WordPress.com



Issues related to direct and indirect farm subsidies and MSPsIndia’s combined food, fuel, and fertilizer subsidies amount to about 15% of all government spending, and 2.5% of the GDP. If we add LPG, electricity, railways subsidies as well, total subsidy bill comes to about 4% of the GDP. Food subsidies in India can be classified into:Farmer support, via MSPs (direct subsidy), fertilizer subsidies (indirect subsidy) etc.Consumer support, via PDS FPSs that issue grains at CIPSubsidies to cover all the costs of FCIThe main benefits of food subsidies are the resultant food security provided to the citizens, particularly the poor at affordable prices, and incentives to the farmers to keep foodgrains production at a comfortable level.(Note: Although TPDS is a central government scheme, food grains are procured and distributed by state governments themselves)Problems with farmer support subsidies:MSPs:About 1.2% of the GDP is spent on rice, paddy, and pulses subsidies Nearly half of all subsidy spending goes towards food subsidy (meeting the difference between the cost of staple foods (rice, wheat, and lentils), and the artificially low CIPs)High MSP => High procurement => Build-up of reserves beyond what is required => Higher storage costs and wastage, and higher food subsidy bill: MSPs are announced annually on the recommendation of the CACP. In recent years, notified prices have usually been higher than the CACP recommendation. This has meant that procurement has been high and off-take low, resulting in an inevitable build-up of stocks and a bloated food subsidy billMSPs should be set using the CACP determined ‘C2’ cost, which includes all cash costs and input cost of family labourProcurement should not be open endedRegional imbalance in favour of relatively well-off producer states: FCI’s purchase operations are mainly confined to five areas – Punjab, Haryana, Western Uttar Pradesh, Andhra Pradesh and now Chhattisgarh. The implication for the present policy of purchase is that farmers of only a few States get the entire farmers’ subsidy. A large percentage of these farmers are not even poorIn 2012, only about 15% percent of all paddy and wheat farmers sold their produce to any procurement agency; together, they account for only 6 percent of total farmers in the country. Thus, the direct benefits of procurement operations in wheat and rice, with which FCI is primarily entrusted, goes to a miniscule number of agricultural households in the country (Shanta Kumar)Increase in open-market prices: Since the issue price and the purchase price are linked, higher purchase prices result in higher issue prices. Further, with a large part of the marketed surplus in FCI warehouses, the lower supply exerts an upward pressure on prices in the open market. Everyone except those farmers with marketable surpluses of foodgrains are affected adverselyProcurement should not be open endedStrangles private trade, and subsidizes inefficient FCI: High MSP combined with open-ended purchases by FCI has compounded the problem for vibrant wholesale trade and storage with lower incidental and storage costs in foodgrains. Inefficiencies in the FCI are also responsible for the subsidy bill. Since all costs of FCI are automatically reimbursed in the extant system, there is little incentive to raise efficiency and reduce costs.In the long-term, procurement and distribution operation should be progressively decentralized, to reduce costs incurred on FCI operations; FCI should increasingly become a coordinating bodyDistorts crop production incentives: The exclusive attention to wheat and rice has distorted the cropping pattern of farmers in their favour. The higher water and fertilizer intensity of these two crops in turn has had adverse environmental impactsFertilizer subsidies:About 0.8% of the GDP is spent on fertilizer subsidies Fertilizer subsidies in India are given not to the farmers but to companies that make fertilizers, so that they sell fertilizers to the farmers at a reduced priceEstimates show that more than a third of the subsidy benefits the fertilizer companies instead of the farmersResearch shows that only about 50% of the overall subsidy reaches small and medium farmers, and more than 50% subsidy is going to the top 6 well to do states: Punjab, Haryana, UP, AP, Maharashtra, and MPCorrect proportion in which fertilizers should be used is 4:2:1 for NPK. However, subsidized urea (at less than half the actual price) leads to overuse of urea and underuse of P and KUrea fertilizer manufacturers form a strong political block, and this is not true for other kinds of fertilizers. Thus, cutting urea subsidies is politically very hard, and leads to imbalanced and improper usage of fertilizers. Excess use of urea over other fertilizers threatens the environment as well, and can pollute ground water, enter food chain etc.In light of this, fertilizer subsidies should be made cash transfers, and fertilizer prices should be completely deregulated.PDS- objectives, functioning, limitations, revampingThrough PDS, procured grains are supplied to consumers at CIPs via about 5 lakh FPSs; CIPs are uniform all across the country. Under the NFSA 2013, procurement of more than 61mt will need to be made every year.Objectives:Ensuring remunerative prices to farmersEnsuring food security by strategic buffer stocksEnsuring access to affordable food to consumersFunctioning and Limitations:While MSP has been rising, CIP has been frozen. Beyond the MSP, government also spends about 35% extra on other incident and distribution costs; this shows that the subsidy bill channeled through the FCI is risingAbout 47% of all foodgrains are leaked before they reach the beneficiaries (differing estimates- Shanta Kumar says 47%, others say 35% etc.)Even among the beneficiaries who get the grains, targeting is poor. Many states haven’t done proper exercises to identify BPL families (might get better after NFSA is properly implemented)PDS allocations of Kerosene, in fact, exceed both reported PDS and non-PDS consumption figures!Revamping:Reforms introduced by several states, including laggard states such as Chhattisgarh and Bihar, have shown promising results even at the all-India level numbers in reducing leakages (from 55% in 2004 to 35% in 2011), improving access (23% households in 2004 to 39% in 2011) Community involvement and decentralized procurement Food couponsDBT using JAM trinityUse of technology such as e-PDMS covering the entire food supply chain, monitoring of FPSs via CCTVs, GPS tagging of trucks used to transport food, computerized records of grain availability at various places, smart biometric cards (UID Aadhar cards) to make payments at FPSs etc. Issue of buffer stock and food securityThe state governments or their nominees stock foodgrains. Buffer stocks are required to tide over bad harvests, stabilize prices etc. These buffer stocks are sometimes released into the open market via Open Market Sales Schemes, to moderate market prices. To supply grain from the surplus states to the deficit ones, of all grain being transported, railways ship about 90%.Apart from PDS, the government procures food for Other Welfare Schemes (OWSs) such as MDMS, WBNP, Emergency Feeding Programme, ICDS etc. Periodically, an official committee is set up to recommend the volume of minimum buffer stocks to be maintained at the beginning of each quarter for the purpose of food security. This quantum, together with the amount needed to run the PDS, constitutes the minimum operational stocks of the FCI. However, the purchases of the FCI are open-ended in that it has to accept all the grains that are sold to it at the declared purchase price, and this sometimes results in mounting stocks well beyond the buffer stock norms.Official estimates say that as of March 2014, the total storage capacity available for central pool foodgrain was about 74mt, as against stocks of about 40mt. Also, total stock requirement for implementing the NFSA is likely to be about 61mt; hence, sufficient storage capacity is available for holding the required stocks (IYB 2015).However, stocks with the government have regularly been far exceeding buffer stock norms (80mt in 2012 as against mandated 32mt). There may be several reasons behind this, ranging from high bonuses and taxes on MSP of wheat and rice, which have crowded out private sector from buying in many states, to lack of any clear-cut liquidation policy when stocks build up etc.There are several problems with this situation of high procurement and rising stocks:Despite high stocks, food inflation has been high at about 10%, and lots of food rots due to inefficient storageWithdrawing such large quantities from the market also results in rising open market prices of foodgrains, neutralizing much of the consumer benefits that the subsidy provides The cost of these stocks, calculated at economic cost plus the cost of carrying the buffer, would come to nearly Rs 100,000 crore. This illustrates the extent of economic inefficiency in the system To run the excessive stocks down, foodgrains are often exported by providing exporters foodgrains at near BPL pricesEven while the buffer stocks are high, During 2012/13, India emerged as the world’s largest exporter of rice, and in terms of total cereals (rice, wheat, and corn), exported more than 20mt of during each of 2012-13 and 2013-14, which India has presumably never done in its recorded history. Also, Forex reserves are high, and even to tide over a really bad harvest, even if India were to buy 10mt of wheat, it would cost only about 1.5% of India’s forex reserves. This shows that production is no longer a problem, especially when it comes to cereals.In light of these facts, there must be some rationalization of India’s procurement policies; unnecessary reserve buildup, over and above what is required to ensure food security, should be avoided. Some suggestions for operationalizing this are as follows:Coverage under NFSA should be brought down to about 40%; current system actually hurts the BPL families by reducing their entitlement to 5 kg/ person from 7 kg (Shanta Kumar) The central government should discourage state governments from announcing bonuses on top of the announced MSP, and if states do this anyway, they should only buy the amount of grains that they mandated, and not the extra amount that was procured due to high priceCentral procurement should have a limit; it shouldn’t keep following the policy of acquiring unlimited amount of grain at the announced MSPBuffer stocking and trade policy:India currently holds about 5 mmt of strategic reserves beyond PDS requirements (total strategic reserves plus PDS buffer comes to about 32 mt). Estimates show that even in really bad years, we can get by with reserves of about 10mt. Thus, we should continue having 5mt reserves, and ensure that we have enough forex to buy internationally if need beIndia carries about double the mandated amount of buffer stocks; the underlying reasons for this situation are many, starting with export bans to open ended procurement with distortions (through bonuses and high statutory levies), but the key factor is that there is no proactive liquidation policy. Whenever stocks go overboard, they should be liquidated in the export markets. The current system is extremely ad-hoc, slow and costs the nation heavilyImport duties on rice and wheat are very high when compared to other foodgrains; these should be brought down to about 10% to ensure food security in a cost-effective manner (by using imports)Storage, transport, and marketing of agricultural produce and issues and related constraintsStorage: India produces about 250mt of foodgrains per year. However, losses have remained stuck at around 10%, which means that losses are also increasing with increasing production. 6% of all losses happen at the storage stage. Storage structure design and its construction play a vital role in reducing or increasing the losses during storage. In India, the major part of production (about 70%) is stored at farmer level, and is the root cause of high storage losses. We should encourage use of coal-tar drum bins, domestic hapur bins, etc. for farmer-level storage, and pusa bins for farmer-level storage. Bulk storage responsibility lies with FCI, Central Warehousing Corporation, State Warehousing Corporations, etc. Existing storage capacity with FCI and state agencies for central pool stocks is about 72mt, of which15 mt (20%!) is CAP (cover and plinth, which just means outdoor stacks of grain covered with some waterproof material).FCI should expedite the outsourcing of storage function to CWC, SWCs, and the private sector via the PEG (Private Entrepreneurship Guarantee) scheme (under which private sector players are allowed to earn rent plus a guarantee on their warehouses, when they’re being used for bulk storage by the government)Covered and plinth (CAP) storage should be gradually phased out with no grain stocks remaining in CAP for more than 3 months. Silo bag technology and conventional storages, wherever possible, should replace CAP, with potential help from the private sectorNegotiable Warehouse Receipt System (NWRS) should be taken up on priority basis, and scaled up quickly. Under this, farmers can deposit their produce to the registered warehouses, and get, say, 80 percent advance from banks against their produce valued at MSP. They can sell later when they feel prices are good for them. This will bring back the private sector, reduce massively the costs of storage to the government, and be more compatible with a market economyGoI can encourage building of warehouses with better technology, and e-track levels of stocks on a regular basisTargeted beneficiaries can be given 6-month rations in one go; this will save on storage costs, as well as transaction costs for the beneficiariesFor scientific storage, drying of food grains to a safe moisture level is essential; we need to invest in appropriate drier infrastructure at godowns and at farm levelWe should tap into FDI and financing from ADB, IFC etc. for creating storage infrastructure.Transport/ Movement of agriculture produce:In order to ensure availability of foodgrains for TPDS and OWS (other welfare schemes), and to maintain reasonable levels of buffer stocks at various strategic locations throughout the country, and to reduce the strain on existing storage capacity, FCI undertakes transportation of foodgrain (wheat and rice) from surplus States to the deficit States and also within the States by rail, road and riverine modes. About 90% of all India movement is undertaken by railways and rest by road and waterways.CAG report says that the main reasons for inefficiencies in movement of food grains were deficient monthly movement planning, unplanned/unscheduled supply of rakes and dispatch without proper assessment of requirement at the consignee end, delay in loading and unloading of railway wagons, and weakness in existing system of claim settlement. To overcome these, CAG recommended that there be better coordination between the FCI and railways.Movement of grains needs to be gradually containerized which will help reduce transit losses, and have faster turn-around-time by having more mechanized facilities at railway sidings. Using inland waterways and hinterland ports could be further explored, especially from coastal states with a net surplus etc.HLC also recommends total end-to-end computerization of the entire food management system, starting from procurement from farmers, to stocking, movement and finally distribution through TPDSInvite FDI in construction of modern silos and grain movement through containers. Railways need to be encouraged to open it for private sector, both domestic and foreign. Scarcity of storage space and lack of timely availability of railway rakes is a major bottleneck in movement of grains in timeMarketing of agricultural produce:Agricultural marketing covers the services involved in moving an agricultural product from the farm to the consumer. Due to the involvement of various levels of middlemen, the actual producers of food get the lowest price in the entire chain, while the consumers pay the highest. The purpose of state regulation of agricultural markets was to protect farmers from the exploitation of intermediaries and traders and also to ensure better prices and timely payment for their produce. Over a period of time, these markets have, however, acquired the status of restrictive and monopolistic markets, providing no help in direct and free marketing, organized retailing and smooth raw material supplies to agro-industries. Exporters, processors and retail chain operators cannot procure directly from the farmers as the produce is required to be channelized through regulated markets and licensed traders. There is, in the process, an enormous increase in the cost of marketing and farmers end up getting a low price for their produce. Monopolistic practices and modalities of the state-controlled markets have prevented private investment in the sector.There are several challenges involved in marketing of agricultural produce: limited access to market information, low literacy levels, multiple channels of distribution that increase middlemen etc. There is no organized and regulated marketing system for marketing the agricultural produce. Presently, markets in agricultural products are regulated under the APMC Act enacted by State Governments. There are about 2,500 principal regulated markets in India (!). The Act covers not only cereals, pulses etc., but also chicken, goat, fish etc., and says that the first sale of these commodities can be done only through the commission agents licensed by the APMC Act. Various taxes, fees/charges and cess levied on the trades conducted in the Mandis are also notified under the Act. APMCs levy multiple fees of substantial magnitude that are non-transparent, and hence a source of political power. They charge a market fee from buyers, and a licensing fee from commissioning agents who mediate between farmers and buyers. States also impose their own VAT and other levies. Such high taxes at the first level of trading have significant cascading effects on the prices as the commodity passes through the supply chain, and hence the consumers end up paying a much higher price than what the farmers receive (for rice and wheat, such levies are 10-15% of the cost). These taxes vary widely between states- from 20% in AP for rice, to near zero in Maharashtra and Gujarat.Problem is that the APMC is seen as an extension of the state, rather than a service provision. The levies charged by APMC do not go to the state exchequer, and there is no reason these should be imposed above what is required to cover the fee for service provision. Positions in the market committee at the state level and the supervisory market board are often usurped by the politically powerful, who enjoy a cosy relationship with the licensed commission agents, who often wield monopoly power in their domain, and determine the prices received by farmers. Model APMC Act: Since various State APMC Acts created 2,500 fragmented markets for agricultural commodities and curtailed the freedom of farmers to sell their produce other than through the commission agents, the centre has drafted a model APMC and has been urging States to adapt it. It provides for:Direct sale of farm produce to contract farming sponsorsEstablishment of consumers’ and farmers’ markets to facilitate direct sale of agricultural produce to consumersPermits private persons to establish new markets for agricultural produce in any areaRequires a single levy of market fee on the sale of agricultural commoditiesReplaces licensing of market functionaries to allow them to operate in one or more different market areas Provides for the creation of marketing infrastructure from the revenue earned by the APMC Provisions of the model APMC act can lead to greater competition. Many of the States have partially adopted the provisions of model APMC Acts and amended their APMC Acts. Some of the states, however, have not; this indicates hesitancy on the part of state governments to liberalize the statutory compulsion on farmers to sell their produce through APMCs. Inadequacies of the Model APMC act:Even though the model APMC act allows for direct selling, it retains the mandatory requirement of the buyers having to pay APMC charges even when the produce is sold directly outside the APMC area, say, to the contract sponsors or in a market set up by private individuals even though no facility provided by the APMC is used. This would render private players uncompetitive, as they will need to charge APMC levy on top of their service fee (grading, loading, weighing, storage etc.) and desired profitThe provisions of the Model APMC Act do not go far enough to create a national (or even state level) common market for agricultural commodities. In fact, market may get more fragmentedThough the model APMC Act bars the APMCs and commission agents from deducting the market fee/commission from the seller, the incidence of these fees/commission falls on the farmers since buyers would discount their bids to the extent of the fees/commission charged by the APMC and the Commission agents Suggestions:States should be guided to drop fruits and vegetables from the APMC act; this could then be followed by more commodities, until in the limit all commodities are droppedState governments should be persuaded to provide support for setting up infrastructure (warehousing, cold storage etc.), land allotment etc. for marketsStreamlining the FCIThe new face of FCI should be akin to an agency for innovations in Food Management System with a primary focus to create competition in every segment of foodgrain supply chainWhile the FCI has greatly devolved procurement and stocking to states, it still does rice levies and procurement itself. At least the states that have gained sufficient experience in procurement and stocking should be fully handed over these functions for wheat, paddy as well as rice, which then hand over the surplus to FCI for transportation to deficit states. FCI should have no business to do directly with millersFCI should focus on States where market prices often go well below MSPs, especially eastern Uttar Pradesh, Bihar, West Bengal, and Assam; focus should be on developing appropriate infrastructure and capacityStorage and movements of grain should be slowly outsourced to CWC and SWCs, and private sector participation should be encouragedProcurement of wheat, paddy and rice should be totally outsourced to capable states, and FCI should move on to help states in the eastern belt to build innovative procurement systems that are suitable to small holdersAs FCI becomes leaner, unnecessary offices should be shut downThe entire food management system should undergo end-to-end computerization ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download