurement and monopolist in storage and distribution), competition would lead to more efficiency in the operations and development of adequate infrastructure in storage and warehousing.

Increasing focus on subsidies is harming the growth of agricultural sector

  • The growth in public investments in agriculture is negatively correlated to increases in food subsidy outlay.
  • As investments are the crucial input to increase in productivity, the increasing focus on subsidies is harming the growth of agricultural sector in the long-run.
  • This imbalance between subsidies and investments needs to be urgently corrected for sustainable growth in Indian agriculture and overall inclusive growth.
  • Trend of decreasing demand for cereals and increasing supply of cereals shows that the production pattern is not synchronized with the demand patterns.
  • The farmers are deriving their signals, not from the demand patterns (reflected in the actual market prices) but from the Government policies of procurement and distribution policies for grains.
  • Thus, the intervention of Government has led to a disconnect between demand and supply of grains in foodgrain markets.

How to incentivize diversification and environmentally sustainable production

  • It is evident from the analysis above that there has been a paradigm shift on food (cereal) front between the time when FCI was created and today.
  • India has moved from being a food scarce country to a food surplus country with a substantial increase in production and has emerged as a net exporter of cereals.
  • The Government policies of assured procurement and distribution gave the right incentives to increase production at that time.
  • The current foodgrain economy is, however, riddled with various economic inefficiencies described above. These policies, therefore, need to move on now to incentivize diversification and environmentally sustainable production.
  • The farmers need to be empowered through direct investment subsidies and cash transfers, which are crop neutral and do not interfere with the cropping decisions of the farmer.
  • The coverage of NFSA needs to be restricted to the bottom 20 per cent and the issue prices for others could be linked to the procurement prices.
  • A better alternative would be giving income transfers to consumers through Direct Benefit Transfers (DBT).

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