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)
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.
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.