Time the government quit mandis

The art of policy making is to know when the government should intervene in the system and how, and when to withdraw from it. Quite often the governments forget the latter part

ASHOK GULATI The Economic Times Monday, 03 July, 2006

The story of the positive role of the government in the grain economy during the mid-’60s is well known. But the saga of 2000 and beyond is different. There was a massive build-up of food grain stocks in 2001-02, touching 64 million tonnes in July 2002, which had to be liquidated through hefty subsidisation. This was a case of massive mis-management in government policy. Thereafter, the private sector was encouraged in grain management.

Movement restrictions and storage limits on private trade were eased, direct buying from the farmers and future markets in grains introduced, and so on. All these steps, taken to make space for the private sector to operate more effectively in the grain system, have been in the right direction, and need to continue. The government should not panic and reverse these decisions if there is a little shortfall in grain production and stocks.

This year the grain stocks with the government are low, world prices of wheat high, and there is talk of importing 3-4 million tonnes of wheat by the government. The key question being asked is: what is the role of the government in such a situation? Should the government take full charge and decide the quantity and price at which to import wheat or should it be left to private traders? Should it bring back restrictions on the private trade in domestic grain markets? To answer these questions, one needs to realise that today the country is not in the kind of situation it was in during the mid’60s or even in the late ‘80s.

• First, there is a fundamental difference in the availability of foreign exchange to play the global markets.
• Second, the shortfall is not huge.
• Third, there is ample evidence to show that the private sector can do the job of managing grains more cost effectively than the government. Thus, it would not only be naive, but harmful to bring back controls on the private sector.

On the contrary, what is needed is a clearer picture of the role of the private sector in an open economy environment. For this, the private sector should be permitted to import grains freely, without any quota restriction. And this policy should remain open and stable. Let the private traders scale up their operations, and the government should help them by extending easy credit, as it does for any other business, so that they can become global players. They need to invest in bulk handling and storage facilities to create world-class infrastructure for marketing of grains, and create scale economies. The government should regulate imports only through quality control and tariffs, if needed.

If the private sector is to play a lead role in domestic marketing and in imports of grains, it raises a question as to how will the government feed the public distribution system (PDS). The answer is simple: the government should buy grains from the open domestic market or import from world markets in competition with private trade. If that means a ballooning bill of food subsidies, one needs to think of targeting PDS only for those below the poverty line. All others should pay the market price.

Supporting the poor is a responsibility of the state and one should find alternative instruments that are more cost effective. Studies at IFPRI have shown that employment guarantee schemes are much more cost effective in protecting the poor than PDS. In fact, to make sure that one rupee worth of income support reaches the poor, it takes the government to spend more than Rs 6.8 through PDS and only about Rs 1.8 through the employment guarantee scheme. The message is clear: gradually phase out PDS as the government expands employment guarantee scheme...

As India operates more and more in an open economy environment, it needs to work towards better and competitive functioning of domestic markets, and for that it needs to let the private sector play a major role. The government should set the rules of the game, which create competition, and not displace the private sector by directly intervening in the markets. This would be more cost effective and benefit the consumers as well as the producers, and would also be financially sustainable. (The author is IFPRI director in Asia)

• Private sector must be allowed to import grains freely, without any restrictions • If farmers have to be provided insurance against the risk of precipitous price fall, it has to be at the average variable cost • Government must set the rules of the game that create competition and not displace the private sector from markets