Friday, March 25, 2011

297 - 763 - Inflation fix is UPA’s underbelly - Live Mint

Inflation fix is UPA’s underbelly

The only way to bring parity, especially when it comes to dealing with a vital commodity like foodgrain, is to meet some of the excess demand by offloading stocks in the PDS—which by definition provides foodgrain at subsidized prices, mostly to those living below the poverty line (BPL)

In the next few weeks, the arrival of the kharif, or summer, crop in the local grain markets will begin gathering momentum, kicking off the annual procurement by the Food Corporation of India (FCI). This time, however, it is going to give rise to a piquant situation that further exposes the fallacies of public policy pursued by the Congress-led United Progressive Alliance (UPA), especially with respect to managing inflation.

Though the country’s granaries are overflowing with surplus food stocks, the UPA will have no option—unless it is willing to court a political backlash from the farmer lobby ahead of key elections in Punjab next year—but to go ahead and procure more. Since it has not been able to offload the current surplus, either through the public distribution system (PDS) or the open market, it would mean that more foodgrain will rot away (as detailed in the Tracking Hunger series done jointly by Mint and the Hindustan Times) and the food subsidy bill will burgeon. A supreme irony, considering that food inflation was, as on 9 October, at the level of 15.63%; it has averaged double digits for most of the last 18 months.

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Common sense economics tells us that prices increase when there is a mismatch between demand and supply. The only way to bring parity, especially when it comes to dealing with a vital commodity like foodgrain, is to meet some of the excess demand by offloading stocks in the PDS—which by definition provides foodgrain at subsidized prices, mostly to those living below the poverty line (BPL).

This then begs the question: Why has the surplus food stock not found its way into the system? Not only will it help meet excess demand, it will also help reduce the food subsidy since the government will not have to bear the carrying cost of these foodgrain. Particularly since the Central government has instructed FCI to offer more food grains through the PDS and the open market.

Perusal of the data available on FCI’s website reveals that in the last one year, beginning October 2009, states and the Union territories (UTs) lifted only 45% of the 1.46 million tonnes of rice and little less than 8% of the 2.16 million tonnes of wheat allotted to them. On the face of it this seems counter-intuitive: when food prices are in double digits, why would the authorities not acquire stocks for distribution through the PDS?

Not really. The states and UTs have clearly been influenced by the price at which FCI has offered the foodgrain. In the case of wheat the price band is Rs. 10-14 per kg and for rice Rs. 14-16 per kg. Most states offer foodgrains to the BPL population at about Rs. 2 per kg. In other words, the states and UTs need to incur a loss of upwards of Rs. 9 on every kg of foodgrain that they distributes through the PDS.

Politically, yet again it makes no sense. Why wouldn’t states and UTs absorb the cost differential, because after all they risk the wrath of the people. The answer may lie in the fact that most states are fiscally stretched and would find it very difficult to absorb the cost. In other words, the onus, inevitably as it does in such extenuating circumstances—and the current bout of inflation is nothing but a national calamity—falls on the Union government. Understandably, the Central government has similar compulsions. But then it has no one to pass the buck to. And it also flies in the face of its otherwise generous spending when it comes to populist programmes such as the Mahatma Gandhi National Rural Employment Guarantee Scheme—on which annual spending is above Rs. 40,000 crore. The government is now readying, under the urging of Congress party president Sonia Gandhi, a Food Security Act that will guarantee foodgrain at subsidized prices to the poor.

The reluctance may have a lot to do with the linear manner in which the Central government approaches fiscal reforms and the belief that the PDS is a waste since large allocations leak from the system. Alternatively, albeit a more cynical surmise, it could well be that the political arithmetic of bailing out the states would allow the UPA only indirect credit at a time when seven states in the country are ruled by the principal opposition Bharatiya Janata Party.

While tackling wasteful subsidies is without question critical, it makes no sense in doing so in a mechanical manner. The thrust of public policy cannot ever be to prevent misuse; instead, it has to encourage use of such subsidized initiatives by those at which it is targeted. The solution is to fix the PDS—the only demonstrable urgency for which seems to be coming from the newly created Aadhaar programme to provide a unique identity to all residents of India—or find another alternative. The strategy of throwing the baby out with the bath water is hardly desirable.

In a few weeks from now, when the results of the ongoing elections to the Bihar assembly will be declared, we will know whether inflation was a factor with the voters. If indeed it proves to be a factor, the ruling parties in the crucial states of Kerala, Tamil Nadu and West Bengal that would follow Bihar to the polls will need to find ways to counter electoral fallout from inflation.

Anil Padmanabhan is a deputy managing editor of Mint and writes every week on the intersection of politics and economics. Comments are welcome at