How UPA will destroy the food market and feed the rich

In its anxiety to win the next elections, or at least not lose it, the Congress is well on its way to destroying the country’s agricultural markets.

Between them, the Food Security Bill and concurrent moves to raise minimum support prices (MSPs) ahead of the next elections, meant to help feed the poor and benefit farmers, will have the opposite effect: feeding the rich, both in India and abroad, by imposing inflation on India’s poor and fomenting further corruption to benefit the crooked rich.

The damage to be caused by the Food Security Bill, which seeks to cover 65 percent of the population with super-subsidised grain, is already well understood by all except for the political bosses of the Congress-led UPA.

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As _Firstpost_ wrote yesterday , the procurement needs of rice, wheat and coarse grain will destroy the agricultural markets because the government will simultaneously become both a monopoly seller and monopolist buyer in grain in the country.

The Food Security Bill is a covert way to nationalise the buying and selling of key cereals, which can only lead to higher prices and more corruption. When the government is the only major buyer or seller of foodgrain, you will

[caption id=“attachment_770267” align=“alignleft” width=“380”] The Food Security Bill is a covert way to nationalise the buying and selling of key cereals, which can only lead to higher prices and more corruption. Reuters[/caption]

essentially create two markets - one legitimate and another illegitimate. The legal one will be run by the government and its procurement agencies, while the illegal one will deal in grain siphoned off from the public distribution system and sold in the open market.

Put another way, there will be an official market for grain - where prices will bear no relation to the real cost of producing food - and there will be a “black market” - which will be the real market for grain.

In this scenario, it does not take more than the IQ of a backward rabbit to realise that the UPA is programming for more corruption rather than less. The lessons of 2G, CWG, Coalgate and the MNREGA scams have simply been wasted on the UPA.

Worse, there is now evidence that the UPA - or rather the Congress - is going to compound the follies of the Food Security Bill.

A report in Business Standard today says that the government has set up a new panel headed by Ramesh Chand, Director of the National Centre for Agricultural Economics and Policy Research, to check if the Commission on Agricultural Costs and Prices (CACP) is using the right methodology to set minimum support prices (MSPs) for grain. This is disingenuous - and the UPA’s action seems suspect. It is probably trying to shoot the messenger, which is bringing it bad news on the Food Security Bill and MSPs.

The combo of Food Security and the proposed new method of calculating MSPs will be a grain market killer.

The CACP, headed by respected economist Ashok Gulati, has been at the forefront of debunking the cost calculations of the Food Security Bill by surfacing its hidden costs. It has also warned that the actual Bill will be at least Rs 6,00,000 crore over three years, making the fiscal situation worse.

The CACP has also been warning against mindless increases in procurement prices without reference to real demand and supply. This will needlessly push up the subsidy bill.

Last December, the Union Cabinet specifically overruled the CACP’s decision to keep wheat procurement prices unchanged since the godowns were overflowing. It raised prices by 5 percent, adding to the grain mountain and subsidy bill.

Quite clearly, the UPA sees the pragmatic CACP as an impediment to its political calculations, which call for more dramatic increases in MSPs in the run-up to the next general elections.

In 2008, the UPA not only announced farm loan waivers but also spectacular increases in MSPs. An analysis of the causes of subsequent inflation by V Kumaraswamy in Business Standard in 2011 had this to conclude: “In just one year - 2008-09 - MSPs of most foodgrains have been increased by 30 percent to 75 percent. The steep increase in 2008-09 could only be the result of political arithmetic with ensuing elections. This genie is not the handiwork of market forces where either demand grows faster, leading to supply shortfalls, or cost inflation in key inputs (which) create price spirals: it is solely the by-product of administrative action.”

In short, inflation was largely the result of administratively decided MSPs.

Now cut to the Ramesh Chand committee, which has been set up to overturn the CACP’s more moderate approach to MSPs.

Today’s Business Standard says that the committee will help figure out whether farm costs are understated because of inappropriate calculation of the “value of family labour, the rental value of land, the interest on capital, the depreciation of fixed assets - factors vital to calculating MSPs…”.

It may be true that some costs are understated in the MSPs, but many costs also overstated. But even this is beside the point: it is not the job of the government to price grain at a cost that is unrelated to demand. If the demand for wheat is X, and the cost of producing it determined to be X-Plus according to the new calculation, farmers should be exiting wheat production not encouraged to grow more of it.

Farmers would benefit from growing more profitable crops that the market is demanding rather than wheat whose prices are the result of the government’s electoral benevolence.

According to a Reuters report, the wheat harvest this year is higher than expected, and thus India’s export price (fixed by the government) is now 10 percent higher than global market prices. “India is currently holding to a floor price of $300 per tonne for wheat exports, making its offer of the grain unattractive compared with global prices of $270-280 per tonne.”

Calls for cutting the minimum export prices are growing. Failing that, the wheat export plan of 5 million tonnes by June 2013 will flop. Exports are vital to clear some godown space for fresh arrivals at the mandis.

If India cuts export prices, it means we will not only be subsidising our own people, but the world markets as well. A poor country will be subsidising the rich.

The move to legislate the Food Security Bill and the proposed changes in the method of calculating food MSPs, which can only mean upward revisions, will possibly ruin what’s left of the agricultural markets in India.

At one stroke, India will be legislating higher food inflation, higher subsidies, and an end to reform in the agricultural sector since all prices will now be government-inflluenced.

So much for UPA-nomics. It’s about winning elections, not feeding the poor. It’s about poor economics and more corruption.