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Stoking inflation

How food security law is creating perverse incentives

Business Standard  |  New Delhi 

That the vastly amended food security Bill will soon adorn the statute book seems likely considering the way the government sought to push it through in the Lok Sabha amidst pandemonium over demands for the resignation of tainted ministers. In any case, none of the main political parties would like to be seen as blocking this populist measure. However, what is being overlooked in the hurry is its far-reaching implications in terms of the transfer of Central resources to the states through ever-swelling grain procurement and high state-imposed levies; and also the fate of the private food trade. Also being disregarded is the deleterious impact of this measure on an agricultural production pattern that is already tilted in favour of cereals at the cost of pulses, oilseeds, fruits and vegetables - which are contributing to supply crunch-driven food inflation.

Some states have already begun to produce and procure more grain for handing over to the Centre to earn larger revenues by way of mandi charges. States like Punjab and Haryana, traditional contributors of wheat and rice to the Central grain pool, are charging local taxes as high as 14.5 per cent and nearly 11 per cent, respectively, to garner higher tax proceeds for their exchequers. Madhya Pradesh has gone a step further and has begun offering hefty bonuses - Rs 100 a quintal last year, hiked to Rs 150 this year - on top of the minimum support price to maximise procurement. Though the fiscal burden of the bonus is borne by the state government itself, this is offset to a large extent by the higher tax collection from increased procurement as a result of this incentive. Little wonder that Madhya Pradesh last year emerged as the second largest procurer of wheat, after Punjab, relegating Haryana to the third spot. This might help explain its apparently impressive double-digit growth in farm production. Taking a cue, Chhattisgarh, which has now become surplus in rice, has also begun procuring it for the Central kitty and has stepped up market levies on these purchases. Interestingly, Bihar, only a marginally wheat surplus state, has this year set up more grain procurement centres than the major wheat-growing states of Punjab, Haryana and Uttar Pradesh put together.

These, obviously, are trends that need to be restrained. One of their untenable fallouts is the mopping up of the wheat surplus in the peak season by the government, which is tantamount to virtual nationalisation of the foodgrain business - something even that arch-statist Indira Gandhi had realised was eventually a bad idea. This, coupled with a skewed cereal-oriented agricultural production system, is likely to widen the mismatch in the availability and rapidly swelling demand of high-value foods like pulses, edible oils, vegetables and fruits, to keep their prices on the boil. Even in the case of cereals, their demand in the open market is likely to remain firm given that the beneficiaries' monthly per-head grain entitlement under the food security law has been slashed from seven kg to five kg, which is unlikely to suffice for most households.

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First Published: Tue, May 07 2013. 21:40 IST