Welcome to Even More Inflation: Govt Plans to Increase Buffer Stocks by 50%

2 comments Written on December 18th, 2013 by
Categories: Government

You thought inflation was high? It might get higher.

The government plans to buy a heck of a lot more cereals, wheat and rice, and store them and let them rot. This reduces what you and I can buy from the market, which will obviously push prices higher.

From Business Standard:

To ward off any grain shortage once all states start implementing the ambitious food security law, the central government plans to increase the buffer stocking and strategic reserve limits of Food Corporation of India (FCI) for both wheat and rice.

According to a senior government official, the Cabinet is likely to take up a proposal on the matter this week. The move could push up the requirement by at least 50 per cent from the current norm.

Phenomenal, I say.

Of course, it won’t matter right now, because we are already at least 40% above the revised limits. Current stocks are 66 million tonnes, which is 50% more than even the revised buffer stock limit (of 44 million tonnes).

The Insanity of Rice

India currently produces about 100 million tonnes of rice, which is 22.5% of global production. (Yes, we’re big on rice!) Of that the government procures 40 million tonnes! And stores in in massive godowns.

image

(Source: Agricoop)

Demand, as you can see, is only 52.5 million tons, and we should have been huge exporters, of about 40%+ of our production (40 milion tonnes). But because our government buys and stores rice in godowns, we export just 7.4 million tonnes!

So if we were to increase buffer stocks by 50%, the government will want to buy 6 to 10 million tons more of rice more per year, which then begins to cut into India’s domestic consumption.

The Rice Reporting Scam

By the way, the above “Ending Stocks” level is not including something called “unmilled paddy” because they are trying to fool us. Unmilled paddy is what you will get rice from. And we have a ludicrous 21 million tons of it! Unmilled paddy was reported separately starting September 2013 - and this is a big scam, because we have been adding to unmilled paddy substantially (from 9m tons in Sep 2013 to 21m tons in Dec 2013) while reducing rice stocks. This allows the reporting of rice + wheat stock (the official stock quantity) to look smaller than it is!

The Solution

  • Do not increase these buffers. I would repeal the FSB entirely, but it’s a political nightmare, so it’s best to make it impossible to deliver.
  • Sell stock into the market to reduce stock, until we have reached the buffer norms.
  • Remove the silly underreporting scam by including paddy in the rice estimate.
  • And pare off this subsidy eventually. If we did, rice would fall to Rs. 10 per kg and pretty much everyone can afford that now.
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The man behind Capital Mind. Deepak is a co-founder at MarketVision, a financial knowledge company. Deepak also provides data research and consulting services, and now lives in Bangalore. Connect with him at deepakshenoy@capitalmind.in.

2 comments “Welcome to Even More Inflation: Govt Plans to Increase Buffer Stocks by 50%”

Generally Paddy (unmilled rice) will come to harvest only two times a year (if have two crops), but rice can be sold throughout the year. At the time of harvest period there will be severe pressure on rice millers from govt to buy paddy from farmers. So rice millers procure paddy & stock it and mill it throughout year based on demand. So this may be a reason for discrepancy in paddy figures. & some big farmers who have some money will buy paddy during harvest time & will sell after some time when paddy prices increases. Generally in south India raw rice from old paddy (of like six months) command 10%-15% more price then from rice of new paddy(they call it steam rice in bnglr)

Last year AP govt went to an extent that govt officers allocated that this paddy from these areas had to be procured by this respective ricemill & they had to procure paddy at a specified rate irrespective of marker price.

I’m pretty sure this is just another way to send money down the tubes to gain favors, votes, etc. After all, the more the govt procures, the more it can control who the money goes to. High time some one followed down the trail of this money and the paybacks, voting patterns, etc.