REPORT ON LONG-TERM GRAIN POLICY

1.1. The Union Ministry of Consumer Affairs, Food & Public Distribution constituted this High Level Committee for formulating a Long-term Grain Policy for the country on the 17th of November 2000. The Terms of Reference (see Annexure 1) assigned to it required examination of the following areas:

i) Minimum Support Prices (MSP) and Price Support Operations

ii) The Role of the Food Corporation of India (FCI)

iii) Functioning of the Public Distribution System (PDS)

iv) Policies regarding buffer stocks, open market sales and foreign trade

v) Allocation of grain for Rural Development and other Welfare programme

1.2.  These cover almost all aspects of the present system of national food security, under which:

The Union Government announces MSPs at which it guarantees open-ended purchase of whatever grain is offered by farmers.

The Committee’s task was to examine the functioning of this present system and to recommend policy changes which can improve the effectiveness with which producer incentives can be maintained and price stability ensured for consumers, particularly the poor. In arriving at its final recommendations it has consulted all State governments, all Union Ministries with interest in the issues, the Banking sector including the Reserve Bank of India, most trade organisations and others, including economists, journalists and NGOs.

1.3. The Committee submitted an Interim Report on May 30^th 2001. This Interim Report was concerned primarily with certain short-run issues deriving from extremely high levels of food grains stocks. It placed the facts regarding the situation of excess stocks, highlighted that these are of rather recent origin and outlined some options to cope with this. It also made some recommendations for the immediate situation (Annexure 2). Some key recommendations, for example on reducing the Central Issue Price (CIP) for Above Poverty Line (APL) population, increasing the allocation for Below Poverty Line (BPL) population, making more grain available for “Food for Work” type employment schemes and on expanding the scope of such schemes have already been implemented. Certain other recommendations, eg. on open market sales and on statutory levies were, however, not implemented.

I. THE APPROACH

1.4. In its Interim Report the Committee had considered proposals made by other Expert Bodies and stated its approach to long-run policy. This was that “barriers to trade in the grain market should be removed so as to make it more integrated nationally. The role of public intervention should primarily be to stabilise prices and that any system of price stabilisation must be national in scope. Also, decentralisation will be acceptable to the States only if this is carried out in a manner which does not involve the Centre passing on to them the fiscal costs that it bears currently”. Moreover, the Committee had agreed unanimously on certain essential aspects of long-run policy and had decided to record these for wider discussion prior to its Final Report. These were:

The MSP should be announced before the sowing season on the basis of C₂ cost of production (i.e., all costs including the imputed costs of family labour, owned capital, and rental on owned land) on the recommendations of the CACP. At this price the central government should undertake open ended purchase of FAQ grain to assure growers adequate return on cost.

The central government may purchase above MSP in situations where market conditions warrant to make up any shortages in normative buffer stocks and to meet PDS requirements. This price should be determined by the FCI on the basis of market assessment in each year. And this should not form the basis of MSP for the next year.

The central government should instruct its procuring agencies/state governments to extend their MSP operations more effectively to states/regions, such as Assam, Bihar, Orissa and Uttar Pradesh, where farmers have reported to have been receiving prices below MSP.

There is a need for immediate action to reduce taxation on essential food items and to minimise barriers to private trade

The OMSS should not distort markets by selling grains at heavily subsidised prices. The minimum price for OMSS should not be below the acquisition cost of FCI less statutory levies with additions for transport and storage costs in different regions and at different times of the year.

The  system of exports and imports of food grains should be based on a system of variable tariffs  which should replace quotas. This is required for stabilisation of prices in an open economy. As far as possible, releases for exports from public stocks should be on best commercial terms.

Decentralisation of the food grain procurement and distribution system is desirable provided this is seen as a means by which States can be given greater flexibility in design of their PDS and the FCI be given greater incentive for cost control, without the Central government diluting its commitment to the requirements of price stabilisation and food security.

In principle, dual/multiple  prices in the PDS are  distortionary and provide scope for leakages. 

This approach was based on its terms of reference, and on the commitment given by Government to Parliament as part of the National Agricultural Policy to maintain and strengthen the existing MSP system. The Committee had assumed that “the existing MSP policy will continue but that over time the functioning of this policy and private trade can be improved so that the volume of public procurement is balanced to meet the needs of price stabilisation and the PDS”.

1.5. Subsequent to submission of its Interim Report, the terms of reference of the Committee were widened to include an examination of the possibility of providing direct income support to farmers in place of the present system of price support through physical procurement at MSP. In particular, it was asked to examine a proposal from the Ministry of Agriculture (MoA) to initiate an insurance based income support linked to Minimum Support Prices (MSP) to replace the current system of  open-ended grain purchase at these prices by the Food Corporation of India (FCI). The rationale for this proposal was that delinking physical procurement from the insurance function in present MSP policy could not only provide a solution to the present problem of high and unsustainable stock accumulation, it could also be a “green box support” as defined in the Agreement on Agriculture under the World Trade Organisation (WTO). If so, subsidies on insurance would be exempt from WTO discipline on the Aggregate Measure of Support (AMS). The Committee has examined in detail the MoA proposal, found merit in the principle of providing insurance against both price and yield risks to farm income, and agrees that insurance should be part of Long-term Grain Policy. However, it also notes that it is not financially viable to link insurance to MSP if, as at present, MSPs are much higher than what market prices would be in the absence of physical price support operations. Moreover, linking insurance to MSP will also make the scheme ineligible to qualify as a “green box” support in the WTO.

1.6.  From the point of view of the Committee, a more fundamental question was raised by this widening of its terms of reference. This was  whether it should change the approach that it had decided to adopt, and stated in its Interim Report. In particular, it had to reconsider whether price stabilisation in the grain market should at all be a primary objective for government and, if so, should this continue to involve open-ended public purchase at MSP? The Committee has put this question to all the parties that it has consulted since submission of the Interim Report, and has also deliberated on this matter in detail. With the exception of a few economists, the almost unanimous opinion was that price stabilisation was an important objective and that for this the present MSP system with open-ended procurement should continue. In particular, every State government that the Committee has consulted rejected any idea of doing away with the present MSP system.

1.7. However, since this is a matter at the core of formulation of any new long-run grain policy, the Committee has deliberated on the underlying principles involved. The few of the economists consulted who favoured doing away with MSP policy argued that the present situation of unsustainable stock levels is a result of high MSPs which is evidence of an inherent tendency of “government failure”. According to them, MSP policy is a relic from the closed economy, that any intervention by government in physical trade and price formation is potentially distorting, that markets should be allowed to function freely without government intervention, and that if this does lead to price and income instability, the solution is to compensate for income loss through direct income transfers. In this context it was mentioned that the trend in the WTO is towards “de-coupled income support”, i.e. income support to farmers without this being linked to either production or to prices of output or inputs.

 

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