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Budget 2014: Has it failed to cognise the real issue?

Food grains [rice and wheat] stocks held by FCI and State agencies were 69.84 million tonnes as on June 1, 2014 vis-à-vis the buffer stock norm of 21.20 million tonnes as on April 1, 2014. 

That in simple language means that the Government has pulled out approximately 50 million tonnes from markets and holds this stock over and above what is apparently required at this time of the year. In short, this is hoarding by Government and not by private parties! Yet, every time there are spikes in food commodities in India, strangely the national discussion invariably skips the debilitating impact of pubic hoarding, especially on inflation.

Put pithily, food inflation is a creation of faulty economy policies compounded by sheer incompetency of successive governments. And this incompetency compounded by denial is at the root of the present consternation of all economic ills plaguing the nation.

 

Food grains [rice and wheat] stocks held by FCI and State agencies were 69.84 million tonnes as on June 1, 2014 vis-à-vis the buffer stock norm of 21.20 million tonnes as on April 1, 2014. [Source: Monthly Economic Report of May 2014 published by the Department of Economic Affairs, Ministry of Finance].

That in simple language means that the Government has pulled out approximately 50 million tonnes from markets and holds this stock over and above what is apparently required at this time of the year. In short, this is hoarding by Government and not by private parties! Yet, every time there are spikes in food commodities in India, strangely the national discussion invariably skips the debilitating impact of pubic hoarding, especially on inflation.

In this connection, the Wall Street Journal in an article titled Are Hoarders the real cause of inflation in India? [June 23, 2014] observes: “Every time there is a flare up in food prices in India, policy makers are quick to point fingers at a nefarious national network of “hoarders” who apparently fill up their godowns with scarce commodities, hoping to profit as the rest of the country suffers.”

Interestingly the article goes on to define the impact of such public hoarding when it states “....the biggest hoarders of food grains in India may be the state-run agencies. The total food stock with state agencies is around 62 million tons of rice and wheat. That is almost three times the stockpile the government is required to hold.”

Now look at the consequence of holding [read hoarding] gargantuan stock of food grains. For the sake of simplicity, assume that the cost of procuring food grains held by the government is a mere Rs 15 per kg. That means government has “spent” in excess of Rs 1 Lac crores to procure this quantity of grains.

As this money circulates in the economy, the concomitant production i.e. 70 MT is withdrawn by the government itself from circulation in the markets. This leads to excess of money chasing fewer goods – the classical definition of inflation.

Having created an artificial supply side constraint, the government now wants us to believe that food inflation is a by-product of a lax monetary policy. Hence it innocently assumes that this can be cured by RBI hiking policy rates, little realising that cancer cannot be cured by pain balms.

Basic common sense demands that Government must let this stock into the open markets and thereby address supply side constrains. But there is another dimension to this mess. Of this quantity of food grains held by the government, a significant portion on account of poor storage facilities would have by now been consumed by rodents and another portion unfit for even cattle consumption.

Put pithily, food inflation is a creation of faulty economy policies compounded by sheer incompetency of successive governments. And this incompetency compounded by denial is at the root of the present consternation of all economic ills plaguing the nation.

Now look at what the Finance Minister [FM] has to offer to tackle this menace of food inflation. Apart from vague motherhood statements the FM identifies minimization of losses of farm products during harvests and post harvests as an important measure to tackle food inflation. Consequently he proposes the reduction in excise duty from 10 percent to 6 percent on “specified” food packaging and processing machines.

Believe it or not, this 4 percent reduction in such “select” machineries is supposed to tackle food inflation in this country. Will this obsession with trivia by successive FMs ever cease? Why is it that none of them ever acknowledge the presence of the 800 pound gorilla in the room? Why FMs do not acknowledge, much less identify policy alternatives to this issue of public hoarding as primary cause of inflation in India?

Unless the FM tackles the issue of inflation upfront, one is certain that the issue of economic growth would be meaningless. Every economist worth his salt would know for sure that inflation, especially food inflation, is the worst form of taxation and is highly regressive as it hurts the poor the most.

This impacts food consumption

But inflation is not the only by-product of a myopic policy of our government. The Economic Survey provides us fascinating details about the Indian economy. The Economic Survey of 2012 reveals that the average daily per-capita food grain consumption of an Indian in 1965 was 418 grams and that of pulses, 62 grams. Remember, in 1965 we had a war with Pakistan on top of a deadly drought.

Approximately after five decades of our “successful” tryst with green revolution, the survey shockingly points out that the average daily per capita food grain consumption of an Indian in 2010 was a meagre 407 grams and of pulses, a disappointing 32 grams. Obviously, we are not producing enough food grains or pulses now when compared to 1965 on a per capita level. Yet, for the past four decades or so we have been under the mistaken belief that distribution, not production, is central to the issue on hand.

That explains why experts opine that PDS is akin to the proverbial rain dance of the African tribal chief. Crucially, we assumed that this will settle our production deficiencies in our farm sector. When the prognosis is faulty, it is but natural that the prescription that follows it too will be faulty.

It is well known that unless we bring in massive reforms in food distribution, our per capita consumption of food will be amongst the lowest when benchmarked against other Asian countries. The Budget is strangely silent on this mother of all issues. Apart from providing funds of a few hundred crores for setting up a couple of Agriculture Research institutes, the Budget fails to impress on this crucial front of improving production and productivity.

Mal-nutrition issue
Calculated by the International Food Policy Research Institute (IFPRI), the Global Hunger Index (GHI) is a comprehensive measure to track hunger globally, regionally and by country. Reducing a complex set of narratives into simple numbers, the GHI focuses on the successes and failures of respective countries in tackling the menace of hunger over a period of time.

Combining equally weighted indicators, this index includes three basic constituents: one, percentage of undernourished in the population, two, prevalence of underweight in children under five years and three, under-five mortality rate. The latest GHI report brings about some dismal figures relating to India.

Ranked 65 amongst 79 countries, obviously, India’s record in tackling hunger is abysmal. What must shock the reader is that Malawi (rank 45), Mali (49), Uganda (42) Benin (38) and Ghana (20) - mostly poor under-developed sub-Saharan African countries are ranked much above us in tackling hunger. Interestingly, two of our neighbhours - Pakistan (57) and Sri Lanka (37) too seem to have a better record on this matter. So does North Korea (52).

Now comes the interesting part. Between early nineties (1992-94) and later part of the last decade (2006-08), Burkina Faso reduced the proportion of undernourished population from 14 per cent to 8 per cent, Congo from 42 per cent to 13 per cent, Honduras from 19 per cent to 12 per cent, Niger from 37 per cent to 16 per cent, Nigeria from 16 per cent to 6 per cent and Sudan from 39 per cent to 22 per cent. While countries like Congo and Sudan have shown extraordinary progress, others too have made rapid strides in tackling hunger.

But India? Expectedly our “progress” is glacial. If 20 per cent of our population was undernourished then, approximately one-fifth of our population is impoverished now. In short, the two decades of our “spectacular economic progress” has side-stepped a vast swath of our underprivileged that oscillates between 20 per cent and one-fifth of our population!

When it comes to prevalence of underweight in children below five years, India has a dismal record where nearly 44 per cent of our children are under stress to this day. In contrast, Ethiopia (35 per cent), Bangladesh (41 per cent), Bhutan (13 per cent), Burundi (35 per cent), Afghanistan (28 per cent) and Liberia (14 per cent) seem to take care of their infants better.

Similarly, our record in tackling under-five mortality rate is no better at 6.3 per cent. China (1.8 per cent), Cuba (0.6 per cent), Indonesia (3.5 per cent), Iraq (3.9 per cent) and Lebanon (2.2 per cent) have a better record than us on this score.

Hunger and malnutrition is a function of several wrong policies of successive governments. It cannot be reversed overnight. Nevertheless the beginning has to be made somewhere. Unfortunately, apart from vague reference to the issue of malnutrition in Para 72 and a far vaguer promise of “being committed” to a 4% annual growth in Agriculture in Para 79, the Finance Minister has not really dealt with this crucial issue with the commitment it deserves. One hopes that by February 2015 when the Budget for the next year is presented, Mr Jaitley will come out with a comprehensive plan to tackle these issues.

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