Stabilising prices PDF Print E-mail
Tuesday, 20 May 2014 00:39
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Insurance fund for agri and FCI-revamp also critical

Though BJP leaders have been talking of a price stabilisation fund for controlling prices, it is important to keep in mind that far greater impact can be got by revamping FCI as well as through greater agricultural reform. The idea of the stabilisation fund, though, is a good one, and works well in times of huge spikes such as the recent one in onion prices. If the budget is to make an annual allocation, of R2,000 crore for the fund and, say, there is a spurt in onion prices. Nafed can then be asked to import onions and use the stabilisation fund to sell these imports at lower prices in the local market. The fund, however, only works to the extent that a Nafed is able to import quickly and seed the local market efficiently—neither condition is easy to meet since, at a time when market prices are very high, it is going to be difficult for a Nafed to ensure its sales are not cornered by middlemen and sold at the prevailing market price.

The solutions that offer higher impact are those relating to FCI and to larger agriculture reforms. As the first of our page one series on low-hanging fruit points out, the Food Corporation of India has between 2 and 3 times the amount of foodgrain it needs to carry. Just dumping 10 million tonnes of rice and wheat, for instance, could lower inflation in these two grain to zero and, in the bargain, lower WPI inflation by around 0.4 percentage points and CPI inflation by 1.9 percentage points—based on their FY 14 inflation rates and respective weights in the consumer basket. In addition, using Aadhaar-based cash transfers instead of the traditional FCI-based ration shops could help save more than R1 lakh crore each year. Given that the greatest of agricultural volatility is seen in areas which have poor irrigation, spending some part of this in creating fresh irrigation facilities would go a long way in creating more supply certainty and, thereby, controlling inflation.

Since a large part of the low supply response—in terms of fruits and vegetables primarily—is due to the extreme volatility of prices, as well as poor cold chain infrastructure, agriculture reform is critical. If, instead of MSP-based incentives for rice and wheat, farmers were given a per-acre subsidy, they would be incentivised to grow more fruits and vegetables. Large capital subsidies for building cold chain infrastructure is also something that needs to be looked at seriously—essentially, the trade-off is between spending money on subsidies that don’t reach people and creating infrastructure that benefits everyone. Given how poor the government’s delivery of drought relief is, a more tenable solution is to make a budgetary allocation for agriculture insurance, after putting in place norms for payouts—an X% shortfall in rainfall over the norm, for instance, and the insurance firm should pay out the sum due. That too would go a long way in increasing supply response.


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