Is India ill-prepared to deal with consequences of Food Security Bill?
The country limits imports to products such as oilseeds and high-protein seeds known as pulses, which cannot be produced domestically.By Deepak Gopinath
India has long been the sleeping giant of global agriculture. Despite being the world's second-largest producer of agricultural goods, including rice and wheat, it has been slow to integrate into global markets, preferring instead to maintain a relatively restrictive trade policy.
The country limits imports to products such as oilseeds and high-protein seeds known as pulses, which cannot be produced domestically in adequate quantities. India tends to curb exports to safeguard domestic supplies.
That has changed. India has overtaken Thailand to become the world's biggest rice exporter, with shipments accounting for 25 percent of global exports. Wheat exports also have risen sharply, with India's share reaching 5 percent. The country also has overtaken Brazil to become the world's biggest exporter of buffalo, capturing 24 percent of the global beef market.
India's newfound position as a leading food exporter will be short-lived, however. Government policies that prioritize the production of rice and wheat, along with a new right-to-food law that's now before the parliament, will not increase food security. Instead such policies will drive food inflation, accelerate India's transformation into a net grain importer and increase its dependency on global markets for non-cereal foods. India will be forced into the global food marketplace, and not on its own terms.
The main driver of India's unusually large grain exports last year, and of its coming shift to being a major food importer, is the government's food-procurement and food-distribution system, set up to provide subsidized rice and wheat to the poor.
The system is supposed to work like this: The government provides farmers production incentives by committing to open-ended purchases of rice and wheat at annually specified minimum support prices, with farmers free to sell either to the government at the MSP or at market prices, whichever is higher. MSPs are supposed to be floor prices, designed to provide farmers with a safety net in case of a collapse in market prices.
The grain procured by the government, by individual states and also by the Food Corporation of India is then added to a central pool managed by the FCI. Grain stocks in the central pool are then distributed to the poor via the so-called Public Distribution System.
In reality the system leads to a series of dysfunctional outcomes, including food inflation, overproduction of rice and wheat relative to non-cereal commodities, accumulation of excess grain stocks and rapid erosion of the country's agricultural productive capacity.
Seeking to shore up its popularity, the government has rapidly increased the MSPs of rice and wheat in recent years. The result: MSPs tend to exceed market prices during the procurement season. Selling to the government is the first, rather than the last, resort for farmers.
The pro-cereal policy has been successful in boosting output, but at a cost: Production of non-cereal foods such as pulses, oilseeds, fruits and vegetables has lagged, driving up prices and benefiting those countries that meet India's growing demand.
The government's commitment to open-ended purchases of wheat and rice at ever-higher MSPs has led to a cycle of ever-increasing procurement. The government buys approximately one-third of total cereal production, which also contributes to food inflation. Elevated MSPs and state taxes keep private traders out of the grain market and discourage high stock levels. As a result open-market availability of wheat and rice falls after the end of the procurement season, thus boosting prices.
India has long been the sleeping giant of global agriculture. Despite being the world's second-largest producer of agricultural goods, including rice and wheat, it has been slow to integrate into global markets, preferring instead to maintain a relatively restrictive trade policy.
The country limits imports to products such as oilseeds and high-protein seeds known as pulses, which cannot be produced domestically in adequate quantities. India tends to curb exports to safeguard domestic supplies.
That has changed. India has overtaken Thailand to become the world's biggest rice exporter, with shipments accounting for 25 percent of global exports. Wheat exports also have risen sharply, with India's share reaching 5 percent. The country also has overtaken Brazil to become the world's biggest exporter of buffalo, capturing 24 percent of the global beef market.
India's newfound position as a leading food exporter will be short-lived, however. Government policies that prioritize the production of rice and wheat, along with a new right-to-food law that's now before the parliament, will not increase food security. Instead such policies will drive food inflation, accelerate India's transformation into a net grain importer and increase its dependency on global markets for non-cereal foods. India will be forced into the global food marketplace, and not on its own terms.
The main driver of India's unusually large grain exports last year, and of its coming shift to being a major food importer, is the government's food-procurement and food-distribution system, set up to provide subsidized rice and wheat to the poor.
The system is supposed to work like this: The government provides farmers production incentives by committing to open-ended purchases of rice and wheat at annually specified minimum support prices, with farmers free to sell either to the government at the MSP or at market prices, whichever is higher. MSPs are supposed to be floor prices, designed to provide farmers with a safety net in case of a collapse in market prices.
The grain procured by the government, by individual states and also by the Food Corporation of India is then added to a central pool managed by the FCI. Grain stocks in the central pool are then distributed to the poor via the so-called Public Distribution System.
In reality the system leads to a series of dysfunctional outcomes, including food inflation, overproduction of rice and wheat relative to non-cereal commodities, accumulation of excess grain stocks and rapid erosion of the country's agricultural productive capacity.
Seeking to shore up its popularity, the government has rapidly increased the MSPs of rice and wheat in recent years. The result: MSPs tend to exceed market prices during the procurement season. Selling to the government is the first, rather than the last, resort for farmers.
The pro-cereal policy has been successful in boosting output, but at a cost: Production of non-cereal foods such as pulses, oilseeds, fruits and vegetables has lagged, driving up prices and benefiting those countries that meet India's growing demand.
The government's commitment to open-ended purchases of wheat and rice at ever-higher MSPs has led to a cycle of ever-increasing procurement. The government buys approximately one-third of total cereal production, which also contributes to food inflation. Elevated MSPs and state taxes keep private traders out of the grain market and discourage high stock levels. As a result open-market availability of wheat and rice falls after the end of the procurement season, thus boosting prices.
The level of stocks far exceeds the government's storage capacity and results in significant waste. The government has estimated preventable post-harvest losses of food grain at about 20 million tons per year, equivalent to 10 percent of total production. Faced with excess stocks and need to make room for the next harvest, the government is forced to resort to exports.
Those exports, and the entire cycle of events making them necessary, are unsustainable. India's breadbasket states are reaching the limits of their productive capacity. The overproduction of grains due to ever-rising MSPs has rapidly depleted underground aquifers and sharply reduced soil fertility. With the government concentrating procurement activities and agricultural investment in terms of capital, fertilizers and infrastructure in northern and western states, in the country's eastern states, primarily rain-fed, productivity has stagnated despite attempts to raise yields. The government will have no alternative but to increasingly depend on international markets when output in the major grain-producing states starts to lag demand.
Perversely, the government's planned National Food Security Bill will only accelerate this process. The bill creates a right to food for two-thirds of India's 1.2 billion people and requires the government to distribute heavily subsidized food grain on a massive scale.
The government is pushing the law despite well-documented failures of the public-distribution system to get food to the right people. Almost 40 percent of the grain in the public system, which distributed 24 million tons of wheat and 32 million tons of rice in 2011-2012, does not reach intended recipients and is diverted to open markets.
The food-security bill will increase procurement targets and require higher MSPs, further skewing farmer incentives toward cultivation of grains. The law will reduce exportable surpluses during the next two years, because it will require the FCI to carry higher stocks of grains in order to avoid having to resort to large, expensive imports in case of a drought. The law also will hasten India's transformation into a net grain importer by putting additional pressure on already-overstressed farmland.
The end result of these policies will be India's forced integration into global agricultural markets, not only as a grain importer, but also as a leading buyer of non-cereal commodities. This will benefit grain exporters in the Americas, pulse producers such as Australia, Canada and Myanmar, and palm-oil exporters in Indonesia and Malaysia.
Indians will lose out. Food inflation, primarily driven by protein-rich foods such as pulses, dairy, meat and eggs, in addition to post-harvest shortages of grains in the open market, will continue to weigh on incomes. Price volatility will increase as the country's import dependency increases its exposure to the vicissitudes of global markets.
The sleeping giant of global agriculture may be waking to a nightmare.
Deepak Gopinath is global-markets director for Trusted Sources, a London-based emerging-markets research and consulting service.
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