Food inflation and the downfall of UPA
by K P Prabhakaran Nair on 16 Jan 2014 6 Comments
It may sound farfetched, but the writer is of the opinion that food inflation has propelled the downfall of UPA-II. The Congress president Sonia Gandhi attributed said that inflation was responsible for the decimation of the party in the recent elections to four major north Indian states, but I wish she was more specific and had stated that the culprit was food inflation. The way UPA-II is moving on to its closure, it seems that it has not learnt any lesson or is choosing to ignore an important one. 


The spectre of inflation has been haunting India since September 2008 when food prices soared to double digits. The UPA government has had little to show by way of action to dampen prices, but plenty by way of blasé explanations or facetious forecasting about the downward movement of those prices, all of which have simply proved wrong. In April 2010, when food price inflation was at about 16 per cent, the Prime Minister assured the nation that it would fall by December that year.


Kaushik Basu, then chief economic advisor to the government, echoed this prediction. But in July Manmohan Singh pushed the date to March 2011, instead of December 2010, as earlier predicted. This date was closer to the Reserve Bank of India’s estimate of the wholesale price index (WPI) or headline inflation heading towards 5.5 per cent by March 2011. The then Finance Secretary also said that by the calendar year end inflation would be around 6 per cent. Indians watched in distress when this charade continued. In July 2012, Basu said that prices would slide to 7 per cent by September. The new chairman of the Prime Minister’s Economic Advisory Council, Raghuram Rajan, assured that the wholesale price index (WPI) would fall to 6.5 per cent and retail inflation to 9.2 per cent “soon”. How soon is anybody’s guess!  


I think the real reason for this spiralling food inflation lies elsewhere. There are two very worrying things that are likely to go out of control, unless properly handled right now. The first is the Food Security Act (FSA). This author has clearly warned that the government is literally walking on a dynamite laid field and has eloquently discussed the difficulties earlier.


The just concluded WTO meet in Bali saw how the developed countries, in particular the  USA and European Union (EU) arm-twisted India on food subsidies, starting from the minimum grain support price (MSP) paid to farmers in the mandis. The second is the mindless mopping up of available grains to fill the Food Corporation of India (FCI) godowns. In November 2013, wholesale cereals inflation stood at about 11 per cent – wheat 7 per cent and rice 15 per cent, more than double that of wheat. Any action that propels higher inflation should not be entertained by New Delhi. Let us examine how the government’s food procurement plan is contributing to food inflation.


The government is now contemplating filling the FCI godowns to the brim, now that the rice harvests have already started pouring in and wheat harvests will soon follow in April/May. This simply is not the most opportune time to do it. There is absolutely no need to revise upward the buffer norms. The proposed 53 million tons (of wheat and rice) as the “new” buffer norm, in view of the FSA is simply uncalled for, at the moment, because this will sharply escalate food inflation. The implementation of FSA has been deferred by one year. The actual responsibility of ensuring the grain requirement for the FSA rests with the Government that sits in New Delhi, post May elections, and there is no need to keep hoarding grains right now. On December 1, 2013, food grain stock levels with FCI or other agencies was 45 million tons, which is about 20 million tons more than that required. I would venture to add that if New Delhi gives the signal to the principal grain producing states in the north Indian belt that it proposes to procure more rice and wheat in the coming months, that will be the starting point for the food inflation to climb from the present levels. This political populism will suck in more grain for the FCI/State agencies, simply crowd out the private players in grain trade, and, without doubt precipitate a higher fiscal deficit and, therefore, will inflame the inflation embers.


The new buffer norm in FCI is 53 million tons. Assuming an annual off take of 61.2 million tons under FSA, a stock requirement of 48-40 million tons should be sufficient. The figure 61.2 million tons has been based on a monthly requirement of 5.1 million tons. If one moves from the point that the buffer norm should include three months of supply requirement, which would be 15.3 million tons, and an equal amount as reserve, plus a strategic reserve of about 7.5 million tons, the total buffer requirement works out to less than 40 million tons.


Hence, where is the need to assume it to be 53 million tons? Clearly, there is something fishy in the whole assumption. An excess inventory of about 13-15 million tons than what is precisely required will translate into an economic cost of close to Rs 38000 crores, and if one goes by past experience with FCI storage, most of it will rot and end up unfit for consumption, or alternatively, be pilfered and sold in the black markets, Kejriwal and co’s brave words about rooting out corruption from the Indian soil, notwithstanding.


What I foresee is that the above line of action proposed to be put in place by the Food Ministry will spur the already high food inflation, smother private grain trade, and, needless to add, look for imports. It does not take much imagination whose pockets it will fill.


The most important and very urgent step that New Delhi must initiate is to erect and put in place fool proof storage facilities. China has excellent facilities, which this author has seen, and, ironically, the current minister of food and civil supplies KV Thomas, made an extensive tour of China to “study” its storage techniques more than three years ago, spending a huge amount of money from the national exchequer for travel and other extravagant expenditure. After that, he now says that 74 million tons of food grains can be stored in pucca and kaccha structures. I truly hope the minister is not proposing a very grand feast for the rodents. We know what happens to stored grains under plastic sheets in soaking rains!

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