CONTENTS
S. No. Description Page
Acronyms i
List of Tables iv
List of Charts v
List of Annex Tables vii
Summary of Recommendations viii
1. Overview 1
2. Demand-Supply, Procurement, Prices and Market Distortions 8
3. Trade Competitiveness of Indian Agriculture 22
4. Costs, Returns and Inter Crop Price Parity 32
5. Productivity and Costs 42
List of Acronyms
A2+FL Actual paid out cost plus imputed value of family labour
AAY Antyodaya Anna Yojana
APEDA Agricultural and Processed Food Products Export Development Authority
APMC Agricultural Produce Market Committee
BE Budget Estimates
C2 Comprehensive cost including imputed rent and interest on owned land and capital respectively.
CACP Commission for Agricultural Costs and Prices
CAGR/CARG Compound Annual Growth Rate/Compound Annual Rate of Growth
CAP Cover and Plinth
CBOT Chicago Board of Trade
CCTs Conditional Cash Transfers
CIF Cost, Insurance & Freight
CF Correction factor
CoP Cost of Production
CS Comprehensive Scheme
CSO Central Statistics Office
CWC Central Warehousing Corporation
DAC Department of Agriculture & Cooperation
DCT Direct Cash Transfer
DES Directorate of Economics & Statistics DFPD Department of Food & Public Distribution
DGCI&S Directorate General of Commercial Intelligence and Statistics DGFT Directorate General of Foreign Trade
DIPP Department of Industrial Policy & Promotion
DTA Domestic Tariff Area
ECA Essential Commodities Act
EDI Electronic Data Interchange
FAI Fertilizer Association of India
FAO Food and Agriculture Organization
FCI Food Corporation of India
FFPI FAO Food Price Index
FOB Free on Board
FMC Forward Markets Commission
FY Financial Year
GCF Gross Capital Formation
GDP Gross Domestic Product
GVO Gross Value of Output
HRW Hard Red Winter
HSDO High Speed Diesel Oil
IPGA India Pulses & Grains Association
KMS Kharif Marketing Season
LCS Land Customs Stations
LDO Light Diesel Oil
LPA Long Period Average
MEP Minimum Export Price
MGNREGA Mahatma Gandhi National Rural Employment Guarantee Act MORTH Ministry of Road Transport & Highways
MP Madhya Pradesh
MRP Maximum Retail Prices
MSP Minimum Support Price
NAFED National Agricultural Cooperative Marketing Federation of India Limited
NBS Nutrient Based Subsidy
NCAER National Council of Applied Economic Research
NCCF National Cooperative Consumers’ Federation of India Limited
NFSO National Food Security Ordinance
NSC National Seeds Corporation
NSSO National Sample Survey Organization
OEA Office of Economic Adviser
OECD Organization for Economic Co-operation and Development
OGL Open General License
p.a per annum
PACS Primary Agricultural Cooperative Societies
PSS Price Support Scheme
Q1, Q2, Q3,
Q4 Quarters pertaining to financial year
Qtl Quintal
R&M Rapeseed and Mustard
RCA Revealed Comparative Advantage
RMS Rabi Marketing Season
SEAI Solvent Extractors’ Association of India
SRW Soft Red Winter
TE Triennium Ending
TFP Total Factor Productivity
TPDS Targeted Public Distribution System
UNDP United Nations Development Programme
USDA United States Department of Agriculture
VVOF Directorate of Vanaspati, Vegetable Oils and Fats
wef with effect from
WPI Wholesale Price Index
List of Tables
Table No. Topic Page No.
Table S.1 Actual and Recommended MSPs of Rabi crops xiii
Table 2.1 Stock- to- Use Ratios of Rabi Crops (%) - 2010-11 to 2012-13 9
Table 2.2 MSP and State Bonuses over MSP in the last four years (Rs/qtl) 14
Table 2.3 Increases in Statutory Levies in Major Wheat & Rice Producing States
16
Table 2.4 Index Table and Ranking (Wheat) 21
Table 3.1 RCA Index for India’s Agri Exports – 1980 to 2011 23
Table 3.2 Forecasts for International Prices 30
Table 4.1 All India Gross and Net Returns over Actual Cost of Cultivation of Rabi Crops
34 Table 4.2 All India Projected Cost of Production (A2+FL & C2) for Rabi crops
for 2013-14 Crop Season
37 Table 4.3 Relative returns (%) of Rabi crops over A2+FL and C2
(Average from 2009-10 to 2011-12)
40 Table 4.4 All India Estimated Cost of Production for Rabi 2013-14 Season
(RMS 2014-15) (Inclusive of Marketing, Transportation and Crop Insurance premium)
41
Table 5.1 Growth rate of Rabi Crops at All India level during 1980s, 1990s and 2000s
43
Table 5.2 Benchmarking Productivity of Important Crops 44
Table 5.3 Impact of Variation in Yield on CoP 45
Table 5.4 Drivers of Yield 46
Table 6.1 Recommended MSPs of Rabi Crops (RMS 2014-15) and their Justification
52 Box 2.1 MP: Continuing state policy leading to distortions in wheat
market
List of Charts
Figure No. Topic Page No.
Chart 1.1 Inflation in Wheat & Rice during 2012-13 2
Chart 1.2 Central Pool Stocks with FCI 2
Chart 1.3 Production of major Agricultural Commodities, 2011-12 & 2012-13
5
Chart 1.4 (a) Exports & Imports of Agri-Commodities 6
Chart 1.4 (b) Composition of Agri-Exports, 2012-13 (%) 6
Chart 2.1 Foodgrain stocks in Central Pool & Inflation Rates of Wheat & Rice
10 Chart 2.2 Wheat Procurement as Percent of Production &
Marketed Surplus (2000-01 to 2011-12)
12 Chart 2.3 Wheat Procurement as a percent of Market Arrivals,
TE 2012-13
12 Chart 2.4 Procurement as a share of production in MP
(2001-02 to 2011-12) 13
Chart 2.5 Share of major crops in incremental irrigated area in MP
(2010-11 over 2007-08)
14
Chart 2.7 Statutory Levies Imposed by States (as % of MSP)
(KMS & RMS 2012-13) 15
Chart 2.8 (a) – (f) Wholesale prices of rabi crops & their MSPs 18 Chart 3.1 Domestic Wholesale Prices, MSP and International
Prices of Wheat & Barley
24 Chart 3.2 India’s Imports of Pulses from 2001-02 to 2012-13 26 Chart 3.3 Domestic Wholesale Prices, MSP and International
Prices of Gram & Lentil
27 Chart 3.4 India’s Imports of Edible Oils from 2001-02 to 2012-13 28 Chart 3.5 Domestic Wholesale Prices, MSP and International
prices of R&M Oilseed/Oil 30
Chart 4.1 All-India Profitability of Rabi Crops (Average from
2009-10 to 2011-12) 34
Chart 4.2 Average Annual Growth Rate of Agriculture Labour Wage Rate (Rs/day) by States and at All-India Level in Nominal Terms (May 2009-April, 2010 to May 2012-April 2013)
35
Chart 4.3 WPI and Percentage Increase in Prices of Farm Inputs
(May 2013 over May 2012)
36
Chart 4.4 Relative Prices of Urea, DAP & MOP 37
Chart 4.5 (a to e) Projected Cost and Supply of Rabi crops by states for RMS 2014-15
List of Annex Tables
Table No. Topic Page No.
Annex Table 2.1 All India Estimates of Area, Production and Yield of All Crops
54
Annex Table 2.2 Availability of Rabi Crops 57
Annex 2.3 Methodology of Ranking of States by the Nature and Degree of Distortions in Wheat
60 Annex Table 2.4 Nature & Degree of Market Distortions in Wheat 64 Annex Table 4.1 State-wise Gross and Net returns on actual estimates
of cost of cultivation of Rabi crops (Average of 2009-10 to 2011-12)
65
Annex Table 4.2 Month-wise average daily wage rates for Agricultural
Labour (Man) 67
Annex Table 4.3 Farm Inputs: Index Numbers of Wholesale Prices (Base 2004-05=100)
69 Annex Table 4.4 State-wise Projected Cost of Production (C2 & A2+FL)
for Rabi 2013-14 and their shares in Production in in-creasing order of Cost
71
Annex Table 4.5 Index of Terms of Trade Between Agriculture and
Non-Agriculture Sectors 73
Annex Table 6.1 MSP Suggested by State Governments for the Rabi
Summary
of Recommendations
S.1 In the last report on price policy for rabi crops, 2013-14 season, the Commission had focused on ‘getting the markets right’ to enable efficient functioning of agri-markets, remunerative prices for farmers and taking Indian agriculture forward to a high growth trajectory. This focus continues in the current report with minor realignment of prices for the six rabi crops.
Non-price Policy Recommendations
Paradox of overflowing granaries and rising food prices
S.2 The major challenge faced by the Indian food sector since last year has been to prudently manage the ‘paradox of overflowing granaries and high cereal inflation’. The existence of overflowing granaries (73.9 million tonnes of grain stocks on 1st July, 2013) co-existing with a sharp rise in prices of rice & wheat (in March 2013, wheat and rice prices were higher by 19.6 percent and 17.1 percent respectively over March, 2012) indicates sub-optimal management of food economy. Accordingly, the Commission makes the following non-price policy recommendations:
Liquidation of Stocks
S.3 As recommended in the Kharif Price Policy Report, 2013-14, the Commission reiterates that at least 15 million tonnes of stocks need to be urgently liquidated as it will help ease domestic prices as also save large carrying costs of excessive stocks.
The Government has appreciably taken some steps in that direction by announcing a decision to liquidate about 10 million tonnes of wheat stocks at Rs 15,000/tonne (ex-Punjab). But so far, the actual liquidation has been very modest. One of the reasons is high sales price. The Commission feels that in order to quickly liquidate large quantities from stocks, especially which are more than one year old, Government will have to be much more pragmatic. As per the Commission’s calculations, any price based on the procurement price at which that crop was bought, plus a maximum of 5 percent towards taxes/cesses etc, should be fine to recover. Else, the Commission feels that the Government will be unnecessarily carrying large quantities of excessive stocks, without much purpose, and which are putting inflationary pressures in the economy.
Review of Open-Ended Procurement Policy
S.4 Due to increased scale of procurement in recent years, the Government has emerged as the single largest procurer and hoarder of foodgrains. In major states like Punjab, Haryana, Andhra Pradesh and lately in MP and Chhattisgarh, the State procures much of the market arrivals (almost 70 percent) of wheat and rice. This is triggered by open-ended procurement policy on one hand and high taxes (statutory levies)/bonuses announced by some states on the other. It is driving out private sector from the market, leading to a de-facto state takeover of grain trade in these states. The Commission feels that this is not a good trend and not in the best interest of the country. Operations of public agencies are often more expensive. Just to cite one example, the cost of departmental labour in FCI for loading and unloading grain is 7 to 8 times the cost of a contract labour doing the same job. The Commission, therefore, recommends that Competition Commission of India (CCI) look into these aspects of public procurement which are leading to monopsony of state agencies, and thereby anti-competitive market behavior.
S.5 The Centre also needs to review its open ended procurement policy and take a policy decision to limit procurement from states that impose taxes and levies beyond 5 percent of MSP, or give special bonus on top of MSP. This is a necessary step to bring about rationality in pricing, contain the food subsidy bill and ‘getting the markets right’. Else, the Commission fears that a major crisis in food management can unfold, leading to large economic losses that the country can ill afford.
Adoption of Warehouse Receipts
S.6 As an alternative to public procurement and holding physical stocks, Warehouse Receipts (WRs) need to be increasingly encouraged. These negotiable instruments, backed by the underlying commodities, contribute to the creation of cash and forward markets and thus enhance competition, reduce transaction costs, and promote efficiency in markets, which ultimately benefits the society at large.
Making NFSO More Effective
S.7 The National Food Security Ordinance (NFSO) legally entitles two-thirds of the country’s population to subsidized grain (basically 5 kg, per capita per month, except under AAY where this allocation is 7 kg per person). It implies a massive procurement of food grains and entails large financial expenditure given the existing inefficient food security complex of procurement, stocking and distribution (currently the leakages amount to about 40 percent as per the Commission’s calculations). It is likely to crowd out private sector operations further with an adverse effect on overall efficiency of procurement, storage and distribution operations as well as on magnitude of food subsidies and open market prices. Given that, on an average, the per capita consumption of cereals per month is around 10.7 kg (NSSO, 2009), it would still require that a substantial part of it is to be bought from the open market. It is plausible that high open market prices, driven by large procurements, would nullify a part of the welfare effects of subsidized grain being made available through PDS. Also, the ordinance’s focus on rice and wheat goes against the trend for diversifying diets to protein-rich foods such as dairy products, eggs and poultry, as well as fruit and vegetables, and would slow down the process of diversification in agriculture. S.8 Literature, international experience and pilot studies in India itself have shown that cash transfers are more efficient and cost effective in promoting food and nutritional security. Thus, NFSO could be integrated with the ‘Direct Cash Transfer’ (DCT) scheme especially in 33 cities of more than one million population and cereal surplus states. This approach, i.e., using the right policy instrument (income policy rather than price policy) will not only empower the poor but also allow the foodgrain markets to function effectively with an active private sector, allow natural process of diversification/growth in agriculture and plug leakages in distribution via use of IT under Aadhaar Platform.
Removing domestic market distortions
S.9 It is time for some of the restrictive laws dealing with agriculture (e.g., Essential Commodities Act (ECA), 1955; APMC Act, tenancy laws, etc) to be reviewed and made much more liberal to let the markets function openly and competitively. It is vital that these laws are modified to facilitate the development of a barrier-free national market.
Review Fertilizer Pricing
S.10 Fertilizer subsidy, which has increased by more than five times during the last ten years, must be restructured and rationalized. Since the adoption of NBS, the retail prices of P&K fertilizers have risen while the price of urea (N) has remained fixed. The differential between the prices of urea and P&K fertilizers has widened leading to excess use of N at the expense of P&K fertilizers. The price of urea needs to be increased by at least 15 percent and the subsidy enhanced on P&K fertilizers to reduce their effective MRPs keeping the fertilizer subsidy constant. In the long term,
direct transfer of fertilizer subsidy to farmers on per hectare basis and decontrolling the fertilizer sector with free imports should be aimed.
Stable, Open and Neutral Agri-Trade Policy
S.11 In 2012-13, agri-exports were to the tune of US$ 41 billion vis-a-vis an import of only US$ 20 billion, earning a net surplus of US$ 21 billion. Therefore, an open, stable, neutral and rational agri-trade policy with moderate duties (not more than 15 percent during normal times) needs to be instituted. In case of abrupt and large falls in international prices, trigger points can be identified for quick action to raise import duties. The Commission recommends fully opening up the exports, even for pulses and oilseeds/edible oils, as their imports are already open at zero or low import duties to make the trade policy neutral to producers and consumers. This will promote resource use efficiency, generate surpluses and promote agri-growth. S.12 Imports of oilseeds continue to be restricted with 30 percent import duty even when import duty on edible oils has been reduced to 2.5 percent for crude oil and 7.5 percent for refined oils. Logically, the import duty is graduated from low on raw material to the highest on refined product. The extant duty structure on oilseeds, raw and refined oils needs a review and revised as per economic rationality; say at 5, 7.5 and 15 percent respectively on oil seeds, crude edible oils and refined edible oils. This would also facilitate better capacity utilization of existing oilseed crushing and refining industry. The Commission also recommends that imports of pulses should have a 10 percent import duty for the next three years to promote their production at home, given pulses worth Rs 12,730 crore were imported in 2012-13.
Oil Palm Development
S.13 Developing oil palm on two million hectares that is identified as suitable for its cultivation is the main answer to bridging the gap between demand and supply of edible oils. The Commission has already submitted a separate report in January 2012 in this regard and recommends that oil palm development in the country should be taken up on a high priority, as it will benefit large numbers of farmers and consumers alike, and also save on the large and growing import bill which was worth Rs 61,106 crore in 2012-13.
De-reservation of Mustard Seed Processing Units
S.14 The Commission recommends de-reservation for mustard seed processing units (also groundnut) from the micro and small-scale sector, along with emphasis on their technology up-gradation and modernization to make them efficient in terms of higher oil recovery leading to cost effectiveness.
Emphasis on Increasing Productivity
S.15 The prudent solution to increasing costs of production lies in enhancing productivity. The actual cost estimates available for the year 2011-12 corroborates
this. A jump of around 7.5 percent in the yield of wheat in 2011-12 at all India level has contained the rise in the costs of production in major States. More emphasis on R&D, irrigation, and better farm practices in this regard will go a long way.
Creation of Insurance Fund/Income Stabilization Fund
S.16 During the Commission’s intensive interactions with State Governments and farmers’ representatives, one of the concerns which emerged was stabilization of agricultural incomes given the high risks (of weather and market) involved. The suggested solution to this may be creation of an Insurance fund or Income Stabilization Fund with a starting corpus of say, Rs 5000 crore. The basis of operations could be an analysis of last three years’ yield levels and prices and a suitable compensation given if the income level in the current year falls below the above average level. The Commission recommends the setting up of such a fund as this would provide a necessary bridge for transition from price policy support to income policy support.
Review of Number of Crops under Commission’s mandate
S.17 The Commission has carefully examined that the number of commodities under its mandate is too large at 24. As the supportive procurement infrastructure is effective only for a few commodities, recommending MSP for all of these commodities does not serve any purpose. Therefore, it is recommended that the number of commodities under the MSP regime may be reduced to 12 viz., rabi crops of wheat, gram, R&M; kharif crops of paddy, maize, tur, soyabean, groundnut, cotton; sugarcane; jute and copra. This would also enable the Commission to make an in-depth analysis of these major crops and serve the country better.
Price Policy Recommendations:
S.18 The Commission, as per its mandate, has carefully considered the overall demand and supply situation of various crops, especially the excessive stocks of rice and wheat with government agencies, their costs of production, their domestic and international price situation along with export/import possibilities, the overall terms of trade between agriculture and industry, the issue of food inflation in the country and optimal utilization of land and water resources. These are detailed in various chapters of this report. Based on these factors, the Commission recommends the following MSPs as given in the table S.1 below. The table also delineates the MSP increases during the last three years to give a medium term perspective of the price policy recommendations.
Table S.1: Actual and Recommended MSPs of Rabi crops (Rs/quintal) CROP Projected Modified C2* cost for RMS 2014-15 Recommendation for RMS 2014-15 Justification RMS 2013-14 RMS 2012-13 RMS 2011-12 Wheat 1138.8 1400 (3.7)
Excessive stocks under Central Pool; Costs contained because of significant increase in yield levels especially in 2011-12; Existing MSP comfortably higher than the projected cost; Exports of wheat increasingly becoming unviable; domestic cereal inflation already very high. 1350 (5.1) 1285 (9.8) 1170 (6.4) Barley 1056.1 1100 (12.2) Demand-supply in balance; need to cover cost; domestic prices hovering around this level. 980 (0.0) 980 (25.6) 780 (4.0) Gram 2913.0 3100 (3.3)
MSPs of last three years raised by almost 60 percent; demand-supply in balance; domestic and international prices showing downward trend. 3000 (7.1) 2800 (33.3) 2100 (19.3) Lentil 2802.1 2950 (1.7)
Last three years MSP raised by 48 percent; demand supply in balance; costs covered; containing food inflation.
2900 (3.6) 2800 (24.4) 2250 (20.3) Rapeseed/ Mustard 2410.5 3050 (1.7)
Last three years MSP raised by 56 percent; costs well covered with ample profits to incentivize diversification. Domestic and international prices of edible oils bearish.
3000 (20.0) 2500 (35.1) 1850 (1.1) Safflower 3466.4 3000 (7.1)
Last three years, MSP raised by 58 percent; Rain-fed crop, low yields; domestic price hovering around this level.
2800 (12.0) 2500 (38.9) 1800 (7.1)
Note: Figures in parentheses are percentage increases over the previous year.
*This includes all actual expenses in cash and kind incurred in production by owner + rent paid for leased in land + imputed value of family labour + interest on value of owned capital assets (exc land) +rental value of owned land (net of land revenue) + costs of marketing, transportation and insurance premium
Chapter-1
An Overview
Challenge of Foodgrain Management
1.1 The major challenge faced by the Indian food sector since last year has been to prudently manage the ‘paradox of overflowing granaries and high cereal inflation’. The country had a record production of wheat (94.9 million tonnes) and rice (105.3 million tonnes) in 2011-12. As against the buffer stock norm of 31.9 million tonnes of rice & wheat (as on 1st July of each year), total Central Pool stocks were more than double at 80.5 million tonnes (30.7 million tonnes of rice and 49.8 million tonnes of wheat) on 1st July, 2012. Yet, the monthly inflation in wheat reached a peak at 23.3 percent in November, 2012 and slightly moderated to 19.3 percent in March, 2013 (Chart 1.1). This is despite the fact that, the minimum support price (MSP) for wheat was increased by 9.8 percent for RMS 2012-13 and only 5.1 percent for RMS 2013-14. This coexistence of good production, bulging central pool stocks and double digit inflation in rice and wheat indicates sub-optimal management of food economy.
Indian food sector faces a major challenge of prudently managing the ‘paradox of overflowing granaries and high cereal inflation’
1.2 This year too, the total Central Pool stocks, are more than double at 73.9 million tonnes (31.5 million tonnes of rice and 42.4 million tonnes of wheat) on 1st July, 2013 against the existing buffer stock norm of 31.9 million tonnes of rice & wheat (as on 1st July of each year) (Chart 1.2). The slight fall in stocks this year has been mainly due to unexpected lower public procurement of wheat in RMS 2013-14 rather than any policy choice. So for two years in a row, the country has been holding hugely excessive stocks. These excess stocks deprive the domestic market of fluid grain exerting an upward pressure on the prices besides having huge cost implications in carrying and storage. The primary reason for high inflation in wheat and rice has been due to the government emerging as the largest holder of grain. In major wheat procuring states like Punjab, Haryana and Madhya Pradesh, the state has emerged as a virtual monopsonist wiping away more than 80 percent of the marketed arrivals.
The primary reason for high cereal inflation has been the government emerging as the largest holder of grain
Chart 1.2: Central Pool Stocks with FCI
Source: FCI
Note: Stocks are shown as on 1st July of each year
Chart 1.1: Inflation in Wheat & Rice during 2012-13
Impact of National Food Security Ordinance (NFSO)
1.4 NFSO, signed by the Hon’ble President of India on 5th July, 2013, marks a paradigm shift in addressing the problem of food security from the current welfare approach to a rights based approach. Besides expanding the coverage of the Targeted Public Distribution System (TPDS), the proposed legislation would confer legal rights on eligible beneficiaries to receive entitled quantities of foodgrains at highly subsidized prices. The central pivot of the Ordinance is large-scale subsidized grain distribution to almost two-thirds of the country’s population of 1.2 billion. This would perhaps be the biggest ever experiment in the world to distribute subsidized grain to achieve food and nutritional security. The government already procures one-third of the cereals production (more than 40 percent of marketed surplus) and any increase in procurement will have enormous ramifications on the cereal economy/markets and would crowd out private sector operations with a consequent effect on open market prices1. This is already being experienced as has been illustrated above.
1.5 Under NFSO, it is proposed to provide 5kg each of cereals per month to 67 percent of the entire population. It needs to be noted here that as per NSSO, the all-India per capita monthly consumption of cereals was 10.7 kg in 2009-10 (11.3 kg in rural areas and 9.4 kg in urban areas). This implies that on an average, a person would have to acquire more than half of his monthly cereal requirements from the market. A double digit inflation in open market prices of cereals hits the ‘poorest of the poor’ hard. Therefore, if government policies have resulted in high inflation, then a complete overhaul of the food management policy design is required.
1.6 The current buffer stock norms need to be certainly revised in the light of NFSO and the underlying statutory commitments. A discussion paper of the Commission estimates2 that the most probabilistic and desirable buffer stock norm, as on 1st of July, could be 46.7 million tonnes of rice and wheat (assuming no imports). This would cover the operational needs under NFSO as well as insure against roughly 95 percent risk regarding drop in production of wheat and rice, based on past 20 years of production pattern. (It cannot cover the risk of a year like 2002-03, when grain production dropped by 38 million tonnes over 2001-02 levels. What will the Government do in such a year, when food is a legal right, is an issue to ponder). Despite revision of these norms, the ‘excess buffer stocks’ as on 1st July, 2013 are around 27 million tonnes with excess holding of around 14 million tonnes of rice and 13 million tonnes of wheat. The value locked in these ‘excess stocks’, estimated at their economic cost3, exceeds Rs 64,000 crore. This infusion of ‘excess’ money into 1 ‘National Food Security Bill: Challenges & Options’, Discussion paper No. 2, CACP
2 ‘Buffer Stocking Policy in the wake of NFSB: Concepts, Empirics, and Policy Implications’, Discussion Paper No. 6, CACP 3 @Rs 20100 per tonne for wheat and Rs 26400 per tonne for rice
High inflation hits the ‘poorest of the poor’ hard as even under NFSO, a person would acquire more than half of his monthly requirements from the market Despite estimated revision of buffer stock norms in wake of NFSO, the ‘excess buffer stocks’ as on 1st July, 2013 are around 27 million tonnes
the economy without corresponding flow of goods is evident in the paradox of rising prices of rice & wheat amidst overflowing stocks in government godowns.
1.7 It will be a much rational policy choice to liquidate these ‘excessive’ stocks. The Commission, in its Kharif Price Policy Report, 2013-144, has already recommended urgent liquidation of at least 15 million tonnes of stocks at the last year’s MSP plus a maximum of 5 percent towards taxes/cesses etc i.e., wheat at Rs 1350/qtl and rice at Rs 1900/qtl, say ex-Punjab. In this context, the Commission welcomes the recent decision5 of the Government to off-load 10 million tonnes of wheat in the domestic market. But the offer price being Rs 15,000/tonne, ex-Punjab, one wonders whether there would be enough takers for this as quite a bit of this wheat is one to two years old. And now that the global prices are showing a bearish trend, it is all the more difficult to liquidate at this price, unless rupee keeps sliding down against the US dollar. The Commission is of the opinion that the offer price will have to take cognizance of market realities and the key issue is of saving the carrying costs of ‘excess stocks’ and taming domestic prices. So far the government has not announced any plans to liquidate ‘excessive’ rice stocks for the domestic market or for exports. Commission’s calculations show that the situation is as serious in rice as in wheat as far as ‘excess stocks’ with the government are concerned, and therefore, the government can be more pro-active in liquidating these stocks and taming domestic prices, and earn some foreign exchange and reduce current account deficit as well as fiscal deficit.
Agricultural Performance in 2012-13: Production & Trade
1.8 The year 2011-12 witnessed a remarkable performance by Indian agricultural sector with a record production of 259.3 million tonnes of food grains (5.9 percent increase compared to 2010-11). In 2012-13, the agricultural sector as a whole is expected to grow at 1.9 percent as compared to 3.6 percent last year6. It is expected that foodgrain production would fall by 1.5 percent to 255.4 million tonnes in 2012-137. Wheat production is expected to fall marginally by 1.3 percent to 93.6 million tonnes in 2012-13 as compared to record 94.9 million tonnes in 2011-12 (Chart 1.3). But, as per USDA estimates8, wheat production in India may fall sharply by 8.3 percent to 87 million tonnes in 2012-13. Agri watch has put India’s wheat production at 88 million tonnes. The Commission’s interactions with various stakeholders also corroborate a fall in wheat production, though it is difficult to estimate the exact scale of this drop. The unexpected fall in procurement of wheat in RMS 2013-14 from Agriculture is expected to grow at 1.9 percent in 2012-13 as compared to 3.6 percent last year Gram, Tur, Soyabean and R&M have recorded high increase in production in 2012-13
4 Available on the website of the Commission at http://cacp.dacnet.nic.in
5 http://articles.economictimes.indiatimes.com/2013-06-21/news/40119498_1_wheat-export-tonnes-wheat-and-rice 6 Provisional Estimates of National Income,2012-13, CSO
7 Third Advance Estimates, DES
8 USDA GAIN Report, ‘India: Grain & Feed Report’, June 2013
At least 15 million tonnes of ‘excess’ Central Pool stocks need to be urgently liquidated
the economy without corresponding flow of goods is evident in the paradox of rising prices of rice & wheat amidst overflowing stocks in government godowns.
1.7 It will be a much rational policy choice to liquidate these ‘excessive’ stocks. The Commission, in its Kharif Price Policy Report, 2013-144, has already recommended urgent liquidation of at least 15 million tonnes of stocks at the last year’s MSP plus a maximum of 5 percent towards taxes/cesses etc i.e., wheat at Rs 1350/qtl and rice at Rs 1900/qtl, say ex-Punjab. In this context, the Commission welcomes the recent decision5 of the Government to off-load 10 million tonnes of wheat in the domestic market. But the offer price being Rs 15,000/tonne, ex-Punjab, one wonders whether there would be enough takers for this as quite a bit of this wheat is one to two years old. And now that the global prices are showing a bearish trend, it is all the more difficult to liquidate at this price, unless rupee keeps sliding down against the US dollar. The Commission is of the opinion that the offer price will have to take cognizance of market realities and the key issue is of saving the carrying costs of ‘excess stocks’ and taming domestic prices. So far the government has not announced any plans to liquidate ‘excessive’ rice stocks for the domestic market or for exports. Commission’s calculations show that the situation is as serious in rice as in wheat as far as ‘excess stocks’ with the government are concerned, and therefore, the government can be more pro-active in liquidating these stocks and taming domestic prices, and earn some foreign exchange and reduce current account deficit as well as fiscal deficit.
Agricultural Performance in 2012-13: Production & Trade
1.8 The year 2011-12 witnessed a remarkable performance by Indian agricultural sector with a record production of 259.3 million tonnes of food grains (5.9 percent increase compared to 2010-11). In 2012-13, the agricultural sector as a whole is expected to grow at 1.9 percent as compared to 3.6 percent last year6. It is expected that foodgrain production would fall by 1.5 percent to 255.4 million tonnes in 2012-137. Wheat production is expected to fall marginally by 1.3 percent to 93.6 million tonnes in 2012-13 as compared to record 94.9 million tonnes in 2011-12 (Chart 1.3). But, as per USDA estimates8, wheat production in India may fall sharply by 8.3 percent to 87 million tonnes in 2012-13. Agri watch has put India’s wheat production at 88 million tonnes. The Commission’s interactions with various stakeholders also corroborate a fall in wheat production, though it is difficult to estimate the exact scale of this drop. The unexpected fall in procurement of wheat in RMS 2013-14 from Agriculture is expected to grow at 1.9 percent in 2012-13 as compared to 3.6 percent last year Gram, Tur, Soyabean and R&M have recorded high increase in production in 2012-13 targeted 44 million tonnes to 25.1 million tonnes is also a pointer to this.
Therefore, the figure of 93.6 million tonnes needs closer scrutiny, including cross verification from satellite imageries.
1.9 The fall in production is steeper for coarse cereals as a whole at 6.0 percent as compared to last year with sharp fall in output of jowar ((-)11.8 percent), bajra ((-)15.3 percent) and ragi ((-)16.6 percent). An appreciable increase of 5.3 percent in total pulses production is expected in 2012-13 at 18.0 million tonnes as compared to last year. The production of tur and gram is expected to reach 3.0 million tonnes (increase of 14.7 percent as compared to last year) and record 8.5 million tonnes (increase of 10.3 percent) in 2012-13. The production of total nine oilseeds in 2012-13 is also expected to be higher by 3.1 percent at 30.7 million tonnes. The production of soyabean is expected to increase to a record of 14.1 million tonnes (increase of 15.8 percent) and that of R&M to a high of 7.4 million tonnes (increase by 12.7 percent). This increase in the production of pulses and oilseeds bodes well for a much needed shift in the composition of agricultural output from cereals to pulses & oilseeds.
9 Defined as per the classification used in Agricultural statistics at a Glance. It excludes paper/wood products & Spirits and Beverages.
Chart 1.3: Production of major Agricultural Commodities, 2011-12 & 2012-13
Source: DES, Ministry of Agriculture
105.3 94.9 42.0 17.1 29.8 104.2 93.6 39.5 18.0 30.7 0 10 20 30 40 50 60 70 80 90 100 110
Rice Wheat Coarse Cereals Pulses Total Nine Oilseeds
Million
Tonnes
2011-12 2012-13
1.10 Agri-exports9 by India during the FY 2012-13 were US$ 40.8 billion against an import of agri-commodities worth US$ 20.1 billion with the agricultural sector emerging as a large trade surplus sector (Chart 1.4 (a)). Since the lifting of the ban on wheat and rice exports in September, 2011, India has emerged as the world’s leading exporter of rice and a large exporter of wheat in 2012-13.
India has exported a record quantity of cereals in 2012-13
India exported a record 10.1 million tonnes of rice (US$ 6.2 billion), record 4.8 million tonnes of maize (US$ 1.3 billion) and 6.5 million tonnes of wheat (US$ 1.9 billion) in 2012-13 (Chart 1.4 (b)). Other major agri exports were guargum meal (US$ 3.9 billion), raw cotton (US$ 3.6 billion), marine products (US$ 3.5 billion) and meat & preparations (US$ 3.3 billion). India also emerged as the largest importer of edible oils (with imports exceeding 10 million tonnes worth US$ 11.2 billion) and pulses (with imports exceeding 3.8 million tonnes worth US$ 2.3 billion). Despite this, the agriculture sector remains a net exporter and to enable the sector to realize its full potential, an open, stable, neutral and rational agri-trade policy with moderate duties is the need of the hour. The guiding principles of such a policy should be the alignment of domestic and international prices along long-term trends, while guarding against sharp spikes and troughs through provision of special safeguards.
Chart 1.4 (a): Exports & Imports of
Agri-Commodities Chart 1.4 (b): Composition of Agri-Exports, 2012-13 (%)
Source: Agricultural Statistics at a glance- various issues & Department of Commerce
Outlook for Agricultural Sector in 2013-14
1.11 In April, Indian Metrological Department (IMD) had predicted a normal monsoon with India receiving 98 percent of its average of 89 cm of rain during the June-September monsoon. Against this prediction, the southwest monsoon covered the entire country on 16th June, 2013- quite ahead of schedule and the earliest arrival recorded. So far, this portends well with advanced sowing and hopes for a bumper output of summer-sown kharif crops such as rice, oilseeds and cotton, provided in the remaining period monsoon does not play truant. By the end of June, 2013, 92 per cent of the geographical area of the country has received either normal or excess rainfall which should help the severe drought hit areas of Maharashtra and Karnataka. A comfortable level of water in reservoirs should also lead to a better rabi output.
By June end, 92% of the country received normal/excess rainfall 0 5 10 15 20 25 30 35 40 45 19 90 -9 1 19 92 -9 3 19 94 -9 5 19 96 -9 7 19 98 -9 9 20 00 -0 1 20 02 -0 3 20 04 -0 5 20 06 -0 7 20 08 -0 9 20 10 -1 1 20 12 -1 3 U S$ B ill io n Agri-Imports Agri-Exports Others, 23.6 Rice, 15.3 Guargum Meal, 9.6 Cotton,9.0 Marine Products, 8.5 Meat & Prep, 8.1 Oil Meals, 7.2 Spices, 6.9 Wheat, 4.7 Sugar & Molasses, 4.0 Maize, 3.2
Global Outlook
1.12 According to FAO Food Outlook, June 2013, food commodity markets are set to be relatively balanced in 2013-14, in particular cereals. Record world wheat production and thereby declining world trade in 2013, global wheat markets would remain stable under generally lower prices. As per CBOT, wheat prices are expected to range between US$ 250 – 265 per tonne during 2013-14. Positive early production forecasts for oilseeds for 2013-14 suggest a more balanced world supply and demand situation and thus a general easing of prices. The FAO Food Price Index (FFPI), with the base of 2002-04, averaged 215.2 points in May 2013, close to its April value but 5 percent higher than in May last year. At that level, the index is nearly 10 percent below the peak reached in February 2011. The overall Food Price Index of FAO is showing signs of moderation in 2013 and combined with the trends in the futures market, the global market conditions are expected to be stable in the short-term.
Structure of the Report
1.13 Indian agriculture is a critical economic activity contributing about 14 per cent to overall GDP of the country and with half the workforce employed in it. But as the Kharif Price Policy Report, 2013-14 highlighted, it is stifled by various controls ranging from trade to domestic marketing and stocking. It is high time that one focuses on reforming the agri-market distortions which would create greater competition and promote efficiency and growth. ‘Getting markets right’ for both agri-outputs as well as crucial inputs is essential for ‘getting the prices right’. Accordingly, this report focuses on the need for ‘getting the markets right’. Chapter 2 of this report delineates the various market distortions for principal rabi crops and also recommends what needs to be done. Chapter 3 looks at domestic prices in relation to international prices and trade policies with a view to reduce distortions with respect to international trade. Chapter 4 presents the costs projections for the rabi crops. Chapter 5 looks at the relation between yields and real costs of production indicating clearly that if costs are to be contained and thereby real prices of agricultural products, there is no soft option but to increase yields by increasing investment in agri R&D (seeds), irrigation and better farm practices. Finally in chapter 6, major highlights of all chapters are presented leading to the key price and non-price policy recommendations.
Food commodity markets are set to be relatively balanced in 2013-14
Chapter-2
Demand-Supply, Procurement and Efficacy of Price Policy
Domestic Market Scenario
2.1 The year 2012-13, as per Third Advance Estimates, is expected to register a marginal fall of 1.5 percent in total foodgrain production to 255.4 million tonnes as compared to a record production of 259.3 million tonnes in 2011-12. Production of wheat is estimated to marginally decline to 93.6 million tonnes as compared to 94.9 million tonnes in 2011-12. Barley production is expected to increase by 2.5 percent to 1.7 million tonnes. Gram is expected to register a record crop of 8.5 million tonnes as compared to 7.7 million tonnes last year. R&M production is expected to increase by 12.7 percent to 7.4 million tonnes as compared to 6.6 million tonnes last year; whereas Safflower is expected to record a substantial fall of 40 percent with an expected production figure of about 0.1 million tonnes. (Annex table 2.1).
2.2 Prices, however, are ultimately determined by the interplay of the forces of demand and supply. In this context, the stocks-to-use ratio is an important parameter to gauge the degree of availability of a commodity vis-à-vis its demand. In the case of seasonal crops the norm is that 17-20 percent of production should be in the form of year-end-stocks to cater to demand till the next crop arrivals. While the estimates on stocks of rice and wheat, which are The year 2012-13 is expected to show mixed variation on the supply side of rabi crops
largely kept in the Central Pool, are known and fairly reliable, the estimated stocks of other commodities that are predominantly held in the private sector are obtained through other sources, whose reliability is contestable. However, these estimates are used by the Commission to understand the price behavior of these commodities. Accordingly, more than one estimate on the stocks-to-use ratios is reported. (table 2.1 and annex table 2.2).
Table 2.1: Stock- to-Use Ratios of Rabi Crops* (%) - 2010-11 to 2012-13
Commodity 2010-11 2011-12 2012-13 Wheat 26.3 41.7 42.3 Wheat # 26.2 46.9 42.3 Barley 37.2 32.9 16.1 Barley # 35.8 32.3 35.7 Gram 11.9 22.6 22.6 Gram # NA 3.6 3.8 Lentil 15.9 29.9 81.8 Lentil # 8.9 10.9 10.9 R&M 24.4 28.4 33.7 R&M # 1.8 5.4 7.4
Notes: * Details on Safflower were not available; NA- Not Available; # - Trade & Other Estimates; Use is defined as Total Domestic Consumption plus Exports
Sources – DAC, DGCIS, USDA, IPGA, NCAER
2.3 Prima facie, it is apparent that the stock-to-use ratios seem comfortable in the case of most of the major crops except barley as per Government estimates although trade estimates are low for gram, lentil and R&M. There is a wide difference between stock-to–use-ratios derived from Government sources of data and trade sources in respect of all the rabi crops except wheat. The wide gap between the government figures and trade figures (IPGA and USDA) is because of the difference in the production and export figures of these sources indicating the need to examine their authenticity and reliability. It may be highlighted that the declining price trend observed in case of most of the rabi crops except wheat and lentil do not corroborate tight stock-to-use ratio derived on the basis of government estimates (barley) and trade estimates (gram and R&M). In the case of lentil, a comfortable stock-to-use ratio based on the government estimates is not validated by its rising price trend.
Cereals- Wheat
2.4 With respect to wheat, owing to high production and procurement levels, there are no supply constraints; the stock position has increased dramatically leading to a high stocks-to-use ratio, up from 26.3 percent in 2010-11 to 42.3 percent in 2012-13 (table 2.1). Wheat Balance Sheet is given in annex table 2.2. Although USDA estimates a fall in wheat production, the stocks-to-use ratio is still high. However, despite the successively and significantly improving stocks, the price of wheat (as well as rice) was increasing as revealed by the WPI based inflation rates and shown in chart 2.1. This anomaly of high stock-to-use ratio and high rate of inflation in wheat prices is largely due to the large
Stock-to-use ratios are comfortable in the case of most of the Rabi crops except barley as per Government data High prices of wheat is largely due to high stocks held by state agencies
scale state procurement and stocking of wheat, with little available for the open market.
Chart 2.1: Foodgrain Stocks in Central Pool & Inflation Rates of Wheat & Rice
Sources: FCI, DIPP
Coarse Cereals - Barley
2.5 As per the Third Advance Estimates, the estimated total production of coarse cereals is 39.5 million tonnes, which is lower than last year’s production of 42 million tonnes; however a marginal increase in the production of barley is estimated to 1.66 million tonnes.
2.6 The stocks-to-use ratio for barley has sharply declined from 32.9 percent in 2011-12 to 16.1 percent in 2012-13 largely due to higher exports. However, USDA estimates a higher stocks-to-use ratio at 35.7 per cent (Table 2.1), which is not supported by the increasing trend in barley prices. Barley Balance Sheet is given in annex table 2.2.
Oilseeds – R&M & Safflower
2.7 R&M is India’s biggest domestic oil bearing oilseed. As per the Third Advance Estimates, the output for the nine oilseeds as a whole is estimated to be 30.7 million tonnes, as against 29.8 million tonnes in 2011-12. Production of R&M is estimated to increase by 12.7 percent to 7.4 million tonnes. After reaching a peak level of 0.24 million tonnes in 2006-07, production of safflower has been steadily declining and is now less than 0.1 million tonnes.
2.8 With the government estimates, the stocks-to-use ratio for R&M shows a comfortable situation, while as per the USDA estimates there is a moderate increase in stocks-to-use ratio, but it is lower at 7.4 per cent, indicating a tight supply situation. However, the current declining trend in prices does not reflect this situation. The R&M Balance Sheet is given in annex table 2.2.
Pulses
2.9 India’s pulses production peaked in 2010-11 at 18.2 million tonnes. As per the Third Advance Estimates, production of pulses is estimated to be 18 million tonnes in 2012-13, an increase of about 1 million tonnes over 2011-12. Of the total pulses production during the triennium ending 2012-13, 45.8 per cent was contributed by gram; gram production in 2012-13 is estimated at a record 8.5 million tonnes.
2.10 While government estimates indicate a comfortable stocks-to-use ratio of gram, trade estimates a tight situation although a record production in gram is anticipated for 2012-13. However, prices of gram are currently showing a declining trend. In the case of lentil also the trade estimates indicate a continued situation of tight supplies, which is confirmed by the rising prices of lentil.
Procurement- Policy and Operations
2.11 Among the rabi crops, Food Corporation of India’s (FCI) procurement operations is largely limited to wheat. National Agricultural Cooperative Marketing Federation of India Limited (NAFED), National Cooperative Consumers’ Federation of India Limited (NCCF) and Central Warehousing Corporation (CWC) are the Central nodal agencies of the Government of India for undertaking procurement of Oilseeds and Pulses under Price Support Scheme (PSS), when the market rates of a particular commodity fall below MSP. As the market prices of R&M and safflower seed and pulses, namely gram and lentil covered under PSS, ruled above MSP, market intervention under the Scheme has not been necessitated (Source: NAFED). Consequently, procurement related issues are focused on wheat.
2.12 The procurement of wheat as a percentage of production and marketed surplus from 2001-02 to 2011-12 is shown in chart 2.2. In 2011-12, procurement crossed 40 per cent of the wheat production and cornered more than 50 percent of the marketed surplus. For the current year, a quantity of 44.1 million tonnes of wheat was expected to be procured. However, only 25.1 million tonnes have been procured by the end of June 2013. The decline in procurement may be attributed to the following reasons: (i) A possible decline in production-as per June 2013 USDA report, production of wheat is estimated at 87 million tonnes; Agriwatch puts it at 88.17 million tonnes; however, the third advance estimates of DAC (93.6 million tonnes) show an increase over the second advance estimates (92.3 million tonnes); (ii) a possible increased procurement by private traders; and (iii) farmers could be holding back more quantities of wheat in anticipation of rise in prices. During the Commission’s interactions, it was reported by representatives of the private traders and farmers’ associations that the quantities procured/held back respectively by these groups are not significant. A possible decline in wheat production, increased procurement by private traders & some holding back of wheat by farmers could be reasons for low wheat procurement
Chart 2.2: Wheat Procurement as Percent of Production & Marketed Surplus (2000-01 to 2012-13)
Notes: Marketed Surplus Ratio is available upto 2010-11 only and repeated for the years after 2010-11 Sources: DES, DFPD, Agricultural Statistics at a Glance, 2012
Chart 2.3: Wheat Procurement as a Percent of Marketed Surplus, TE 2012-13
Source: DFPD
2.13 As is evident from chart 2.3, major states like Punjab, Haryana and Madhya Pradesh procure more than 70 per cent of the marketed surplus, leading to almost a monopsony of the state vis-à-vis private trade. In view of this, the Competition Commission of India (CCI) may look into these aspects of anti-competitive market behavior, which are not in the best interests of creation of vibrant cereal markets.
Major states like Punjab, Haryana and MP procure more than 70 per cent of the marketed surplus, leading to almost a monopsony of the state vis-à-vis private trade
Chart 2.4: Procurement as a Share of Production in MP (2001-02 to 2012-13)
Box 2.1: MP-Continuing State Policy leading to distortions
in Wheat market
• MP has been providing Rs 100/qtl bonus to its farmers since 2007-08 which was increased to
Rs 150/qtl in 2013-14.
• In a span of five years, from 2007-08 to 2012-13, area under wheat has increased from 3.7
million ha to 5.3 million ha and production of wheat from 6.0 million tonnes to 13.1million
tonnes (3rd Advance Estimates).
• MP has emerged as a major wheat procuring state almost matching the traditional grain
procuring states of Punjab, Haryana and UP in terms of production and procurement.
• From procuring 0.8 percent of wheat produce in 2006-07, the Government cornered 85 per
cent of its total wheat produce in 2011-12 (RMS 2012-13). The state has procured 75 per cent of the total arrivals in RMS 2013-14. This has nearly wiped away the private trade in MP. (See chart below)
• Sudden drop in procurement in MP in 2012-13 (RMS 2013-14) is a puzzle. It suggests that in
earlier years there could be possibility of UP wheat flowing into MP for procurement, as MP was giving a bonus on MSP while in much of UP the market prices ruled even below MSP. The new scheme of e-uparjan of MP is reported to have checked such inflow of wheat from other states.
2.14 During the last three years, the declining share in wheat procurement of Haryana and Punjab has been more than compensated by Madhya Pradesh and Rajasthan. The situation in MP has also been distorted due to state policy to declare additional bonus over the MSP. (Box 2.1).
2.15 In recent times, more state governments have been announcing crop specific bonuses, as shown in table 2.2.
Table 2.2: MSP and state bonuses over MSP in the last four years (Rs/qtl)
Mktg Year 2010-11 2011-12 2012-13 2013-14
Sl. no States Paddy Wheat Paddy Wheat Paddy Wheat Paddy^ Wheat
mSP 1000 1100 1080 1170# 1250 1285 1310 1350
1 Chhattisgarh 50 - 50 - 270 - -
-2 Karnataka 100 - 250 - 250 -
-3 Kerala 400 - 420 - 450 - -
-4 M.P. Comm=50
Gr A=50 100 Comm=50Gr A=50 100 Comm=100Gr A=100 100 - 150
5 Rajasthan - - - 100 - 150
6 Tamil Nadu Comm=50
Gr A=70 - Comm=50Gr A=70 - Comm=50Gr A=70 -
-7 U.P. - - - 50 -
-Notes: Comm- common variety, Gr A – Grade A variety of paddy; # - including Rs 50 per qtl incentive bonus for paddy procurement announced by Centre; including Rs 50 per qtl incentive bonus for wheat procurement an-nounced by Centre; ^ - Paddy MSP has been anan-nounced on 27.6.2013, states would announce additional bonuses later. Sources: FCI & state governments.
2.16 These have affected the inter-crop parity as they influence the farmer to grow a particular crop at the cost of other equally important crops and thus distort the production basket. Not surprisingly, given the additional bonuses declared by MP (from 2007-08), the incremental additions to irrigated areas have gone largely to wheat in MP as evident from chart 2.5. This unidirectional expansion in one crop is not healthy as it not only damages the soil health, but also goes against the needs of the nation which is short of edible oils and pulses.
Chart 2.5: Share of major crops in incremental irrigated area in MP (2010-11 over 2007-08)
Source: DAC
2.17 In this context, the Commission reiterates its recommendation that the government revisit the policy of following an open-ended procurement by FCI. The Centre also needs to take a policy decision to not accept more than say, 75 percent of last year’s procurement from states that impose taxes and levies beyond 5 percent of MSP, or give special bonus on top of MSP. This would also Crop specific
bonuses affect inter-crop parity
help in addressing the high economic cost incurred by FCI in its procurement and distribution operations.
Chart 2.7: Statutory Levies imposed by States (as % of MSP) (KMS & RMS 2012-13)
Source: FCI
2.18 The FCI’s economic cost of procurement (worked on constant price basis with base 2004-05) has been rising from 1993-94 to 2013-14 (BE) with increasing scale of procurement (chart 2.6). This is indicative of ‘diseconomies of scale’ in FCI’s operations, i.e., increasing inefficiency with increasing levels of procurement, which may be attributed to higher procurement incidentals and increasing carrying costs of the buffer stock.
2.19 A major contribution of increasing procurement incidentals are the high rates of statutory levies imposed on the market by different states, which vary from zero per cent in Assam and Tamil Nadu to 14.5 per cent in Punjab (chart 2.7). In addition, cesses are also levied for Infrastructure Development and Rural Development, all of which have a cascading effect on prices.
Chart 2.6: Economic cost of Wheat Procurement to FCI (1993-94 to 2013-14)
Source: Commission’s calculations based on the basic cost data from FCI
FCI suffers from ‘diseconomies of scale’ in its procurement operations
2.20 Since revenues from the above taxes/levies accrue to state governments, it is therefore expected that more state governments will tap on this, as for instance, Odisha, which increased the total taxes/cesses levied from 8.5 per cent last year to 12 per cent this year. Andhra Pradesh also increased its taxes/levies by 1 per cent to 13.5 per cent. These taxes also drive out the private sector with the result that the entire stock of foodgrains has to be bought by the Government.
Wheat
State 2012-13 Rate in Earlier
Rate Year Punjab 14.50 12.50 2010-11 Haryana 11.50 10.50 2010-11 MP 9.20 3.20 2009-10 UP 8.50 7.50 2009-10 Uttarakhand 7.50 6.50 2011-12 Rajasthan 3.60 4.10 2008-09 Rice State Rate in 2012-13 Earlier Rate Year Punjab 14.50 12.50 2011-12 Andhra Pd 13.50 12.50 2011-12 Odisha 12.00 8.50 2011-12 Haryana 11.50 10.50 2010-11 Chhattisgarh 9.70 8.70 2010-11 UP 9.00 8.00 2008-09 Source: FCI
2.21 Last year state roller flour mills in Punjab decided to buy wheat from Uttar Pradesh as they found it cheaper to purchase wheat from UP than buying it from Punjab. The trigger was competition with the cheap wheat-based products being supplied by UP-based flour mills across Punjab. It was reported that even after adding freight cost, local taxes and cartage, wheat cost them Rs 1,265 per quintal from UP, which was still below the declared MSP of Rs 1285 per quintal. This is due to the slow growth of flour mills with large capacities in both UP and Bihar. For instance, in Bihar about 92 per cent of wheat flour mills and 97 per cent of rice flour mills are of less than one tonne capacity. Thus, high taxes and levies on wheat in Punjab, coupled with the weak procurement infrastructure in the eastern belt led to this situation. It is also learnt that roller flour mills are charged an additional 5 per cent over these taxes in Punjab. No wonder, this dissuades the food processing industry in Punjab to flourish.
Central Pool Stocks
2.22 Starting with an opening balance of stocks of Central Pool as of 1st April, 2013, of 59.7 million tonnes (12.0 percent higher than that of last year), comprising 24.2 million tonnes of wheat and 35.5 million tonnes of rice, the total stock of foodgrains was 73.9 million tonnes (a fall of 8.2 percent over last year), comprising 42.3 million tonnes of wheat and 31.5 million tonnes of rice as of 1st July, 2013. This is more than double the norm of 31.9 million tonnes for 1st of July. This excess holding of stocks involves high carrying and storage costs and has also led to high cereal inflation. The immediate challenge, therefore, is on their liquidation, domestic as well as exports. Since exports were opened in September 2011, about 7.3 million tonnes of wheat has been exported. The States impose
high statutory levies on wheat & rice driving away the private sector and adding to the costs of procurement Central pool stocks are more than double the buffer stock norm on 1st July, 2013
Government has appreciably taken some steps in that direction by announcing a decision to liquidate about 10 million tonnes of wheat stocks at Rs 15,000/ tonne (ex-Punjab). But so far, the actual liquidation has been very modest. One of the reasons is high sales price. The Commission recommends that the offer price needs to take cognizance of market realities and excess stocks should be quickly liquidated at whatever the markets can absorb.
Storage Capacity
2.23 The total storage capacity of FCI and state agencies, as on 1st April, 2013, was 71.8 million tonnes, of which covered capacity was 53.4 million tonnes and the rest were under Cover and Plinth (CAP) (Source: FCI). As per the estimates in a discussion paper by the Commission, that the revised buffer stock norms in the wake of NFSO could be 46.7 million tonnes on 1st July of a year under the assumption of most likely scenario of reasonable efficiency in operations of FCI to turn around procured grains to distribution channels in two months. If one assumes lower efficiency (say three months), higher will be the stock required (51.7 million tonnes). Thus, the Government may have gone overboard and has led to creation of excess storage capacity which amounts to sub-optimal use of scarce economic resources.
2.24 The solution to large scale physical procurement may lie in the Negotiable Warehouse Receipts (NWRs) which are backed by the underlying commodities. Taking advantage of the Warehousing Development and Regulatory Authority (WDRA), FCI may explore the possibility of use of NWRs for procurement of food grains for TPDS to avoid a glut in the market and improve efficiency in storage and handling operations. It is to be noted that WDRA has been entrusted with the responsibility to regulate and ensure implementation of the provisions of the Warehousing (Development and Regulation) Act, 2007 for the development and regulation of warehouses, Regulations of Negotiability of Warehouse Receipts and promote orderly growth of the warehousing business. It has notified 115 agricultural commodities including cereals, pulses, oil seeds, spices, dry fruits, tea, coffee and rubber etc. as per the standards prescribed by the Agmark, or other approved grading agencies for issuing Negotiable Warehouse Receipts. Of late, the WDRA plans to integrate the Primary Agriculture Credit Societies (PACS) warehouses under the negotiable warehouse receipt system so that the small and marginal farmers may get benefited from this scheme. The Commission feels that this is a better policy instrument to provide support to farmers, which is aligned to market forces and can operate efficiently.
Prices and Efficacy of Price Policy
2.25 An examination of the wholesale prices of the major rabi crops reveals that prices of all crops are generally showing a rising trend and are ruling above their
Total storage capacity of FCI and state agencies, as on 1st April, 2013, was 71.8 million tonnes The solution to large scale physical procurement may lie in the Negotiable Warehouse Receipts
10 http://www.business-standard.com/article/economy-policy/punjab-roller-flour-mills-to-buy-wheat-from- up-112041702004_1.html
11 As per the State Replies
Chart 2.8: Wholesale prices of rabi crops & their MSPs (2006-07 Q1 – 2013-14 Q1)
Notes: Average wholesale prices of wheat at AP, Bihar, Punjab, Haryana, Karnataka, Tamil Nadu, Maharashtra, MP and Gujarat; wholesale prices of wheat in UP; wholesale prices of barley at Haryana, Rajasthan and UP.
(i) Wheat (ii) Barley
Notes: Average wholesale prices of gram at W Bengal, UP, Rajasthan, MP and Bihar; wholesale prices of lentil at W Bengal, Maharashtra, MP, Karnataka, Haryana, and UP.
Notes: Average wholesale prices of R&M at W Bengal, UP, Rajasthan, Assam and Gujarat; wholesale prices of safflower at Maharashtra and Karnataka. Source: DES
(iii) Gram (v) R&M (iv) Lentil (vi) Safflower 1000 1500 2000 2500 3000 3500 4000 4500 5000 20 08 -09 Q1 20 08 -09 Q3 20 09 -10 Q1 20 09 -10 Q3 20 10 -11 Q1 20 10 -11 Q3 20 11 -12 Q1 20 11 -12 Q3 20 12 -13 Q1 20 12 -13 Q3 20 13 -14 Q1 Rs /Q tl Wholesale Price MSP 1500 2000 2500 3000 3500 4000 20 08 -09 Q2 20 08 -09 Q4 20 09 -10 Q2 20 09 -10 Q4 20 10 -11 Q2 20 10 -11 Q4 20 11 -12 Q2 20 11 -12 Q4 20 12 -13 Q2 20 12 -13 Q4 Rs/Qt l Wholesale Price MSP
respective MSPs, except for wheat in UP. The wholesale prices of the major crops vis-à-vis their MSPs are shown in charts 2.8 (i) to (vi).
2.26 As is evident from chart 2.8(i), wheat prices hover quite close to its MSP – this is because it is a highly controlled commodity. The same is also observed in the case of paddy. However, in the case of other ‘freer’ crops, their prices being largely above their respective MSPs, it may be surmised, respond more to the demand-supply factors. It is difficult to segregate the impact of hikes in MSPs on the growth (in area and production) of these crops. However, a simple examination of the trends in the area of rabi crops over the last five years reveals that except for wheat, other crops show year-on-year fluctuations in area sown. This could be due to the fact that there is a reasonably assured procurement system in place for wheat, which reduces the farmers’ price risk. An efficient marketing system, with information about prices together with upgraded infrastructure in mandis (public or private) would enable the farmers to make right choices about their cropping patterns. Currently these are somewhat skewed in favour of wheat and paddy.
Market distortions
2.27 The Working Group on Agricultural marketing Infrastructure, Secondary Agriculture and Policy Required for Internal and External Trade for the XII Plan (2012-17)13 has also identified many gaps in marketing infrastructure. It has assessed the total investment requirement for infrastructure development amounting to Rs 56,000 crore during 2012-17. It is reported that public expenditure on the agricultural marketing sub-sector is around 5 per cent of the total public Gross Capital Formation (GCF) in agriculture; while expenditure on marketing infrastructure development is less than 1 per cent for 2010-11 (Source: DAC). There is thus need to give thrust to marketing infrastructure development.
2.28 The focus of the Rabi Price Policy Report (2014-15) is on ‘getting the markets right’. Agricultural marketing is a state subject; hence the policies adopted by the state in promoting efficiency and strengthening the marketing infrastructure of their state are important. Accordingly, an exercise on the relative ‘market friendliness’ of states with respect to wheat market is presented here.
2.29 The essential roles of a market are price discovery of traded goods and services and serve as a signal for efficient allocation of productive resources. Any distortions to competitive functioning of markets adversely affect these functions and reduce the efficiency of market outcomes. Indian agricultural sector, especially rice and wheat, is currently stifled by various controls ranging from trade to domestic marketing and stocking. These controls are dependent on the state policies; therefore, the greater the controls the lesser is the market friendliness of the state towards that commodity. In this section, seven parameters are considered as being influential in determining the market friendliness of states with respect to wheat. These are:
Policy is skewed in favour of wheat and paddy at the expense of other crops Agriculture is stifled at various levels through controls on domestic marketing & stocking 13 http://planningcommission.nic.in/aboutus/committee/wrkgrp12/agri/weg_rep_market.pdf
