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GS Paper: PDS, Buffer Stock & Food Security

  • A case for a revamped, need-based PDS

    The article highlights the factors governing the food subsidy bill and suggests ways to reduce it.

    Growing food subsidy bill

    • The Economic Survey, tabled in Parliament in January, rightly flagged the issue of a growing food subsidy bill.
    • During 2016-17 to 2019-20, the subsidy amount, clubbed with loans taken by the Food Corporation of India (FCI) under the National Small Savings Fund (NSSF) towards food subsidy, was in the range of ₹1.65-lakh crore to ₹2.2-lakh crore.
    • In future, the annual subsidy bill of the Centre is expected to be about ₹2.5-lakh crore.
    • During the three years, the quantity of food grains drawn by States (annually) hovered around 60 million tonnes to 66 million tonnes.
    • The National Food Security Act (NFSA) 2013, covered two-thirds of the country’s population, this naturally pushed up the States’ drawal.
    • Based on an improved version of the targeted Public Distribution System (PDS), the law requires the authorities to provide to each beneficiary 5 kg of rice or wheat per month.

    How politics influenced the issue price

    • Economic Survey has hinted at an increase in the Central Issue Price (CIP).
    • Central Issue Price has remained at ₹2 per kg for wheat and ₹3 per kg for rice for years, though the NFSA, even in 2013, envisaged a price revision after three years.
    • What makes the subject more complex is the variation in the retail issue prices of rice and wheat, from nil in States such as Karnataka and West Bengal for Priority Households (PHH) and Antyodaya Anna Yojana (AAY) ration card holders.
    • In Tamil Nadu, rice is given free of cost for all categories; this includes non-PHH.
    • A mere increase in the CIPs of rice and wheat without a corresponding rise in the issue prices by the State governments would only increase the burden of States.
    • Political compulsions are perceived to be coming in the way of the Centre and the States increasing the prices.

    Relook at food subsidy system

    • An official committee in January 2015 called for decreasing the quantum of coverage under the law, from the present 67% to around 40%.
    • For all ration cardholders drawing food grains, a “give-up” option, as done in the case of cooking gas cylinders, can be made available.
    •  Even though States have been allowed to frame criteria for the identification of PHH cardholders, the Centre can nudge states into pruning the number of such beneficiaries.
    • As for the prices, the existing arrangement of flat rates should be replaced with a slab system.
    • Barring the needy, other beneficiaries can be made to pay a little more for a higher quantum of food grains.

    Consider the question “There is a pressing need for revamping the food subsidy system. In light of this, suggest the measures to improve the system.”

    Conclusion

    These measures, if properly implemented, can have a salutary effect on retail prices in the open market. A revamped, need-based PDS is required not just for cutting down the subsidy bill but also for reducing the scope for leakages. Political will should not be found wanting.

  • Operation Green

    The article compares the performance of  Operation Flood with Operation Green and offers several lessons for the success of Operation Green.

    Operation Green and its expansion

    • There were three basic objectives when OG was launched.
    • First, that it should contain the wide price volatility in the three largest vegetables of India (TOP).
    • Second, it should build efficient value chains of these from fresh to value-added products with a view to give a larger share of the consumers’ rupee to the farmers.
    • Third, it should reduce the post-harvest losses by building modern warehouses and cold storages wherever needed.
    • The Union budget for the FY 2021-22 proposes the expansion of Operation Green (OG) beyond tomatoes, onions, and potatoes (TOP) to 22 perishable commodities.
    • The move reflects the government’s intentions of creating more efficient value chains for perishables.

    Comparing performance of OG with horticulture sector

    • A closer examination of the scheme reveals that it is nowhere near achieving its objectives.
    • ICRIER research reveals that price volatility remains as high as ever.
    • It also reveals that farmers’ share in consumers’ rupee is as low as 26.6 per cent for potatoes, 29.1 per cent in the case of onions, and 32.4 per cent for tomatoes (see graph).
    •  In cooperatives like AMUL, farmers get almost 75-80 per cent of what consumers’ pay.
    • Operation Flood (OF) transformed India’s milk sector, making the country the world’s largest milk producer, crossing almost 200 million tonnes of production by now.
    • Although OG is going to be more challenging than OF there are some important lessons one can learn from OF.

    Lessons from operation flood

    • First and foremost is that results are not going to come in three to four years.
    • OF lasted for almost 20 years before milk value chains were put on the track of efficiency and inclusiveness.
    • There has to be a separate board to strategise and implement the OG scheme, more on the lines of the National Dairy Development Board (NDDB) for milk.
    • Second, we need a champion like Verghese Kurien to head this new board of OG.
    • The MoFPI can have its evaluation every six months, but making MoFPI the nodal agency for implementing OG with faceless leaders is not very promising.
    • Third, the criteria for choosing clusters for TOP crops under OG is not very transparent and clear.
    • The reason is while some important districts have been left out from the list of clusters, less important ones have been included.
    • What is needed is quantifiable and transparent criteria for the selection of commodity clusters, keeping politics away.
    • Fourth, the subsidy scheme will have to be made innovative with new generation entrepreneurs, startups and FPOs.
    • The announcement to create an additional 10,000 FPOs along with the Agriculture Infrastructure Fund and the new farm laws are all promising but need to be implemented fast.

    Consider the question “What are the objectives of Operation Green? How far has Operation Green succeeded in achieving its objectives?”

    Conclusion

    These lessons from Operation Flood will help in securing the success of the expanded Operation Green.

  • Budget’s big worry: the food subsidy

    The article highlights the challenge of managing the procurement of wheat and rice at MSP by the FCI and maintaining its financial health.

    The problem of surplus in wheat and rice procurement

    • While MSP is declared for 23 crops, the biggest financial burden comes from wheat and rice.
    • Procurement has increased significantly with states like MP, Chhattisgarh, Telangana and Odisha stepping up their efforts.
    • Overall procurement of rice and wheat has gone up to 52 million tonnes and 39 million tonnes, respectively.
    • The requirement of PDS and welfare schemes is about 60 million tonnes.
    • This leaves a surplus of about 30 million tonnes, in addition to the carry-over stock of about 42 million tonnes (current)—far above the buffer and strategic reserve norms.

    Cost of the surplus and its significance

    • The subsidy burden for rice and wheat (2020-21) is estimated to be Rs 1.8 lakh crore.
    • FCI procures wheat and rice at MSP (some states do so under the decentralised procurement & distribution scheme).
    • They incur costs like market fees, labour charges, packing costs, transport, storage charges, etc.
    • These are of the order of 9% for procurement, 9-11% for labour and transport, and 15-17% for distribution.
    • The sale price is fixed at Rs 2 and Rs 3 per kg for wheat and rice, respectively, under the National Food Security Act.
    • In addition, there are releases under LEAN (lower entitlements and higher costs compared to NFSA cards, but subsidised nonetheless) and Open Market Sales (OMSS).
    • Cost of holding the buffer for a year is about Rs 5,500 per tonne.
    • FCI is holding 39 million tonnes of rice and 55 million tonnes of wheat (July 2020) against the buffer/strategic reserve norm of 13.5 million tonnes of rice and 27.6 million tonnes of wheat, i.e., a surplus of 52 million tonnes.
    • The cost of holding this stock works out to Rs 29,000 crore per year.

    Financial burden on FCI

    • The finance ministry has not been able to allocate adequate funds to meet the full requirement of food subsidy.
    • Under-provisioning on this account has been going on, and FCI was being given loans at 8% interest from the National Savings Scheme Fund (NSSF) since 2016-17.
    • The outstanding loan on this account (October 31, 2020) is Rs 2,93,000 crore.
    • This has meant FCI getting zero budgetary support against current subsidy claims since 2017, thereby, postponing the problem year after year.
    • The subsidy burden is rising (with MSP increasing every year, quantities going up and prices under PDS fixed), and is likely to cross Rs 2 lakh crore.

    Conclusion

    Government need to bring in the reforms in the PDS and MSP regime to stop both the systems from collapsing under their own weights.

    Source:-

    https://www.financialexpress.com/opinion/union-budget-2021-22-the-burgeoning-food-subsidy-bill-will-be-a-key-budget-worry/2155584/

  • Diversification of output to overcome the MSP trap

    The article analyses the state of agriculture in Punjab and the its dependace on the MSP regime and suggest the diversification as a solution to the MSP trap.

    Punjab’s role in Green Revolution

    • India was desperately short of grains in 1965, and heavily dependent on PL 480 imports from the US against rupee payments, as the country did not have enough foreign exchange to buy wheat at global markets.
    • The entire foreign exchange reserves of the country at the time could not help it purchase more than 7 MMT of grains.
    • It is against this backdrop that the minimum support price (MSP) system was devised in 1965.

     India’s current grains management system: Issue of excess grains

    • Today, the Food Corporation of India (FCI) stocks grains touched 97 MMT in June this year against a buffer stock norm of 41.2 MMT.
    • The economic cost of that excess grain, beyond the buffer stock norm, was more than Rs 1,80,000 crore, a dead capital locked in without much purpose.
    • That’s the situation of the current grain management system based on MSP and open ended procurement.

    Decline in Punjab’s economic level

    •  In 1966 Punjab had the highest per capita income.
    • Punjab’s position fell to 13th in 2018-19.
    • There are several reasons behind this deterioration, ranging from lack of industrialisation to not catching up even with respect to the modern services sector like IT, financial services.

    What explains Punjab’s prosperity

    • Punjab’s agriculture is blessed with almost 99 per cent irrigation against an all-India average of little less than 50 per cent.
    • The average landholding in Punjab is 3.62 hectare (ha) as against an all-India average of 1.08 ha.
    • Punjab’s fertiliser consumption per ha is about 212 kg vis-à-vis an all-India level of 135 kg/ha.
    • The productivity levels of wheat and rice in Punjab stand at 5 tonnes/ha and 4 tonnes/ha respectively, against an all-India average of 3.5t/ha and 2.6t/ha.

    Assesing Punjab’s real contribution to income and agriculture

    • In Punjab, the total farm families are just 1.09 million, a fraction of the all-India total of 146.45 million.
    •  The overall subsidy, from just power and fertilisers would amount to roughly Rs 13,275 crores.
    • That means each farm household in Punjab got a subsidy of about Rs 1.22 lakh in 2019-20.
    • This is the highest subsidy for a farm household in India.
    • Let’s not forget that the average income of the Punjab farm household is the highest in India.[2.5 time’s the India’s average].
    • But to assess the real contribution of farmers/states to agriculture and incomes, the metric is the agri-GDP per ha of gross cropped area of the state in question.
    • This is an important catch-all indicator, as it captures the impact of productivity, diversification, prices of outputs and inputs and subsidies.
    • On that indicator, unfortunately, Punjab has the 11th rank amongst major agri-states.

    Way forward: Diversification of crops

    • States in south India like Andhra Pradesh, Tamil Nadu and Kerala have a much more diversified crop pattern tending towards high-value crops/livestock — poultry, dairy, fruits, vegetables, spices, fisheries.
    •  If Punjab farmers want to increase their incomes significantly, double or even triple, they need to gradually move away from MSP-based wheat and rice to high-value crops and livestock, the demand for which is increasing at three to five times that of cereals.
    • Punjab needs a package to diversify its agriculture — say a Rs 10,000 crore package spread over five years.

    Conclusion

    Once farmers diversify their farm output and double their incomes, they will not be stuck in the MSP trap.

  • In farmers’ protests, the core is procurement

     

    Context

    • Farmers’ protests have erupted once again in north India, their main worry is about a possible withdrawal of the Minimum Support Price (MSP) and a dismantling of the public procurement of grains.

    Why farmers in Punjab and Haryana are protesting

    • Farmers in Punjab and Haryana are heavily dependent on public procurement and assured price through MSP.
    • Nearly 88% of the paddy production and 70% of the wheat production in Punjab and Haryana (in 2017-18 and 2018-19) has been absorbed through public procurement [Food Grains Bulletin and Agricultural Statistics at a Glance, Government of India].
    • In contrast, in the other major paddy States such as Andhra Pradesh, Telangana, Odisha and Uttar Pradesh, only 44% of the rice production is procured by public agencies.
    •  In the major wheat States of Madhya Pradesh and Uttar Pradesh, only 23% of the production is procured by public agencies.

    Government needs to continue procurement

    • If farmers of Punjab and Haryana need the procurement system, the government needs it even more.
    • This is because of its obligations under the PDS and the National Food Security Act (NFSA).
    • Support under the NFSA is a legal and rights-based entitlement.
    • There are nearly 80 crore NFSA beneficiaries and an additional eight crore migrants who need to be supported under the PDS.
    • In the last three years, nearly 40% of the total paddy production in the country and 32% of wheat production has been procured by public agencies to supply the PDS.
    • Thus, the government has little option but to continue its procurement from these States in the foreseeable future.

    Way forward

    • Therefore, it is imperative that the government reaches out to the farmer groups and assures them of the indispensability of MSP-procurement system.
    • The government needs to start this initiative immediately to allay their legitimate concerns.
    • Two of the major limitations in the laws that need to be addressed immediately:
    • 1) The absence of a regulatory mechanism to ensure fair play by private players vis-à-vis farmers.
    • 2) The lack of transparency in trade area transactions.

    Conclusion

    The severe trust deficit that resulted from the way the Farm Bills have been rushed through needs to be addressed by adopting a conciliatory approach towards farmers and the States.

  • Closing the communication gap with the farmers

    The article suggests the policy options with the government to deal with the protest of the farmers against the recently enacted farm laws.

    Context

    • Farmers have protested against the recently enacted farm laws by converging on Delhi’s highways connected to neighbouring states.

    Why farmers are protesting

    • There is a gross communication failure on the part of the central government to explain to farmers what these laws are, and how they are intended to benefit them.
    • Neither do the laws say anything about it, nor is the MSP/APMC system going to disappear with these laws.
    • Nothing can be further from the truth.

    1) Should government  repeal the laws

    • Punjab farmer leaders, including two major political parties, demand repeal of these laws.
    • However, repealing would mean bringing back controls, licence raj and the resultant rent-seeking.
    • Milk, poultry, fishery, etc. don’t go through the mandi system and their growth rates are 3 to 5 times higher than that of wheat and rice.
    • Overall, almost 90 per cent of the agri-produce is sold to the private sector.

    2) Should the government make MSP legally binding

    • Another demand is making the MSP statutory and legally binding even on the private sector.
    • This is impractical as there are 23 commodities for which MSPs are announced, but in actual practice only wheat and rice enjoy MSPs in any meaningful manner, and that too only in 6-7 states.
    • Punjab is the biggest gainer as its 95-98 per cent of market arrivals of wheat and paddy are procured at MSP by state agencies on behalf of the Food Corporation of India (FCI).
    • The FCI is overloaded with grain stocks that are more than 2.5 times the buffer stock norms.
    • Such high stock indicates massive economic inefficiency in the grain management system.
    • If the government cannot cope up with excess production of just wheat and rice in any meaningful way, think of how it will handle 23 commodities under MSP.
    • In case of excess production the government will not have the wherewithal to buy all and stock them without any viable outlet.
    • It will massively distort markets, make Indian agriculture non-competitive and stocking of these will be financially unsustainable.
    • And then, why only 23 commodities, why not 40?
    • This type of state socialism is a sure path to financial disaster.

    3) Optio of the Price Stabilisation Scheme

    • The third policy option is to use the Price Stabilisation Scheme to give a lift to market prices by pro-actively buying a part of the surplus whenever market prices crash.
    • It can be done directly by NAFED-type agencies that are already active in the case of pulses and oilseeds.
    • Farmers can use Commodity Derivatives Exchanges where farmers can buy “put options” at MSP before they even sow their crops, and if the market prices at the time of harvest turn out to be below MSP, government can compensate them partly for lower market prices.

    4) Decentralise MSP: Let the states decide it

    • The fourth option is to totally decentralise the MSP, procurement, stocking, and public distribution system (PDS).
    • MSP and procurement exist basically to support farmers for supplying grains to the FCI to feed into the PDS.
    • So, the whole money on food subsidy can be allocated to states on the basis of their share in all-India poverty/proportion of vulnerable population, all-India wheat and rice production, all-India procurement of wheat and rice, etc.
    • A step further could include another Rs 1,00,000 crore of fertiliser subsidy and free up fertiliser prices from any controls.
    • Still further, even include another Rs 1,00,000, say, of MNREGA.
    • Let the Finance Commission work out a formula for distribution of this Rs 3,00,000 crore amongst states based on some tangible performance indicators.
    • And the Centre should get off from MSP, PDS, fertiliser subsidy, and MNREGA.

    Conclusion

    This would be true decentralisation, and can be accomplished provided enough ground work is done well in advance. But will this be acceptable to farmer leaders/opposing states/activists? Only time will tell.

  • Stepping out of the shadow of India’s malnutrition

    The article takes stock of the food insecurity and malnutrition in India with the aid of two recently published reports.

    Reports about food security in India

    • Two recent reports — “The State of Food Security and Nutrition in the World 2020” by the Food and Agricultural Organization of the United Nations and the 2020 Hunger report, “Better Nutrition, Better Tomorrow” by the Bread for the World Institute  – document staggering facts about Indian food insecurity and malnutrition.
    • The reports use two globally recognised indicators, Prevalence of Undernourishment (PoU) and the Prevalence of Moderate or Severe Food Insecurity (PMSFI).
    • Using these indicators, the reports indicate India to be one of the most food-insecure countries, with the highest rates of stunting and wasting among other South Asian countries.

    Comparing rate of reduction in malnutrition with neighbouring countries

    • Malnutrition in India has not declined as much as the decline has occurred in terms of poverty.
    • On the contrary, the reduction is found to be much lower than in neighbouring China, Pakistan, Nepal and Bangladesh.
    • The decline in China is way higher than that of India, even though it had started with lower levels of PoU in 2000.

    Food security during pandemic and National Food Security Act 2013

    • Two crucial elements still got left out in the National Food Security Act – 2013.
    • These two elements are the non-inclusion of nutritious food items such as pulses and exclusion of potential beneficiaries.
    • Because of this, the current COVID-19 pandemic would make the situation worse in general, more so for vulnerable groups.
    • Though States have temporarily expanded their coverage in the wake of the crisis, the problem of malnutrition is likely to deepen in the coming years.
    • Hence, a major shift in policy has to encompass the immediate universalisation of the Public Distribution System which should definitely not be temporary in nature.

    Conclusion

    The need of the hour remains the right utilisation and expansion of existing programmes to ensure that we arrest at least some part of this burgeoning malnutrition in the country.

  • What is NAFED?

    The central cooperative NAFED will soon begin importing onions in a bid to tame soaring prices before the festive season.

    UPSC can frame statements based MCQ over the functions of NAFED.

    NAFED

    • National Agricultural Cooperative Marketing Federation of India Ltd (NAFED) is an apex organization of marketing cooperatives for agricultural produce in India.
    • It was founded on 2 October 1958 to promote the trade of agricultural produce and forest resources across the nation.
    • It is registered under the Multi-State Co-operative Societies Act.
    • NAFED is now one of the largest procurement as well as marketing agencies for agricultural products in India.
    • With its headquarters in New Delhi, NAFED has four regional offices at Delhi, Mumbai, Chennai and Kolkata, apart from 28 zonal offices in capitals of states and important cities.

    Functions of the NAFED

    • To facilitate, coordinate and promote the marketing and trading activities of the cooperative institutions, partners and associates in agricultural, other commodities, articles and goods
    • To undertake purchase, sale and supply of agricultural, marketing and processing requisites, such as manure, seeds, fertilizer, agricultural implements and machinery etc.
    • To act as a warehouseman under the Warehousing Act and own and construct its own godowns and cold storages
    • To act as agent of any Government agency or cooperative institution, for the purchase, sale, storage and distribution of agricultural, horticultural, forest and animal husbandry produce, wool, agricultural requisites and other consumer goods
    • To act as an insurance agent and to undertake all such work which is incidental to the same
    • To collaborate with any international agency or a foreign body for the development of cooperative marketing, processing and other activities for mutual advantage in India or abroad

    Now try this PYQ:

    Q.In, India, markets in agricultural products are regulated under the:

    (a) Essential Commodities Act, 1955

    (b) Agricultural Produce Market Committee Act enacted by States.

    (c) Agricultural Produce (Grading and Marking) Act, 1937

    (d) Food Products Order, 1956 and Meat and Food Products Order, 1973

  • Promotion of nutri-cereals(Millet crop) in India

    Promotion of millet crops serves the dual purpose of securing health and supporting farmers. This article explains the strategy adopted by the government to achieve the same.

    Millet crops in India

    • The three major millet crops currently growing in India are jowar (sorghum), bajra (pearl millet) and ragi (finger millet).
    • India also grows a rich array of bio-genetically diverse and indigenous varieties of “small millets” like kodo, kutki, chenna and sanwa.
    • Major producers include Rajasthan, Andhra Pradesh, Telangana, Karnataka, Tamil Nadu, Maharashtra, Gujarat and Haryana.

    Advantages of millet cultivation

    • Millets are good for the soil, have shorter cultivation cycles and require less cost-intensive cultivation.
    • These unique features make millets suited for and resilient to India’s varied agro-climatic conditions.
    • Millets are not water or input-intensive, making them a sustainable strategy for addressing climate change and building resilient agri-food systems.

    Reasons for decline in millet production in India

    • In the 1960s before the Green Revolution, millets were extensively grown and consumed in India.
    • With the Green Revolution, the focus, rightly so, shifted to food security and high-yielding varieties of wheat and rice.
    • An unintended consequence of this policy was the gradual decline in the production of millets.
    • Millets were increasingly seen as “poor person’s food”.
    • The cost incentives provided via MSPs also favoured a handful of staple grains.

    Health issues related to refined food

    • Along with declining millet production, India saw a jump in consumer demand for ultra-processed and ready-to-eat products, which are high in sodium, sugar, trans-fats and even some carcinogens.
    • This demand was again met by highly-refined grains.
    • With the intense marketing of processed foods, even the rural population started perceiving mill-processed rice and wheat as more aspirational.
    • This has lead us to the double burden of mothers and children suffering from micronutrient deficiencies and the astounding prevalence of diabetes and obesity.

    Strategy for promotion of nutri-cereals

    1) Rebranding the cereals as nutri-cereals

    • The first strategy from a consumption and trade point of view was to re-brand coarse cereals/millets as nutri-cereals.
    • As of 2018-19, millet production had been extended to over 112 districts across 14 states.

    2) Incentive through hiking MSP

    • Second, the government hiked the MSP of nutri-cereals, which came as a big price incentive for farmers.
    • From 2014-15 to 2020 MSPs for ragi has jumped by 113 per cent, by 72 per cent for bajra and by 71 per cent for jowar.
    • MSPs have been calculated so that the farmer is ensured at least a 50 per cent return on their cost of production.

    3) Providing steady markets through inclusion in PDS

    • To provide a steady market for the produce, the Modi government included millets in the public distribution system.

    4) Increasing area, production and yield

    • The Ministry of Agriculture & Farmers’ Welfare is running a Rs 600-crore scheme to increase the area, production and yield of nutri-cereals.
    • With a goal to match the cultivation of nutri-cereals with local topography and natural resources, the government is encouraging farmers to align their local cropping patterns to India’s diverse 127 agro-climatic zones.
    • Provision of seed kits and inputs to farmers, building value chains through Farmer Producer Organisations and supporting the marketability of nutri-cereals are some of the key interventions that have been put in place.

    5) Intersection of agriculture and nutrition

    • The Ministry of Women and Child Development has been working at the intersection of agriculture and nutrition by -1) setting up nutri-gardens, 2) promoting research on the interlinkages between crop diversity and dietary diversity 3) running a behaviour change campaign to generate consumer demand for nutri-cereals.

    Consider the question “What are the reasons for decline in the millet production in India? What are the steps taken by the government to encourage its production?”

    Conclusion

    As the government sets to achieve its agenda of a malnutrition-free India and doubling of farmers’ incomes, the promotion of the production and consumption of nutri-cereals seems to be a policy shift in the right direction.

  • Issues with the MSP in the age of surplus production

    The author analyses the inefficiencies in the MSP regime while comparing it with the sugar sector and the milk sector. The recent agri-reform in the opinion of the author could help to make the Indian agriculture more efficient.

    MSP system Vs. Market-driven system

    • MSP regime was the creation of the era of scarcity in the mid-1960s.
    • Indian agriculture has, since then, turned the corner from scarcity to surplus.
    • In a surplus economy, unless we make agriculture demand-driven, the MSP route can spell financial disaster.
    • This transition is about changing the pricing mix — how much of it should be state-supported and how much market-driven.
    • The new laws are trying to increase the relative role of markets without dismantling the MSP system.
    • Currently, no system is perfect, be it the one based on MSP or that led by the markets, but the MSP system is much more costly and inefficient.
    • The market-led system will be more sustainable provided we can “get the markets right”.

    Issues with the MSP

    • A perusal of the MSP dominated system of rice and wheat shows that the stocks with the government are way above the buffer stock norms.
    • The economic cost (to FCI) of procured rice comes to about Rs 37/kg and that of wheat is around Rs 27/kg.
    • No wonder, market prices of rice and wheat are much lower than the economic cost incurred by the FCI.
    • So, grain stocks with the FCI cannot be exported without a subsidy[i.e. export below the cost], which invites WTO’s objections.
    • The FCI’s burden is touching Rs 3 lakh crore which is not reflected in the Central budget as the FCI is asked to borrow more and more.
    • The FCI can reduce costs if it uses policy instruments like “put options”.

    2 Lessons: from sugarcane and milk pricing

    1) Populism resulted in making sugar industry globally non-competitive

    • In the case of sugarcane, the government announces a “fair and remunerative price” (FRP) [not MSP]to be paid by sugar factories [not paid by the Government].
    • While some states like Uttar Pradesh announces its own “state advised price” (SAP).
    • The sheer populism of SAP has resulted in cane arrears amounting to more than Rs 8,000 crore, with large surpluses of sugar that can’t be exported.
    • This sector has, consequently, become globally non-competitive.
    • Unless sugarcane pricing follows the C Rangarajan Committee’s recommendations the problems of the sugar sector will not go away.

    2) Success story of milk sector

    • In the case of milk co-operatives, pricing is done by the company in consultation with milk federations.
    • It is more in the nature of a contract price.
    • It competes with private companies, be it Nestle, Hatsun or Schreiber Dynamix dairies.
    • The milk sector has been growing at a rate two to three times higher than rice, wheat and sugarcane.
    • Today, India is the largest producer of milk — 187 million tonnes annually.

    So, how the recent reforms will help the farmers

    •  As a result of changes in farm laws in the next three to five years companies will be encouraged to build efficient supply lines somewhat on the lines of milk.
    • These supply lines — be it with farmers producer organisations (FPOs) or through aggregators — will, of course, be created in states where these companies find the right investment climate.
    • These companies will help raise productivity, similar to what has happened in the poultry sector.
    • Milk and poultry don’t have MSP and farmers do not have to go through the mandi system paying high commissions, market fees and cess.

    Conclusion

    The pricing system has its limits in raising farmers’ incomes. More sustainable solutions lie in augmenting productivity, diversifying to high-value crops, and shifting people out of agriculture to high productivity jobs elsewhere, the recent reforms are the steps in this direction.

    Back2Basic: What is MSP

    • Minimum Support Price (MSP) is a form of market intervention by the Government of India to insure agricultural producers against any sharp fall in farm prices.
    • The minimum support prices are announced by the Government of India at the beginning of the sowing season for certain crops on the basis of the recommendations of the Commission for Agricultural Costs and Prices (CACP).
    • The minimum support prices are a guarantee price for their produce from the Government.
    • The major objectives are to support the farmers from distress sales and to procure food grains for public distribution.
    • In case the market price for the commodity falls below the announced minimum price due to bumper production and glut in the market, government agencies purchase the entire quantity offered by the farmers at the announced minimum price.

    What are ‘put options’

    • Put options give holders of the option the right, but not the obligation, to sell a specified amount of an underlying security at a specified price within a specified time frame.
    • Put options are available on a wide range of assets, including stocks, indexes, commodities, and currencies.
    • Put option prices are impacted by changes in the price of the underlying asset, the option strike price, time decay, interest rates, and volatility.
    • Put options increase in value as the underlying asset falls in price, as volatility of the underlying asset price increases, and as interest rates decline.
    • They lose value as the underlying asset increases in price, as volatility of the underlying asset price decreases, as interest rates rise, and as the time to expiration nears.