Food Inflation: The Government is Not Just Paying More, It is Buying More

5 comments Written on March 6th, 2014 by
Categories: Inflation

In my last post, I mentioned how, according to RBI’s Rajan, NREGA and MSP have driven up prices of food.

There’s another thing: we have been buying more than we should. We know that the minimum support prices have increased, and that has driven food prices up. This is obvious - if the farmer thinks he can sell to the government for price X at a minimum, then he will only sell it to someone else at a price greater than X.

What we don’t know is that the Food Corporation of India (FCI) which buys food from farmers has actually been buying way more than required.

Buffer norms are set per quarter, where FCI has to maintain a certain amount of stock just to be able to meet immediate demand for the next few months. In order to meet these buffer norms, food stocks are bought from farmers. Now technically the buffers are a LOT, they can easily meet the demand of the public distribution system and a lot more. Apart from this we have 50 lakh tonnes of a “strategic” reserve, which is just extra stuff we have to hold. (Source)

image

It is obvious that if we maintain our stocks close to these buffers, we should be doing okay.

But we have been buying an obscene amount of wheat and rice - stock numbers have exploded.

image

Recently, the data-scam is that they refuse to reveal that “unmilled paddy” is actually rice and will not include it as part of the total buffer, but we’ve added the total stock to show you how badly overloaded we are.

We currently have over 250%, or 2.5 times, the amount we are required to have as a buffer.

It’s not just the fact that we have higher prices for these food items. It is also that we buy a lot more than needed.

Farmers then are incentivized to grow only rice and wheat. So demand for other stuff like like vegetables, fruit and pulses go up, relative to supply. Which again means higher prices.

We have to stop doing this, if food inflation is as much a problem in the government’s eyes as it is in ours.

Related Posts Plugin for WordPress, Blogger...
About the Author:
http://www.capitalmind.in
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@gmail.com.

5 comments “Food Inflation: The Government is Not Just Paying More, It is Buying More”

So does this mean that the Government is the biggest hoarder? Anything above reasonable requirements can be classified as hoarding, if the hoarder is just mopping up from the market and sitting on stock. If the Government has finished distributing to the PDS and still has mountains of the stuff, should it not be selling the surplus at a loss to private traders? This will at least give some return instead of zero for the perishable commodity. More importantly of course, the food will then come into circulation, and could perhaps help reduce prices (even though demand for food may be somewhat inelastic)?

Then we as taxpayers will get dinged just once (funding the food subsidies) instead of twice (funding the subsidies AND paying through our nose for food that we buy).

btw Deepak, thanks for shedding your torchlight on this through the chart and numbers, especially The Mystery Of The Unmilled Paddy.

I read the Food Corporation of India as Food Corruption of India. Same thing.

Interesting article.

Everyone knew that the govt skewed and messed with the dd / ss of wheat and rice … This throws a greater torch light on that matter.

Question is why ? Is it because of the wage / price spiral and because the govt has to keep the farmer lobby happy ? Or do politicians have other intentions ?

We have seen how unreasonable the up govt was with the sugar mills to supposedly protect farmers.. at least they were showing that they were while the panicking small farmers whose stock of cane was rotting fast had to sell at a major loss in terms of fixed prices as standoff / stalemate continued without a solution.

As things stand i wonder if politicians profit or profiteer from the agri procurement and distribution business ?
In Mah lasangaon the biggy traders are NCP men ! same goes with other apmcs …Do politicians and crony middlemen rig the game to make profits at the detriment of consumers and producers