We're compounding one support price stupidity with another one on stock sales: Abhijit Sen

Interview with Member, Planning Commission

The government recently decided to re-examine the mandate of its farm produce price-setting body, the Commission for Agricultural Costs and Prices (CACP), on a complaint from a section of farmer bodies of the Minimum Support Prices (MSPs) not being realistic. Planning Commission member Abhijit Sen says the real problem is with the quality of data in an interview with Sanjeeb Mukherjee. He also talks on other reforms needed to tackle the problem of too-high stocks of grain. Edited excerpts:

There has been some criticism of the method used to calculate MSPs and now the government is re-examining the CACP's mandate. Is there a need to do this?

I think it's a system (of calculating the MSP) which is, unfortunately, not entirely transparent. CACP can't even get to see the farm-level data, in a world where there is now great deal of diversification in agriculture. It is pointless in getting data which is crop-specific. One needs to get complete farm-level data and compare across all alternative crops. That is simply not possible in the way data is disseminated.

Second, these data should be available easily to researchers, which is not the case. If it were, a lot of this criticism regarding the data would go away.

So, what is the main problem with the way CACP calculates MSP? Why is there opposition to some recommendations?

The problem is different. In a world with relatively good competition, market prices would in the long run tend to approximate the cost of production (CoP), provided there is no huge competition from abroad. So, in a closed economy, you would expect long-run prices and long-run CoP to be roughly the same. What has tended to happen is that the MSP has been set hugely above CoP since some time for rice and wheat. So, those are the only crops where you end up getting a surplus and that is the problem successive CACPs are guilty of.

The other stupid thing which did not get into the mind of government is simple economics. If you set the purchase price above the market clearing price, then you have to set the selling price at a lower level than the market clearing price.

Setting the sale price lower than the market clearing price would worsen the fiscal problem, when you are selling so much stock at low prices.
No, the fiscal story actually begins with too high MSPs and once you have procured the grain, you have paid the cost. Then, the sensible thing is to analyse how much do I receive as sales from that. Raising the Central Issue Price (at which the government sells foodgrain through ration shops) will not increase your sales. The situation is very clear that at the given MSP and at the given sales every year, your stocks are increasing by around 10 million tonnes and it costs about Rs 5 a kg to hold stocks for a year. Any sensible guy would have said that instead of paying Rs 5 for holding it, I will give Rs 5 as discount and sell off the stocks.

Given that production in the coming years is expected to be reasonable, unless we face a severe drought, what are the options left with the government?
The correct way of proceeding on this is to do the following things, which is very unlikely to happen in an election year.

Number one, since the MSPs are already fairly high, urea prices should be decontrolled or at least raised, so that at least you have a semblance of parity with other fertilisers. It's not going to be popular but do it. Raising urea prices would reduce production a little bit, which would have some effect on your need to procure.

The second is go for a sensible policy of sales that says if the stocks of grain are higher than a certain amount. I'm going to subsidise the sales.

Do you mean subsidise export as well?
It does not really matter. Ideally, it should be domestic sales. There should not be a case in which FCI (Food Corporation of India) is selling to exporters at a lower price than the price at which it is selling grain to domestic customers.

But, the question is if government subsidizes domestic sales then there could be tendency to purchase the grain at lower price and thereafter export at a higher rate?

Yes, of course, I have no problem with that. There should be a sales price of the FCI, which is at a discount, what the private traders do with that whether they sell in it in the domestic market or export is a matter for the Commerce ministry to look into. That is a matter about trade, it is not about pricing of grains. The only problem which can happen is that if world prices are very high and people are exporting it in large quantities then it can have a price impact on the domestic market. And, then it is matter of whether you want to check that price and the correct way of doing that will be through an export tax, rather than a export ban and that would not come from the food ministry, that would have to come from Commerce or finance ministry.

Do you think the whole scheme of things also calls for opening the foodgrains procurement by government to private traders?
Look in any case most of the foodgrain procurement is by state government agencies, whether or not private players will be able to procure in their states is up to the state governments to decide and nothing to do with anyone else. Regarding private traders procuring for FCI, that is really the domain of the state governments and to me it is not even very clear whether private  agencies would do a better job than government in grain procurement. They are just looking for business

Now that we are talking about grain stocks it brings to the question of food security and Food Security Bill and the argument is that the financial burden may rise due to the proposed Law and it will lead to nationalizing the grain trade
The fact of the matter is with or without the Food Security Bill, government is already buying about 70 million tonnes plus of grains. It is buying roughly 35-40 million tonnes of wheat and roughly the same amount of rice. And mind it this has nothing to do with the Food Security Bill. What would the Bill do, how much food does the Food Security Bill require? It requires a princely amount of 49 million tonnes. So don't blame the Food Security Bill for requiring too many grains. I mean you have got yourself into a mess of procuring 70 million tonnes, not because of any Food Bill but because you have been giving high MSPs and trying to be popular with farmers. In fact the Food Bill, to the extent that it increases off take, would actually reduce the subsidies.