Economics of foodgrain management in India

Kaushik Basu, Chief Economic Adviser at India’s Ministry of Finance has written a super paper on the topic. In sum, there is a need to think about the food management problem in a holistic manner.

Food management involves three functions – production, procurement and distribution. Most of the time we either criticise production (low yields, lack of productivity etc) or distribution (food stocks rotting but people dying of hunger etc.).  However, the policies of government procurement also need to be looked at. This is the focus of the paper:

The simultaneous occurrence of high food inflation and large foodgrain stocks in our granaries has been a matter of  widespread concern in India. The aim of this paper is to understand the fundamentals of our foodgrain market and policy that leads to this situation and to suggest policies for rectifying this. The central argument of the paper is that, in creating a better foodgrains policy, it is imperative that we look at the entire system of food production, food  procurement and the release and distribution of food. Trying to correct one segment of this complicated system is likely to end up in failure or, at best, have limited success.

The paper argues that there are two different motives for foodgrain procurement by the state—to provide food security to the vulnerable population and to even out foodgrain price fluctuation from one year to another. Further, how we procure the food has an impact on how we release the food, and vice versa. Inspired by the sight of foodgrain going waste, it is often made out to be that our central problem is that of poor foodgrain storage. This paper disagrees with this popular view. While we no doubt should improve our storage facilities, it is important to be clear that this in itself will not lower the price of food. To achieve that we need to redesign the mechanics of how we acquire and release food on the market. The paper shows that industrial organization theory can shed light on this stubborn policy problem.

The paper has many insights on the functioning of the food market. All I can say is it is far more complex than one can imagine. There are so many issues. It explains how government procures grains and releases them in the market.There is a paradox in government policies wrt food management. First, it keeps the Minimum Support Price higher than the market prices to help the farmer. Second, if it sells the foodgrains above the MSP it is costly for the public. If it sells at a lower price it leads to fiscal deficit. So, what should it do? BAsu explains that pricurement costs is a suck cost and by not selling it it is anyways leading to fiscal deficit.

It is often argued in official documents that unless food is sold by government at a price above the purchase price (plus other sundry costs like that of  storage and transport), this will add to the fiscal deficit.

What this misses out on is that, if by trying to sell it at such a price we do not manage to sell at all, the fiscal burden on government is even greater. This is because the cost of procurement is a sunk cost. What needs to be realized is that, from a fiscal accounting point of view, not selling procured grain is exactly equivalent to selling it at zero price. It is important to recognize that the overall impact of the pricing policy just described is to raise the price of foodgrains, for at least a segment of consumers, to above what they would have had to pay if there were no government intervention in the market for food. This is because an effective MSP is, by definition, a price higher than the free market equilibrium price. There is no getting away from the fact that having a minimum support price policy and selling some grain at or above the MSP (for instance, to households above the poverty line, APL) means that we are selling grain to some consumers above the price they would have faced in a complete free-market outcome.

He also adds government should not waste too much energy thinking that large% of grains will be bought by traders who will hoard it and sell it at profit. Instead, the idea should be to let people make profits and get the overall government objective right. In order to prevent people from making profits, Government ends up hoarding a large part of grains which does not help anyone.

Read the whole thing for more insights.