Reform of grain management system

Indian Economy

TOPIC:General Studies 3:

• Transport and marketing of agricultural produce and issues and related constraints; e-technology in the aid of farmers.
• Issues related to direct and indirect farm subsidies and minimum support prices; Public Distribution System- objectives, functioning, limitations, revamping; issues of buffer stocks and food security.

Reform of grain management system

Context

In the second quarter of 2020 fiscal year, GDP growth rate has plummeted to 4.5 per cent and the agriculture GDP (GDPA) growth is at mere 2.1 per cent.

What are the reasons for Slowdown?

• One of the main reason is the low demand in the economy. 
• The demand is low because of the incomes have remain subdued particularly the rural incomes (Consecutive Bad Monsoons). As a result, demand for manufactured goods, housing and other goods have remained low. 
• Apart from the above cited cyclical reason, there is also structural reason – primarily supply side constraints like inefficient infrastructure network which raises the cost of goods & services thus impacting the competitiveness of the product.

What measures government has taken recently?

• Government announced corporate tax cuts which intends to boost investment cycle.
• Government has also announced an investment package for infrastructure of about Rs 102 lakh crore over the next five years, which implies more than doubling the growth in infra-investments from its current levels.
• Government also intends to cut income tax levels in the upcoming budget so as to boost demand in the economy (as it leaves more money in the hands of people to spend)

Possible consequences of the above measures:

• Boosting demand can also cause inflation (beyond the threshold level of 6 per cent to be maintained by the RBI).
• There is the challenge of not slipping on the fiscal deficit target of 3.3 per cent, although the CAG has already indicated that the real fiscal deficit of the country is much more if one accounts for the loans taken by many PSUs
• Difficulty in raising funds to fund the massive infrastructure project (102 lakh crore over five years)

Possible Way Out:

• One of the way to raise (save) Rs 50,000 crore per annum to finance infrastructure projects without causing high inflation or without breaching the fiscal deficit target is by addressing inefficiency in the grain management system under the National Food Security Act (NFSA)
• The NFSA gives certain quantities of wheat and rice to 67% of the population at Rs 2/kg and Rs 3/kg respectively -the economic cost of these to the Food Corporation of India is Rs 25/kg and Rs 35/kg respectively. 
• This has led to a provision of Rs 1.84 lakh crore for food subsidy in the last Union budget
• The grain stocks with the FCI are far more than double the buffer stock norms as on January 1, every year.

The reason for inefficiency in grain management system: 

• The procurement for wheat and rice (paddy) remains open-ended, but the disbursal of those stocks remains largely restricted to the public distribution system (PDS).
• The open market operations (OMO) are much less compared to what is needed to liquidate the excessive stocks.
• The money locked in these excessive stocks (beyond the buffer norm) is more than Rs 1 lakh crore.
• If the government decides to liquidate half of it, it can garner Rs 50,000 crore to finance at least half of its infrastructure projects

Way forward (As recommended by Ashok Gulati):

1. While the poor under the Antyodaya category should keep getting the maximum food subsidy, for others, the issue price should be fixed at ~50% of the procurement price (as was done under Atal Bihari Vajpayee for the BPL category).
2. Limit subsidised grain distribution under NFSA to 40 per cent of the population rather than the current 67 per cent
3. Limit the procurement of rice particularly in the north-western states of Punjab and Haryana where the groundwater table is depleting fast, and invite private sector participation in grain management

Connecting the dots

• Doubling of Farmers Income
• Shanta Kumar Committee recommendations on PDS reform