government interventions in foodgrain markets: the case of india

This paper examines the cost involved and effects of government interventions in foodgrain markets in India. It is observed that although these interventions have not been able to reduce price spread, tangible successes in temporal and seasonal price stabilization and increased access to food have been achieved. However, the public distribution of foodgrains has exhibited urban bias, particularly for wheat, and is inconsistent with the incidence of poverty. Freight and interest payments have contributed largely to the cost and hence accentuated the rate of subsidy. The keys to reducing food subsidies are strict targeting of public distribution to people below the poverty line in resource-fragile regions, relief work, rational movement of foodgrains, sale of excess foodgrains to a buffer stock and public distribution in the open market at an economic price.

The authors are with the Division of Agri- cultural Economics, Indian Agricultural Re- search Institute, New Delhi 110 012, India (Tel: 578 7501; telex: 31 77161 IARI-IN).

We would like to thank Dr Spencer Hanson of the University of Reading, UK, and anonymous referees for comments on an earlier draft of this paper, and Pramod Kumar and Jai Singh for help in data compilation.

‘S.E. Offutt and D. Blandford, ‘A review of empirical techniques for the analysis of commodity instability’, Cornell University, Ithaca, NY, mimeo, 1983. ‘D.S. Sidhu, ‘Some aspects of agricultural marketing and price policies in India’, pres-

continued on page 4 15

Government interventions in foodgrain markets

The case of India

Suresh Pal, D.K. Bahl and Mruthyunjaya

Foodgrain markets in less developed countries (LDCs) are seasonal and highly unstable.’ These features are primarily responsible for market failures in physical and economic access to food. However, physical access has improved with investment in market infrastructure, market regulation* and adoption of new seed-fertilizer technology since the mid-1960s.’ Nevertheless mass poverty, frequent droughts, wide temporal fluctuations in prices and production, and regional differences in foodgrain production have affected economic access to food in LDCs. Inaccessibility to food is the main reason for government interventions of varying nature and degree in foodgrain markets.

The relevance of government interventions, the costs involved and the potential benefits have been subject to rigorous analysis and debate. The issues of price formation and stabilization in particular have generated a three-way debate. The free market school argues that government interventions cause large-scale inefficiency in resource use as distorted market prices do not reflect the true opportunity cost as reflected by international prices. This view is rejected by the structural

school on the grounds that international prices are subject to serious distortions generated by developed countries (DCs) such that they do not reflect opportunity cost. Accordingly, domestic prices should be set to favour income distribution objectives. The third strand in the debate supports domestic price stabilization to reflect the trend in international prices and promote optimal efficiency.4 LDCs have by and large opted to intervene in foodgrain markets to meet income distribution and price stabilization objectives. However, it has been argued that the efficiency and welfare benefits of interventions are rather small in comparison to the costs involved.” Therefore such inefficient and ill-designed interventions involve a heavy burden on the public exchequer. Interventions even with favourable income distribution effects cannot be justified in the long run due to pressure on the public purse. Thus interventions should promote more egalitarian income distribution and economic access to food at the lowest possible cost (subsidy), whilst reducing price spread.

414 0306-9192/93/050414-l 4 0 1993 Butterworth-Heinemann Ltd

Government interventions in India’s foodgrain markets

In India, government interventions in foodgrain markets include

procurement, maintaining buffer stocks, public distribution and legislative measures. Broadly speaking, these interventions have four objectives: (i) to ensure remunerative prices to farmers in order to accelerate the pace of growth in foodgrain production; (ii) to increase access to food for economically vulnerable people; (iii) to stabilize foodgrain prices and availability; and (iv) to eliminate the abnormal profit of middlemen.(j Studies have shown that procurement operations have favourable price, production and farm income effects.7 However, Janvry and Subbarao have argued that public expenditure on non-price shifters such as irrigation, infrastructure, etc, are more cost efficient and less regressive on the distribution of consumption than are direct price incentives.8 Therefore government interventions must be effective in stabilizing prices and ensuring the availability of foodgrains particularly to economically vulnerable people. Disaggregated information on these aspects is, however, scanty. This paper is an attempt in this direction. The first section deals with the nature, magnitude and costs of different government interventions in foodgrain markets. The next section pre- sents the effects of interventions on the stability and availability of foodgrains. The following section examines the public distribution programme vis-ri-vis the incidence of poverty. The final section summa- rizes the emerging issues for policy rationalization. The necessary data were compiled from various published and unpublished sources.’ In- terventions were examined since 1970, which corresponds to the period of general adoption of new technology for foodgrain production in India.

continued from page 4 14 idential address delivered at the 50th annual conference of the Indian Society of Agricultural Economics, HAU, Hissar, 27- 29 December 1990. 3C.R. Dieher, ‘The Fifth World Food Sur- vey: an assessment of food supplies and malnutrition’, Journal of American Diet Association, Vol 87, No 12, 1987, pp 1668-l 672. 4For detailed discussion of these issues, see C.P. Timmer, ‘Food price policy: the rationale for government interventions’, Food Policy, Vol 14, No 1, February 1989, pp 17-27. 5D.M.G. Newbery and J.E. Stiglitz, The Theory of Commodity Price Stabilisation: A Study in the Economics of Risk, Oxford University Press, New York, 1985. 6D.S. Tyagi, Managing India’s Food Eco- nomy: Problems and Alternatives. Saqe Pubhcations, New Delhi, 1990. - ‘V.K. Chettv and P.V. Srinivasan. ‘Welfare effects, of selected foodnrain policies in India’, Agricultural Econotks, GoI 4, No 2, 1990. DD 179-192: A.S. Sirohi. ‘Imoact of agric&t&al subsidies and procurement prices on production and income distribution in India’, presidential address delivered at the 44th annual conference of the Indian Society of Agricultural Economics, OUAT, Bhubaneshwar, 7-9 January 1985; J.B. Quizon and H.P. Binswanger, ‘Income distribution in India: the impact of policies and growth in the agricultural sector’, World Bank, Research Unit Agricultural and Rural Development, mimeo, 1984. “A. de Janvry and K. Subbarao, ‘Agricultu- ral price policy and income distribition in India’, University of California. Berkelev. mimei, 1983. .

_

9Bulletin on Food Statistics: production, procurement, public distribution of foodgrains, procurement and issue prices; Agricultural Prices in India: farm, wholesale and retail prices; NSS: utiliza- tion of the public distribution system; De- partment of Food: food subsidy, cost of interventions; FAO Production Yearbook: international prices.

Government interventions: nature, magnitude and costs

The Government of India, in consultation with the state governments, intervenes in foodgrain markets, particularly in rice and wheat. The price policy decisions are taken by the Ministry of Agriculture. The Ministry of Food and Civil Supply is primarily responsible for procurement and distribution policy decisions and the Food Corporation of India (FCI) is the principal agency to intervene in the markets on behalf of the Union Government. There are four basic components of direct interventions (foodgrain handling by the FCI): procurement, mainte- nance of buffer stocks, public distribution and international trade in foodgrains. In addition, the government has adopted certain legislative (indirect) measures such as restrictions on interstate/interzone (foodgrain surplus and deficit zones) movement of foodgrains and enacted the Essential Commodities Acts (19.55 and 1980) to prevent activities such as hoarding of foodgrains which are prejudicial to the supply and distribution of foodgrains to the people. However, the interzonal (mostly state) movement restrictions were relaxed in 1978 with the attainment of reasonably high levels of foodgrain production,

Procurement

The FCI procures foodgrains at procurement prices announced by the government on the recommendation of the Commission for Agricultural Costs and Prices (CACP). The procurement prices to some extent facilitate price formation in the markets. The size of foodgrain procurement depends upon the expected production, a target fixed (until 1978) by the CACP and the difference between procurement and open market

FOOD POLICY October 1993 415


Table 1. Production, procurement, public distribution and net availability of foodgrains: all India.

1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990

Change in Per capita net Net production government Net availability availability of foodgralns Net imports stock of foodgrains per day

(mliiion tonnes) (9)

I , 87.1 3.6 1.1 89.5 94.9 2.0 2.6 94.3 92.0 -0.5 -4.7 96.2 84.9 3.6 -0.3 88.8 91.6 5.2 -0.4 97.1 87.4 7.5 5.6 89.3

105.9 0.7 10.7 95.8 97.3 0.1 -1.6 99.0

110.6 -0.6 -0.3 110.2 115.4 -0.2 0.4 114.9 96.0 -0.3 -5.8 101.4

113.4 0.7 -0.21 114.3 116.6 1.6 1.3 116.9 113.3 4.1 2.7 114.7 113.3 2.4 7.1 128.6 127.4 -0.4 2.7 124.3 131.6 -0.5 -1.6 133.8 125.5 -0.2 -9.5 134.8 122.8 3.8 -4.6 131.2 148.7 1.2 2.6 147.3 149.3 Neg 6.1 143.4

455.0 6.7 (7.7) 8.8 (9.9) 468.0 8.9 (9.3) 7.8 (8.3) 466.1 7.7 (8.3) 10.5 (10.9) 421.6 8.4 (9.9) 11.4 (12.8) 451.2 5.6 (6.2) 10.8 (11.1) 405.5 9.6 (10.9) 11.3 (12.6) 424.3 12.8 (12.1) 9.2 (9.6) 429.6 9.9 (10.1) 11.7 (11.8) 468.0 11.1 (10.0) 10.2 (9.2) 476.5 13.8 (12.0) 11.7 (10.2) 410.4 11.2 (11.6) 15.0 (14.8) 453.7 13.0 (11.4) 13.0 (11.4) 454.0 15.4 (13.2) 14.8 (12.6) 436.4 15.6 (13.7) 16.2 (14.1) 477.9 18.7 (14.0) 13.3 (10.4) 453.7 20.1 (15.6) 15.6 (12.7) 478.3 19.7 (15.0) 17.3 (13.2) 472.7 15.7 (12.5) 18.7 (13.8) 451.2 14.1 (11.5) 18.6 (14.1) 497.2 18.9 (12.7) 15.9 (10.8) 474.6 24.0 (16.1) 15.3 (10.7)

Public Net procuremenr dlstributlonb

(mililon tonnes)

Total closing stocks

6.1 3.4 3.1 2.7 8.3

18.9 17.4 17.2 17.5 17.7 11.5 12.7 15.5 22.6 25.2 23.6 14.1 7.4

11.7 17.3

Notes: Production figures relate to agricultural year: 1970 figure corresponds to 1969/70, and so on. a Figures in parentheses are percentages of net production of foodgrains. b Figures in parentheses are public distribution as percentage of availability of focdgrains.

Source: Economic Survey, 199C-91

“Chetty and Srinivasan, op tit, Ref 7.

prices. As seen from Table 1, annual foodgrain procurement increased from 6.7 million tonnes in 1970 to 13.8 million tonnes in 1979 and 24 million tonnes in 1990. These constituted 7.7%) 12.0% and 16.1% of the total foodgrain production in the country for the corresponding years.

However, rice and wheat continued to be the major components of total procurement. In the triennium ending 1990/91, wheat and rice constituted 45.18% and 54.11% total procurement, whereas the shares of these commodities in total foodgrain production were 31.19% and 41.87%, respectively (Table 2). Further, in the case of rice, one-third of procurement was in the form of paddy (rest rice) in the early 197Os, a figure that has dropped to 18% in recent years.

The rice was procured through a compulsory levy on rice mills. The procurement prices for rice and wheat were significantly below open market prices (Figures 1 and 2). This is believed to have depressed the prices received by farmers. However, in reality the open market prices increased to such an extent that the weighted average price received by farmers was greater than the price prevailing in the absence of government interventions.” The fact that op en market prices have been higher than procurement prices has had negative implications for the procure-

Notes: Figures in parentheses are percentages of rice purchased in the form of paddy to total rice purchases.

a Procurement was mainly limited to sorghum.

Source: Bulletin on Food Statistics, 1987-89; Economic Survey, 1990-91.

Table 2. Percentage of rice, wheat and other grains in total procurement: all India.

Period of % share In procurement % share In production triennium , \ average Wheat Fllce Other grains’ Wheat Rice Other grains

1970-73 58.70 37.98 3.32 21.98 38.95 39.07 (32.67)

1980-83 51 .oo 47.73 1.27 28.02 41.39 30.59 (38.86)

1988-91 45.18 54.11 0.71 31.19 41.87 26.94 (17.66)

416 FOOD POLICY October 1993


= d

250

.f A Procurement

s 2 200

s ._ c: 150

100 1980-l 1981-2 1982-3 1983-4 1984-5 1985-6 1986-7 1987-8 1988-9 1989-90 Figure 1. Trends in wheat prices.

Figure prices.

2. Trends in common rice

Figure 3. Trends in fine rice prices.

600 0 International + Market 1

500 t

A Paddy 0 Levv

1980-l 1981-2 1982-3 1983-4 1984-5 1985-6 1986-7 1987-8 1988-9 1989-90

600 I 0 International

+__--+-+-

100 1980-l 1981-2 1982-3 1983-4 1984-5 1985-6 1986-7 1987-8 1988-9 1989-90

ment operations, particularly in production shortfall years. Consequent- ly the government has resorted to imports to meet the needs of public distribution and check undue price rises. Given the improvements in foodgrain production, imports were comparatively smaller in the 1980s than in the 1970s.

Currently, much of the procurement is confined to the states of Punjab, Haryana and western Uttar Pradesh in the form of direct

“In 1989 almost the entire wheat procure- purchases. I1 Other states such as Andhra Pradesh and Tamil Nadu also ment was confined to Punjab, klaryana and Uttar Pradesh. In the case of rice, the

contribute to rice procurement through the compulsory levy on rice

states of Punjab, Andhra Pradesh, mills. The compulsory levy on producers was also applied to wheat in

Haryana, Tamil Nadu and Uttar Pradesh 1973 but was soon discontinued. For rice, the levy on producers is still contributed 92% to the procurement. followed in parts of some states, for example, Tamil Nadu.



Stocks

Stocks of foodgrains are required for two purposes: (i) operational stocks for regular distribution, and (ii) buffer stocks for stabilizing availability and prices, thereby preventing private speculative hoarding and profiteering. The buffer stocks at one point in time later become the operational stocks and vice versa since there is no label for buffer stocks and all stocks have to be rotated out according to the first-in, first-out prin- ciple. The size of stocks depends upon internal production, procurement, the frequency of shortfalls in production and the cost of handling stocks. As shown in Table 1, the closing central and state governments’ stocks increased to 18.9 million tonnes with a quantum jump of nearly 11 million tonnes in 1976 when domestic production rose by 18 million tonnes. A production shortfall of 19 million tonnes coupled with increased public distribution in 1980 depressed stocks to 11.5 million tonnes in 1981. Further, an import of 2.4 million tonnes, smaller public distribution particularly of wheat in 1984 and a bumper harvest in 1985 increased stocks to 25 million tonnes in 1985. But two successive production shortfall years on account of severe drought in 1987 and 1988 caused a sharp decline. These changes in stocks have tempered temporal fluctuations in the availability of foodgrains as the estimated coefficient of variation (for trend-adjusted data) in the availability of foodgrains (4.9%) was lower than that of production (6.75%).

The composition of stocks is guided by the choices of consumers, availability, acquisition costs and the shelf life of the commodities. Both rice and wheat, which are widely grown and consumed, have a long shelf life and on this account are preferred. In the year 1990, rice and wheat constituted 11.2 and 5.8 million tonnes of the total stocks, respectively.

Public distribution

In order to ensure an adequate supply of foodgrains to the vulnerable sections of society in rural as well as in urban areas, the FCI releases stocks for public distribution, employment-oriented poverty alleviation programmes and open market sales. The lion’s share of total offtakes (89% in 1990) was distributed through the public distribution system (PDS) at issue prices decided by the government. The quantity distributed under the PDS varied from 8 to 12 million tonnes in the 1970s and between 13 and 18 million tonnes in the 1980s. In terms of the percentage of net availability, the PDS represented nearly 10% in normal years and around 14% in shortfall years such as 1980, 1983,1987

and 1988 (Table 1). The share of poverty alleviation in total offtakes was only 11% in

1990. For open market sales and sales to flour mills, there is no systematic policy. The stock of wheat left after meeting PDS and other requirements is sold to flour mills (1.3 million tonnes in 1990).‘*

12Economic Survey, 1990-91.

418

Cost of the interventions: food subsidy

The issue prices of rice and wheat do not cover the total cost of procurement, stockholding and distribution. To cover the remaining cost the government applies a food subsidy. As shown in Table 3, the food subsidy has undergone a sharp uptrend since 1970, reaching Rs 1745 crores in 1988/89. Much of this increase occurred in the 1980s. This is because only wheat was subsidized in the early 1970s and rice had a net surplus until 1975/76. Both rice and wheat were heavily subsidized in the 198Os, as indicated by the rate of subsidy (subsidy per quintal), and

FOOD POLICY October 1993

a For wheat and rice only.

Source: Department of Food, Ministry of Food and Civil Supplies, Government of India.

Table 4. Causes of Increases in food subsidy on wheat and rice: 1976-61 to 1966-69’ (96).

Increased subsidy attributed to Wheat Rice

Increase in quantity 15.29 15.82 Increase in the rate of subsidy 60.58 39.95 Interaction between increase in quantity and rate of subsidy 24.14 44.22

a Triennium averages.

‘3The increase in product of two variables was decomposed into components attri- butable to the increase in each variable and their interaction. For detailed metho- dology, see Suresh Pal, ‘Instability in agri- cuftural production in India’, PhD thesis, IARI, New Delhi, 1986. 14The open market prices refer to weighted wholesale prices. The open market prices for all the major states for which data were available were computed taking a simple average of wholesale prices in different markets. The weighted state prices were used as the all-India prices. The weights were the share of state in all-India market arrivals of the commodity.

Notes The procurement prices of levy rice are for Punjab. For paddy, the difference is between procurement prices of paddy and issue price of rice. The issue prices which were effective for the maximum period in the year were taken.

Source: Based on data in Bulletin on Food Statistics, 1967-69.


Table 3. Food subsidy In India (rate in FtsIquintsl; amount in Rs, crores).

197oi71 1.67 1971 I72 12.40 1972l73 18.15 1973l74 30.37 1974l75 39.26 1975i76 31.85 1976R7 28.15 1977i76 24.32 1976R9 32.71 1979180 28.15 1980/81 40.20 1981182 53.73 196Z83 55.49 1983184 49.07 1984185 63.46 1985186 69.57 1986187 84.92 1987168 62.80 1988189 92.98

Rate

Food subsidy on

Wheat Amount

8.59 71.12

145.29 212.88 255.04 210.97 145.34 187.63 253.47 246.55 306.11 365.94 432.61 355.90 422.23 865.03 936.03

1140.35 832.36

Rate

-1.13 -1.78 -1.58

2.32 -5.19 -0.89

1.27 1.91

19.06 17.70 34.03 42.94 53.35 66.69 74.87 77.34 80.47 80.95

107.29

Rice Amount

Total

7 subsldf (amount)

-1.94 8.65 -3.68 67.44 -3.76 141.53

3.93 216.81 -8.49 246.55 -1.39 209.58

3.10 148.44 5.64 193.27

41.08 294.55 77.28 323.83

179.35 485.46 256.43 622.37 327.00 759.61 466.47 822.37 432.52 854.75 508.38 1373.39 686.45 1822.48 784.08 1924.43 912.72 1745.08

the food subsidy continued to increase over time. Coupled with the increase in the quantum of public distribution, the total food subsidy grew rapidly. A decomposition of the increase in food subsidy13 in the 1980s (Table 4) reveals that the increase in rate of subsidy accounted for 61% and 40% of increased food subsidy for wheat and rice, respectively. The contribution of the increase in quantity to the increased subsidy was only 15% for both rice and wheat. The rest of the increase in the subsidy, 24% for wheat and 44% for rice, was attributed to the simultaneous increase in rate of subsidy and quantity.

The increase in the rate of subsidy is likely to have occurred because of a narrow difference between issue and procurement prices, and an increase in the handling costs. The latter, of course, may increase due to inflation, but the former is directly influenced by policy decisions. These aspects are examined here to explore the possibility of reducing the food subsidy. The trends and differences between the issue and procurement prices (Figures 1-3 and Table 5) reveal four interesting features. First, all the administered prices followed the trend in open market prices.t4 Second, the levy prices of rice (both common and fine varieties) for sellers (generally millers) were higher than the issue prices to consumers, thereby escalating the subsidy. The price difference was markedly higher for common rice in the years 1988189 and 1989/90 which was largely distributed through the PDS. A minor difference between the procurement price of paddy and the issue price of rice, coupled with a 39% procurement of paddy, might have accentuated the rate of subsidy

Table 5. Differences between issue and procurement prices of wheat and rice (Rs/qulntal).

1960/81 1981182 1982183 1983&t 1984185 1985186 1986187 1987188 1986/69

PDS

13 15 18 21 20 15 28 29 31 51

Wheat Flour mills

13 25 43 57 20 33 43 44 67

60 60 66 76 80 89 93 69 84

104

Fine

68 68 74 84 88 97

101 110 134 154

Levy rice Common Fine

-9.5 -9.3 -18.8 -19.2 -16.9 -17.6 -12.7 -13.8 -13.8 -15.3

-7.7 -9.4 -6.0 -7.9

-12.6 -1.4 -25.5 9.9 -21.5 12.6



Notes Figure in parentheses are percentages of total post-procurement cost. ’ Excluding carrying charges paid to state agen- cies.

Source: Department of Food, Ministry of Food and Civil Supplies, Government of India.

15/3u//etin on Food Statistics, 1987-89. ‘%ince the operations of the FCI are subsidized by the government, the cost of handling foodgrains is the nominal cost and not the resource cost. “The average length of the transport by rail was 1507 km per consignment in 19871 88 (FCI, Annual Report, 1988-89). Also the ratio of movement to procurement was 1.65 in 1987/88 (Department of Food), indicating improper positioning of stocks and movements.

As regards the handling cost l6 of foodgrains (per quintal), as given in

Table 6, the procurement cost was lower than the post-procurement cost, which includes the distribution and carrying costs of buffer stocks. The procurement cost was Rs 47.10 per quintal for wheat, Rs 32.73 for paddy and Rs 13.80 for rice for the triennium ending 1987/88. The low procurement cost of rice was because of the direct purchase of levy rice from rice mills. The distribution and carrying costs of buffer stocks were in the order of Rs 58.80 and Rs 43.90 per quintal, respectively. The high distribution cost was attributed to the massive transportation of rice and wheat from northern surplus regions to other parts of the country.17 A breakdown of post-procurement costs (Table 6) reveals that, in spite of heavy subsidy, interest payments on bank overdrafts and government loans accounted for 33.63% and freight 30.78% of the total cost. Storage incidentals formed 12% of the total cost, with grain losses during storage and transportation adding a further 9% to post- procurement costs; transit losses, which were 2.88% of total purchases, were more important than storage losses (1.19%). Total losses were in the order of 4.07% of total purchases, amounting to a loss of 7 lakhs tonnes of foodgrains worth Rs 169.82 crores in 1987/88 (Table 7). Labour and administrative overhead together formed 14.54% of the post-procurement cost. Thus a reduction in grain losses, storage at proper locations and rational movement of stocks could significantly reduce the food subsidy.

Effects of government interventions

The effects of government interventions on foodgrain availability, price stability and price spread are discussed in this section.


Table 6. The costs incurred by the FCI in the handling of foodgrains.

costs

Procurement cost (Rs/quintal) Wheat Rice (levy) Paddy

Post-procurement cost Distribution cost (Rs/quintal of sales) Carrying cost of buffer stock (Rs/quintal of average buffer stock)

Individual items of post-procurement cost (Rs. crores) Transportation Interest Storage Grain losses Handling labour Et;inistrative overheads

a

1985-68 (triennium average)

47.10 13.80 32.73

58.80 43.90

502.33 (30.78) 548.67 (33.63) 196.67 (12.05) 146.67 (8.99) 146.67 (8.99)

90.60 (5.55) 1631.67 (100.00)

on rice in the early 1980s. Third, the price difference for wheat continued to increase over time, for except 1985/86. Finally and interestingly, issue prices were equal to open market prices in 1984/85 and 1986/87 and marginally higher in 1982/83 and 1983184. Also, the issue price of wheat for flour mills was in general higher than the open market price, except in 1987/88 and 1988/89. As a result, the offtake of wheat for the PDS declined by nearly 2 million tonnes in 1983/84. The stocks of wheat also accumulated rapidly during 1982/83-1985/86, with a record high of 15 million tonnes in 1984/85.15 From this it appears that the administered price policy was more important in increasing the rate of subsidy for rice than it was for wheat.


Table 7. Transit and storage losses of foodgrains: 1987188.

Quantity Value Losses Loss (iakh tonnes) (Rs, crores) (% of purchases)

Transit loss 4.96 117.39 2.88

Source: Department of Food, Ministry of Food Storage loss 2.05 52.43 1.19

4.07 and Civil Supplies, Government of India.

Total 7.01 169.82

‘8The international prices of wheat are fob price of winter wheat No 2 in USA and for rice they are fob price of white 5% broken rice in Thailand. Source: FAO Production Yearbook, various years. “A. Gulati and P.K. Sharma, ‘Employ- ment, foreign exchange and environment: implications for cropping pattern’, Econo- mic and Political Weekly, Vol XXV, No 39, 29 September 1990, pp Al 1 l-l 24. ‘OThe data were adjusted for trend using three-year moving averages and the de- viations from the trends were taken to compute the CV.

Foodgrain availability: temporal changes

Buffer stock operations have, as seen earlier, achieved significant stability in foodgrain availability. The per capita availability ranged from 405.5 to 476.5 g per day in the 1970s and from 436.4 to 497.2 g per day in the 1980s. A detailed analysis of shortfall years (Table 8) shows that the buffer stock successfully absorbed production shortfalls in 1977 and 1987 but performed only moderately well in 1980. In 1973 when the food situation was not so comfortable, and in 1988, the second successive major shortfall year, foodgrain availability was destabilized as the fall in per capita availability was higher than that in net production.

Trend and instability in prices

It is evident from Figures l-3 that the domestic prices of rice and wheat were appreciably more stable than international prices.18 The trend in the open market price of wheat was similar to that of the international price, though the rice price trend was less close. Further, the open market price of wheat was either equal to or below the international price until 1984/85, but the reverse was true in the late 1980s. In the case of rice, the open market price was above the international price from 1982/83 to 1987/88. In the remaining years a sharp increase in the international price kept it well above the domestic price for rice. However, Gulati and Sharma have shown that rice and wheat were disprotected commodities in the sense that their domestic prices were below the international prices.” It may be noted here that these authors took procurement prices in computing protection coefficients; this caused a downward bias in their results.

The instability in production tends to be transmitted through the market, which in turn destabilizes prices. It is expected that government interventions would stabilize prices to the extent that the instability in prices would be lower than that in production and market arrivals. Therefore the instability in the prices during the last two decades vis-&vis production and market arrivals of rice and wheat for major states and the country as a whole were analysed with the help of coefficients of variation (CV) for trend-adjusted data.” The results are given in Table 9. As can be seen, the instability in prices was fairly low (CV of around 4% for both rice and wheat) compared with variations in

Table 8. Percentage change in net production, availability and prices of foodgrains in major production shortfall years.

Net availability Price index

Net production Total Per capita per day Wheat Rice Foodgrains

Note: Production figures relate to agricultural 1973 -7.72 -7.69 -9.55 4.55 17.39 17.60

year: 1973 figure corresponds to 197203, and 1977 -8.12 3.30 1.25 3.45 5.55 11.17

so on. 1980 - 16.81 -11.69 -13.86 6.99 15.00 15.29 1987 -4.83 1.10 -1.17

Source: Based on data in Bulletin on Food 5.88 6.64 6.41

1988 -2.07 -2.67 -4.55 12.42 Statistics, 1987-89.

13.05 18.17



“P.B.R. Hazeli, M. Jaramilla and A. Wil- liamson, ‘The relationship between world price instability and the prices farmers re- ceive in developing countries’, Journal of Agricultural Economics, Vol 41, No 2, 1990, pp 227-241. *?yagi, op tit, Ref 6.

422

Table 9. Coefficient of variation of production, market arrivals and prices of rice and wheat, 1970/71-1987/88.

State Rice Wheat r

Production Market arrivals Price Production Market arrivals Price

Andhra Pradesh 9.36 9.90 5.41 - _

Bihar 13.05 12.85 7.24 10.40 12.91 6.44 Gujarat 26.73 12.89 10.06 12.56 10.13 7.98 Haryana 9.79 13.25 10.19 4.92 16.85 8.76 Karnataka 18.19 8.82 5.72 - _ Madhya Pradesh 20.98 17.43 8.37 10.89 19.14 9.33 Maharashtra 15.63 11.32 3.62 15.49 13.10 4.68 Orissa 17.07 22.24 8.08 - Punjab 5.96 9.21 5.47 9.05 -7.92 4.84 Rajasthan - _ 14.44 14.10 6.30 Tamil Nadu 11.21 17.66 4.02 - _

Uttar Pradesh 14.70 20.29 6.76 9.54 -9.54 9.06 West Bengal 14.73 21.90 5.89 - _

All India 9.03 7.43 3.55 7.79 6.14 4.47

production and market arrivals. Further, the instability in domestic prices was far below that in international prices (CV of 27.8% for rice and 23.1% for wheat).*l However, a sharp increase in price could not be controlled in major production shortfall years (in 1973 and 1980 for rice and in 1988 for both rice and wheat; Table 8). The state-level analysis shows that the CV of prices was less than that for production and market arrivals in all states. In the case of rice, the states of Gujarat, Karnataka, Madhya Pradesh, Maharashtra, Orissa, Uttar Pradesh and West Bengal achieved price stability in spite of comparatively high instability in market arrivals. For wheat, an appreciable price-stabilizing effect was achieved in the states of Maharashtra, Rajasthan, Madhya Pradesh, Gujarat and Bihar. This means that the stocks of rice and wheat allotted to various states were, by and large, successful in stabilizing the respective prices.

Apart from temporal stability, government interventions should also be successful in arresting high seasonality in prices. To examine this, seasonal indices for quarterly prices and market arrivals of rice and wheat were computed (Table 10). It can be seen that seasonality in market arrivals was extremely high for wheat, with a seasonal index of 281.6 for the post-harvest season (April-June). For the remaining three seasons the indices were 42.4 or less. In the case of rice, the seasonality was moderate, as indicated by the index: 186.3 for October-December and 103.1 for January-Match. The moderate seasonality in rice could be due to the fact that it is grown throughout the year in one part of the country or another.

Table 10 further shows that the seasonality in prices was of a very low order for both commodities. This clearly shows that government interventions were helpful in controlling intra-year fluctuations in prices. However, this may have accentuated seasonality in market arrivals as holding of stocks for sale in lean seasons may not be economical for farmers on account of a low price rise.22 In fact, for rice the seasonality index of market arrivals for the main post-harvest season (October-December) rose from 179.2 in the 1970s to 201.9 in the 1980s. This increase in seasonality will, however, further compel the government to increase its procurement operations to avoid a sharp fall in prices, thereby increasing total costs. Therefore a sufficient difference in seasonal prices should prevail so as to encourage private storage and minimize the degree of government intervention.

FOOD POLICY October 1993


Table 10. Indices of seasonal@ in market arrivals and prices of rice and wheat: all India.

Time period

1970/71-1979/80 1980/81-1987188 1970/71-1987188

1974175-I 979180 1980/81-1987188 1974l75-1987188

Market arrivals Price I \ , ,

October- January- Aprll- July- October- January- April- July- December March June September December March June September

Rice 179.2 109.2 66.9 44.4 96.1 96.8 102.4 104.3 201.9 104.1 58.4 37.9 90.4 91.0 101.7 116.6 188.3 103.1 64.8 45.8 93.6 94.1 102.0 109.9

Wheat 31.9 28.0 290.7 49.7 105.8 109.1 88.0 97.1 33.1 32.7 292.8 41.6 105.6 105.9 89.5 99.5 33.8 42.2 281.8 42.4 105.8 107.4 88.6 98.2

Note: Seasonal indices were computed using the ratio to moving average method. The ratios were multiplied by 100 to make them easier to read as percentages. See S. Makridakis, SC. Wheelwright and V.E. McGee, Forecasting: Methods and Applications, John Wiley & Sons, New York, 1983.

*3Uma Lele, Foodgrain Marketing in India, Cornell University Press, Ithaca, NY, 1971. 24B.W. Brorsen, J. Chavas, W.R. Grant and L.C. Schnake, ‘Marketing margins and price uncertainty: the case of the US wheat market’, American Journai of Agriculturai Economics, Vol 67, No 3, 1985, pp 52% 528. *5M.M. Ghosh, ‘Impact of regulation on price spread of important foodgrains: a case study of Bihar’, Indian Journal of Agricultural Marketing, Vol 2, No 1, 1988, pp 60-64.

Price spread

Although foodgrain markets in India are said to be competitive, the availability of large capital with few traders and unstable prices may allow abnormal margins.23 Brorsen et al also observed that interventions which are price stabilizing (temporal and seasonal) in nature reduce marketing margins.24 It is therefore expected that government interventions reduce price spread by controlling abnormal margins of private traders. Studies have shown that the regulation of markets has increased the producer’s share in the price paid by the consumer through a reduction in price spread.2s Price spread may increase over time in absolute terms because of an increase in the cost of marketing. But in relative terms it should remain at least constant, if it does not decline over time.

This issue was examined with the help of the farm-retail price spread for rice in the four major rice-growing states. Transportation and storage operations may be considered as the same over time in the producing states. As shown in Table 11, the absolute price spread has progressively increased in all the markets of the selected states during the last two decades. Interestingly, the ratio of farm harvest to retail prices has declined since the early 1970s in Andhra Pradesh. The ratio decIined in Delhi while it increased in Kanpur in the 1970s but remained constant in the 1980s. In contrast, for Punjab the ratio increased markedly in the 1970s but declined marginally in the 1980s. A change in the procurement from paddy in the 1970s to rice in the 198Os, thereby allowing additional margins to paddy traders, might have caused a decline in the ratio. However, the ratio was the highest in Punjab in the

Table 11. Trends in farm-retail price spread in rice by selected markets.

Market (state)

Amritsar (Punjab)

Kanpur

Price spread Ratio of farm harvest to retail Trend coefficients of the ratio of farm (Rslquintal) price harvest to retail price (1970/71-19W97)

I , --, -\ 1970/71- 1990/81- 1994&S- 1970/71- 1900/01- 1904l0!& 19nl73 1982l83 1986/87 1972l73 1982l03 1986l87 Intercept Time Time2 R2

87.53 88.13 166.54 0.39 0.55 0.50 0.394= 0.034= -0.002c 0.05 (4.74) (1.57) (-1.46)

84.16 152.11 176.37 0.40 0.43 0.43 0.394= 0.002b - 0.17 (Uttar Pradesh) (33.17) Delhi

(2.05) 88.03 189.50 285.77 0.41 0.37 0.38 0.4358 -0.003 - -0.01

Kakinada (11.70) (-0.88)

51.98 124.20 170.11 0.57 0.50 0.47 0.56Oa -0.005a - 0.30 (Andhra Pradesh) (30.12) (-2.83)

Notes: Farm harvest and retail prices are for paddy and rice (common variety), respectively. For Delhi, farm harvest prices of paddy in Amritsar were taken, Figures in parentheses are ‘1’ values. a.b,c Significant at l%, 5% and 20% levels respectively.



Table 12. Public distribution of foodgrains and incidence of oovertv in imoortant states.

Notes: The sum over the states does not tally with all-India figures as some states are not included. a Source: Bulletin on Food Statistics, 1987-89. b Triennium average c Source: B.S. Minhas, L.R. Jain and SD. Ten- dulkar, ‘Declining evidence of poverty in the 1980s: evidence versus artefacts’, Economic and Political Weekly, Vol XXVI, Nos 27 and 28, 1991, pp 1672-1682.

26The estimates of poverty were taken from B.S. Minhas, L.R. Jain and SD. Ten- dulkar, ‘Declining evidence of poverty in the 1980s: evidence versus ‘artefacts’, Economic and Political Week/v. Vol XXVI. Nos 27 and 28, 1991, ~~‘1673-1682: These estimates are appropriate as they allow variations in consumption patterns and prices of various goods and services across different states.

Andhra Pradesh Assam Bihar Gujarat Haryana Himachal Pradesh Jammu B Kashmir Karnataka Kerala Madhva Pradesh

Manipur Orissa Punjab Rajasthan Tamil Nadu Tripura Uttar Pradesh West Bengal Delhi

1186.0 6.72 703.6 3.99 850.7 4.82

1122.3 6.36 130.3 0.74 148.0 0.84 379.0 2.15 884.3 5.01

1716.0 9.73 686.0 3.89

1878.6 10.65 49.3 0.28

388.6 2.20 181 .O 0.91

1025.0 5.81 1805.6 10.23

150.7 0.85 956.3 5.42

1688.0 9.57 711.3 4.03

All India 17636.3 100.00

Public distribution of foodgrains* (19S7/88b)

Quantitv Incidence of poverty=

% of people % share of state iwo . % of total

distribution below poverty line

in total poor population

33.80 5.75 48.54 2.74 64.87 14.43 40.65 4.34 21.90 0.91 23.02 0.30 28.04 0.55 43.18 4.99 44.12 48.94 47.15 16.86 62.50 17.97 41.80 47.08 22.90 46.45 49.81 14.60

45.85

3.27 8.33 9.56 0.07 5.04 0.94 4.74 6.77 0.15

16.61 8.80 0.35

100.00

1980s clearly indicating the effects of large procurement operations in the state. The results of trend analysis did not show encouraging results, as indicated by a very low R2 value except for Andhra Pradesh where the decline in the price ratio was significant. From these results it seems that government procurement interventions could not further reduce price spread except to a marginal extent in the state with the large procurement. Regulation of markets seems to be more effective, particularly in states where procurement operations are not significant.

Public distribution and the incidence of poverty

Public distribution is expected to increase the availability of foodgrains to weaker sections of society and urban dwellers. As seen earlier, the lion’s share of total foodgrain offtakes was distributed through the PD.5 at issue prices lower than prevailing open market prices. Therefore regional distribution through the PDS should not only be in proportion to the incidence of poverty, but it should also be most beneficial to the low-income groups. This section analyses these issues.

Table 12 gives the incidence of povertyz6 and public distribution of foodgrains in the important states of India. This table clearly shows that four states - Bihar, Madhya Pradesh, Uttar Pradesh and Orissa - which account for 44.41% of the total number of poor people in India received only 16.33% of the total offtake for the PDS. In contrast, the states of Kerala and Tamil Nadu and the Union Territory of Delhi together received 24% of the total offtake, whereas only 10% of poor people resided in these states. In the remaining states the proportion of the offtake was consistent with the incidence of poverty. The shares of hilly states and the arid state of Rajasthan in total offtake were, no doubt, in excess of their incidence of poverty, but they were nevertheless not commensurate with the resource-poor and ecologically fragile nature of the regions.

The distribution of foodgrains at concessional prices obviously pro- motes the egalitarian distribution of income. These distributional be-



Table 13. Percentage distribution of persons using PDS and percentage of quantity purchased from PDS to total purchases by fractile groups: all India.

Rice Percentage of persons using only PDSb Percentage of persons using PDS and other source@ Percentage of quantity purchased from PDS to total purchases

Wheat Percentage of persons using only PDS” Percentage of persons using PDS and other source? Percentage of quantity purchased from PDS to total purchases

Rice Percentage of persons using only PDSb Percentage of persons using PDS and other source@ Percentage of quantity purchased from PDS to total purchases

Wheat Percentage of persons using only PDSb Percentage of persons using PDS and other sourcesb Percentage of quantity purchased from PDS to total purchases

&lo ltJ-20

15.0 11.5

13.7 11.8

16.9 15.3

13.3 13.7

10.8 8.6

9.5 9.7

13.0

17.8

10.5

14.0

21.5 21 .o

10.8 11.6

10.1 8.5

12.3 16.6

Fractile orouosa 20-40 4@-80

Rural

24.2 19.6

24.8 19.8

17.6 15.5

22.6 20.2

19.7 22.0

14.0 12.8

Urban

25.3 24.0

26.2 18.7

18.5 19.6

25.6 21.8

28.5 24.4

18.1 23.6

-h-&l 80-w 90-100 All groups

18.4 6.8 4.5 14.2

18.1 7.7 4.3 25.7

17.9 17.8 16.3 16.8

17.1 7.9 5.3 26.5

23.0 9.7 6.1 24.8

14.1 13.4 13.6 12.6

16.4 6.8 4.1 11.4

14.4 5.4 3.5 28.0

18.2 16.7 14.6 19.0

17.1 7.8

18.9 5.6

5.3

4.0

19.5

29.5

7.2

20.0 22.1 19.3

a For definition, see Ref 29. b The sum over fractile groups is 100%. Source: Based on NSS data, 42nd round, Sawekshana, Vol XIII, No 4, Issue No 43, ApriLJune 1990.

“Chetty and Srinivasan, op tit, Ref 7. **SM. Dev and M.H. Suryanarayana, ‘Is PDS urban biased and pro-rich? An eva- luation’, Economic and Political Week/y, Vol XXVI, No 41, 12 October 1991, pp 2357-2366. *‘The NSS formed 10 fractile groups with equal numbers of households by arranging sample households in ascending order of income. Thus an increase in fractile group refers to an increase in income.

nefits are clearly documented by Chetty and Srinivasan.27 These authors have also shown that welfare losses were substantial if the poor were left out of the PDS network. Dev and Suryanarayana have further shown that there was no apparent class bias in the PDS.28 The rural sector’s share of public distribution was 71% for rice and 56% for wheat. This implies that the quality-conscious urban population purchased less coarse rice, which was mainly distributed through the PDS, and purchased more wheat, which has lower range of quality differences. The quality preference is further supported by the results presented in Table 13. This table shows that the percentages of people using only the PDS were half as great as those of partial users of rice in rural as well as in urban areas. In contrast, in the case of wheat, the percentage of persons solely dependent on the PDS was much higher than those partially dependent in both areas. In contrast to Dev and Suryanar- ayana’s results, the majority of persons using the PDS solely as well as partially belong to the middle fractile groups29 for both rice and wheat.

Table 13 further shows that, for all the fractile groups together, the PDS purchase was 19% of total purchases of rice and wheat in urban areas, and 17% for rice and 13% for wheat in rural areas. The low figure for rice in rural areas may be because per capita purchases and



Table 14. Percentages of PDS users and PDS purchases as percentages of total purchases of rice and wheat by states.

State Rice Wheat

Rural Urban \

Rural Urban Quantity Quantity purchased

Quantity purchased

Quantity

% of person5 as % of total % of persons purchased

as % of total % of persons purchased

as % of total as % of total using PDS purchases using PDS

% of persons purchases using PDS purchases using PDS purchases

Andhra Pradesh 73.31 32.54 50.23 21.47 31.52 20.39 51.17 47.98 Assam 48.73 14.41 46.08 14.83 12.04 17.79 6.03 1.65 Bihar 1.02 0.42 0.85 0.29 3.15 1.51 9.54 7.05 Gujarat 61.42 46.53 47.21 26.21 49.95 37.02 30.35 19.63 Haryana 9.44 7.29 13.39 8.89 _ _ _

Himachal Pradesh 44.75 35.80 33.59 20.48 16.67 17.01 9.68 8.81 Jammu and Kashmir 37.33 37.91 79.58 63.87 97.29 19.35 73.57 58.54 Karnataka 68.66 22.22 62.72 25.69 74.63 49.86 60.77 43.78 Kerala 91.22 51.36 87.14 46.19 99.16 92.04 80.75 91.48

Madhya Pradesh 67.88 6.14 21.95 10.47 16.06 7.17 11.21 5.65 Maharashtra 59.88 27.45 44.90 27.77 57.44 43.13 33.84 21.45 Orissa 1.55 0.40 0.79 0.41a 16.91 18.11a 22.79 25.02 Punjab _ _ 8.06 5.15 _ _ 0.41 0.05 Rajasthan 4.85 7.47 5.07 15.94a 22.40 16.21 6.46 3.61a Tamil Nadu 65.62 18.66 50.57 12.17 82.41 77.46 67.21 63.48 Tripura 81.62 26.03 57.02 24.52 2 89 5.63 1.88 15.28 Uttar Pradesh 4.73 4.45a 8.96 8.03 4.06 2.43’ 5.06 3.32a West Bengal 27.82 6.59 43.69 19.48 58 75 49.03 74.67 69.87

All India 39.89 16.76 39.32 19.02 31.30 12.64 36.69 19.33

a The figures were lower for bottom fractile groups.

Source: Based on NSS data, 42nd round, Sarvekshana, Vol XIII, No 4, Issue No 43, April-June 1990.

3”The per capita monthly consumption of rice and wheat was 7.11 kg and 4.77 kg, respectively, in rural areas, whereas the corresponding figures for urban areas were 5.33 kg and 4.83 kg (NSS, 42nd round, 1987-88). See Sarvekshana, Vol 13, No 4, Issue 43, April-June 1990.

Source: Based on NSS data, 42nd round, Sar- vekshana, Vol XIII, No 4, Issue No 43, Aprif- June 1990.

Reason

Not entitled/no ration card Not required Not available in ration shop Qualify not satisfactory Not available in sufficient quantify Not available in sufficiently small quantify Credit purchase not possible Others Total

Rice Wheat Rural Urban Rural Urban

7.76 16.76 4.32 11.18 35.69 14.95 60.91 39.96 25.46 19.35 22.35 21.13

5.30 19.55 2.35 15.85 14.84 22.28 1.79 4.68 0.34 0.57 0.10 0.21 1.46 0.88 0.87 0.86 8.40 4.92 6.18 5.05

100.00 100.00 100.00 100.00


consumption in rural areas were higher than in urban areas; but the reverse holds true in the case of wheat, indicating bias in the PDS in favour of the urban population.30 The PDS purchases by fractile group, however, showed diverse patterns for rice and wheat. In the case of rice, the proportion of the PDS in total purchases was equal to that of all fractile groups in rural areas, and it was marginally higher for lower- fractile groups in urban areas. In the case of wheat, the percentage of the PDS purchase to total purchases was considerably lower for the bottom fractile groups than that for upper fractile groups in both rural and urban areas. Therefore there seems to be an upper-class and urban bias in the PDS, particularly for wheat.

Another most disquieting feature of the PDS, illustrated in Table 14, was that its coverage in terms of percentage of users and purchases was extremely low in the states of Bihar, Madhya Pradesh, Orissa and Uttar Pradesh. As noted earlier, the share of these states in total poverty was 44% and in all India public distribution was 16%; thus poor poverty targeting of the PDS is again shown. Further, the unavailability of foodgrains in terms of time and adequacy, unsatisfactory quality and unavailability of ration cards were found to be the main reasons for poor access to the PDS (Table 15).

Table 15. Percentage distrlbution of persons making partial or no purchase of rice and wheat from PDS by reasons: all India.


The rationalisation of policy interventions

It is clear from the foregoing discussion that government interventions, substantial in nature and magnitude, were confined to rice and wheat. Although the interventions could not, in general, reduce price spread, tangible success in temporal and seasonal price stabilization, and increased access to food, have been achieved. This success was, however, attained at increased costs mainly comprising freight, interest payments, storage incidentals and grain losses. Much of the cost was due to the positioning and movement of stocks at places away from distribution routes. Consequently the food subsidy increased at a rapid rate over time. However, public distribution has been inconsistent with the incidence of poverty across the states and has subsidized upper- income groups at the cost of lower-income groups.

Are increasing costs and other drawbacks of interventions sufficient reasons to recommend their withdrawal? The high seasonality in market arrivals, regional imbalances in production and mass poverty which are still the reality of the day suggest that withdrawal would have an adverse welfare impact. Therefore rationalization of direct interventions holds the key to reducing the food subsidy. The necessary measures include storage of foodgrains along distribution routes, minimization of grain losses, strict targeting of the PDS to people below the poverty line living in resource-fragile and tribal regions, and relief work. An economical and politically feasible approach to this would be to allow much larger offtakes of rice and wheat for employment-oriented poverty alleviation programmes in both rural and urban areas. A higher subsidy for these programmes than that for the PDS would result in self-selection of eligible people. Buffer stocks should continue to be dominated by rice and wheat because of their long shelf life. Complete dependence on international trade to stabilize foodgrain availability in shortfall years seems too risky because of the volatility of world market prices, foreign exchange scarcity and the uncertain availability of foodgrains on the world market (which is determined by economic and political factors). Procured foodgrains in excess of buffer stocks and public distribution can be sold in the open market or through the PDS at the FCI’s economic prices.31 Here it is worth mentioning that the FCI’s economic

31The economic prices are those at which prices were below the open market prices in deficit states.32 A further

the FCI could have sold the wheat and rice cut in economic prices could be attained through improved efficiency of in the open market without involving any subsidy to the central exchequer and at the

the FCI and reduced transportation costs and grain losses. In the long

same time earning a post-tax return of run, concerted efforts to increase foodgrain production in deficit areas

12% on the equity. would reduce dependence on the PDS and hence result in a smaller food 3qyagi, op tit, Ref 6. subsidy.


government interventions in foodgrain markets: the case of india

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