APPENDIX I

SOME OBSERVATIONS ON PRICES, COSTS AND SUBSIDY LEVELS

I.1. Consumer Prices

The enclosed charts I.1 and I.2, which plot monthly rice and wheat prices collected for the Consumer Price Indices for Agricultural Labour and Industrial workers from January 1995 to January 2002, show the following:

The degree of market integration is low, both across States and between the rural and urban areas of the same State.

• In recent years, these differences have increased significantly, for example
• Wheat price differentials between the South and North have enlarged
• Rice price differentials have also widened between the South and East as compared to the North in urban areas
• Rural prices of rice have dropped much more sharply in Eastern states than in other states and than in urban areas of the same State
• These imply that the present functioning of markets are putting particular pressure, both on producers in some States and consumers in others.

I.2.  MSP, Cost of Production and Prices Received by Farmers

Another set of charts, I.3 and I.4, shows the MSP, Farm Harvest Price (FHP), the implicit price received as obtained from cost of production surveys and the C2 cost of production, also obtained from these surveys. All these are expressed in constant 1999-00 prices, as deflated by the Consumer Price Index for Agricultural Labour (CPIAL) for the state concerned. These show:

• The MSP for wheat has increased in real terms over the 1990s, after having declined during the 1980s. It is now substantially above cost of production in all major States.
• The MSP for paddy has also increased in real terms, and though less higher than cost in many States than wheat, is higher in most States
• Actual prices received have dropped below MSP in Andhra Pradesh, Bihar, Orissa, Rajasthan, Uttar Pradesh and West Bengal
• In some of these States, particularly for paddy, FHPs are below cost of production. But in others they are substantially higher, e.g. Punjab.

This reinforces the conclusion emerging from consumer prices regarding poor market integration, and illustrates the consequences of regionally uneven price support.

I.3. Food Subsidy Calculations

The Committee has noted substantial differences between its own calculations of subsidy, as based on material obtained from the FCI, and those appearing in the Union Budget. FCI was asked to clarify the matter. The enclosed statements (Tables I.1 and I.2), from FCI, show:

• On 31^st March 2002, there was Rs 5688 crore outstanding between the amount claimed by FCI and that reimbursed by Government. Of this, Rs 3003 crore are on account of 2000-01 alone. This is in addition to Rs 634 crore to be reimbursed towards shortages during earlier years regularised.
• Also, accounts exclude carryover charges payable but not actually paid to State agencies. Carrying costs payable to agencies in Punjab and Haryana were Rs 2001 crore on 31st March 2002.
• Taking these into account, subsidy accruing to FCI in 2001-02 was 23 to 47 per cent larger than the Rs 17,612 crore shown disbursed in Union Budget 2002-03.
• In addition, the Ministry of Rural Development pays FCI at economic cost for grain distributed free under SGRY and the Ministry of Human Resources Development pays BPL prices for free distribution under Mid-day Meal  (MDM) scheme. In 2001-02, 2.1, 1.9 and 2.8 million tonnes of grain were distributed through MDM, SGRY and Food for Works (FFW) respectively, costing Rs 2259, 2079 and 3133 crore at FCI economic cost. Although not shown under “food subsidy” if payment is made to FCI, expenditure of other departments for this is properly a part of the food subsidy of the Central government as a whole.
• Our own calculations are that Food subsidy accruing in 2001-02 on carrying cost and on sales excluding SGRY, FFW and MDM was over Rs 22,000 crore. Moreover, more than Rs 6000 crore was the value at economic cost of grain distributed through SGRY, FFW and MDM, less payment on MDM sales.
• Even these figures are underestimates since a large part of grain purchased but not sold remains valued at acquisition cost although unit sales prices are much lower. 

I.4.  Food Subsidy Projections

The Committee has made projections of procurement, sales and subsidies till 2006-07 under four different scenario: “Business as usual” involving MSPs rising with inflation and sales prices remaining as at present; “MSP frozen” with MSPs and sales prices both as at present. In “MSP cut”, MSPs for paddy and wheat are reduced to Rs 500 per quintal from the next season and increased with inflation thereafter with cash compensation provided to States for farmers and against reduced statutory levies. Also, an uniform CIP is set for PDS at Rs 4.50 and Rs 6.00 per kg for wheat and rice in 2001-02 but increased to acquisition cost from 2004-05, with cash payments to States in lieu of additional subsidy for BPL. The Committee’s preferred scenario is “MSP cut and employment programme” which involves, in addition to “MSP cut”, an expanded SGRY of which the grain component is gradually phased out but the additional annual cash expenditure of Rs 5000 crore is retained. The projected figures are based on a simulation model which assumes 2 per cent annual inflation and annual growth of rice and wheat production at 1.25 and 1.5 per cent. Price elasticities for total demand, public procurement and offtake from public stocks are as estimated (i.e. roughly 0.33, 2 and 1.5). Income effects of employment schemes and Antyodaya are also taken into account. The results are summarised in tables I.3 and I.4 which show:

• Stock reduction is nil with “business as usual” and marginal with “MSP frozen”.
• A cut in MSP to around C₂ does reduce stocks substantially but these reach norm levels within the Xth Plan period only with expanded SGRY
• The Food subsidy proper begins to decline immediately with reduced MSP and procurement, and in 2006-07 is less than a third under “business as usual”.
• Expenditure on SGRY and FFW are large even in “business as usual”, which assumes the actual situation during the year ending June 2002. In the preferred package, these rise further in the first three years but subsequently fall to less than in “business as usual”. The higher initial expenditure is amply paid for by the eventual subsidy cut and likely asset creation.
• Even taking into account compensation against MSP cut and transfers in lieu of BPL, overall expenditure in the preferred package in 2006-07 is projected Rs 15,000 crore less than in “business as usual”, and Rs 10,000 crore less than even in “MSP frozen”. This is the dividend which can be used to widen Antyodaya , for child related food interventions, and to improve rural infrastructure.