One-shot solution to inflation, BoP and fiscal deficit
While the Cabinet debates the higher buffer stock norms suggested by the Commission for Agricultural Costs and Prices (CACP) for the new Food Security Act (FSA)—a hike of 24-60% for different months of the year—the larger question is of why foodgrain stocks are so high and the cost this imposes on the government. On July 1, for instance, India had wheat and rice stocks of 82.2 million tonnes as against the existing buffer norm of 31.9 million tonnes that includes a 5 million tonne strategic reserve—the post-FSA norm is 46.7 million, still leaving a surplus of over 35 million tonnes. For October 1, the current norm is 21.2 million tonnes, the post-FSA norm 34 million tonnes and the actual was 55.1 million tonnes.
Apart from the fact that very large amounts of this rot since the Food Corporation of India does not have covered storage for more than half its stocks, it’s a good idea to look at the kind of money stuck. At current prices of grain, were this to be liquidated, the government could easily fetch around R70,000-75,000 crore. Given India’s budget deficit, that’s a sizeable amount, around 0.7% of GDP. Looked at another way, freeing up this grain would also do wonders for India’s exports given how competitive India currently is in global agricultural markets. Just exporting 10 million tonnes of wheat, for instance, would have fetched India $3 billion a few months ago when prices were ruling at around $300 per tonne.
What is more surprising is the thought process in the government that allows keeping such large stocks while average cereal price inflation has been around 15% in the last 8 months—it was around 11% in the same period last year. Given the 3.4% weight of cereals in the WPI, dumping a few million tonnes of grain would finish off cereal inflation and that would result in WPI inflation coming down 0.5 percentage points. In the case of CPI where the weight is 14.59%, the impact would be even more dramatic. There are equally serious implications of this waste since it means farmers unnecessarily use up precious ground water growing crops that are not even needed. This is what the Cabinet needs to discuss, not merely the MSP or the buffer stocking norms.