Food subsidy: Crop-specific mechanism is the way forward

We need a dynamic policy that offers a carefully chosen customised subsidy mechanism — either a support price or Direct Benefit Transfer — for specific crops, depending on their individual production volumes and the need and extent of their strategic buffer stocks. The focus of the support price programme should now shift to pulses and other grains that have been hitherto neglected. An increase in the production of these crops will generate much-needed movement towards an ideal crop mix for the country.

Milind Dawande and A Amarender Reddy

AGRICULTURAL support policies in most developing countries were introduced during the early years of the Green Revolution in the 1960s. During this period of widespread poverty and frequent famines, the goals behind (minimum) support prices were three-fold: one, as a supply-side incentive, via guaranteed procurement at attractive prices, to protect farmers from price risk due to overproduction and thereby encourage them to increase production and adopt Green Revolution technologies. Two, as a demand-side provisioning mechanism to satisfy the consumption needs of the poor — via the distribution of foodgrains procured under the support price programme to the economically weak population at nominal prices. Three, as a mechanism to improve the country’s food security by maintaining a strategic foodgrain buffer aimed at alleviating the impact of yield uncertainty. The significant difference between the government’s procurement cost under the support price programme (plus the cost incurred in transportation and storage) and the relatively small revenue generated through the subsidised sale of foodgrains is now a routine part of the government’s annual ‘food subsidy’ aimed at meeting these three goals.

To a large extent, India’s price support policies have achieved their goal of increased foodgrain production. In an example of the early impact of support prices, wheat production increased nearly three-fold in Punjab between 1965 and 1972. The distribution of foodgrains under various welfare schemes such as the Public Distribution System (PDS) for poor households and the mid-day meal and anganwadi schemes for children and pregnant women, has helped in protecting the vulnerable population.

For both paddy and wheat, which have been the focus of India’s support price procurement programme, price risk has been satisfactorily addressed. Evidence shows that attractive support prices over the years for these two crops have also reduced yield risk: with assured prices, farmers have adopted modern technology and high-yielding varieties, fertilisers, and invested in irrigation infrastructure.

On the other hand, support prices have had limited success in increasing production and consumption of other important crops such as pulses and oilseeds. In response to the huge shortage of pulses, the government increased support prices for pulses in 2016. However, unlike paddy and wheat, these support prices were not fully backed by actual procurement on the ground at the mandis across the country. With the government not able to procure pulses in sufficient quantities, both the level of buffer stock and the distribution to the poor have not been enough to ultimately result in a sufficient increase in production as well as consumption by the poor. An important takeaway here is that, to be successful, support prices should be backed up by procurement in large quantities. A procurement of at least 30 per cent of the total production can likely make a real impact on production and consumption.

Overall, in India, it can be said that support prices have achieved their goals in the case of paddy and wheat but have met with limited success for crops like pulses.

The macro situation for paddy and wheat changed in the 1990s — ‘open-ended’ procurement of paddy and wheat in states such as Punjab and Haryana increased both the area and production of these crops, displacing crops like pulses and oilseeds. This increased the monocropping of paddy and wheat, even in environmentally fragile areas, and resulted in excessive stockholding beyond the norm required for food security, with some estimates suggesting that about 10 per cent of the procured foodgrains are routinely wasted in post-harvest handling and storage losses. As of May 2021, the actual food stock with the government was about 83 million tonnes, against the strategic requirement of only 50 million tonnes. Indeed, it is the off-loading of procured foodgrains and not food insecurity that has been (arguably) the bigger problem faced by the government in recent years. For paddy, the economic cost of procurement (procurement plus logistics costs) is currently estimated at Rs 37/kg, while the international price is only about Rs 28/kg. Similarly, the economic cost of wheat procurement is Rs 27/kg, while the international price is Rs 16/kg. Thus, the government incurs a loss of Rs 9/kg for off-loading paddy and Rs 11/kg for wheat. Based on these figures, the estimated total loss to the government to off-load all excess food stock (total stock minus strategic buffer norm) at international prices is about Rs 33,200 crore, with operational expenses of about Rs 2 lakh crore.

The simple lesson here is that procuring excessive stock beyond the buffer norm results in losses rather than any social benefit to the government. The marginal utility of food stock can be higher than the cost incurred only until the strategic holding limit. This should therefore be treated as a hard limit for procurement operations.

The utility of in-kind food subsidy — aimed at encouraging more production — for paddy and wheat has progressively reduced since the 1990s. The number of poor people who cannot afford to purchase foodgrains at market prices has been continuously increasing. In such a scenario, a better alternative to support prices is in-cash subsidy, namely Direct Benefit Transfer (DBT), where the government directly transfers money to individual beneficiaries. This increases the purchasing power of the poor and has an indirect bearing on production. Further, with recent advances in direct money transfer technologies, like JAM (Jan Dhan-Aadhaar-Mobile), the implementation challenges of DBT have eased with near-zero leakages and logistics costs, especially for paddy and wheat where production is not a problem.

In contrast, in the case of crops like pulses, where production is insufficient for both consumption and strategic holding, strong support prices coupled with increased procurement can play a big role in increasing production and decrease fluctuations.

Developing countries across the world continue to recognise the need for budgetary support to farmers — more than 50 per cent of their population survives on agriculture and the poverty of this segment has progressively increased over the years relative to the non-agricultural sector. However, the mechanisms to deliver food subsidy should be chosen more intelligently than the status quo. We need a dynamic policy that offers a carefully chosen customised subsidy mechanism — either a support price or DBT — for specific crops, depending on their individual production volumes and the need and extent of their strategic buffer stocks. In India, the present macro state of production of wheat and paddy does not warrant the continuation of high support prices and open-ended procurement of these crops. Instead, DBT provides a transparent, leakage-free alternative that can save the government a considerable amount of money as well as grain-off-loading headache. The focus of the support price programme should now shift to pulses and other grains that have been hitherto neglected. An increase in the production of these crops will generate much-needed movement towards an ideal crop mix for the country.

Dawande is Mike Redeker Distinguished Professor of Operations Management, The University of Texas at Dallas; Reddy is Principal Scientist, ICAR-Central Research Institute for Dryland Agriculture, Hyderabad