Food Security, Price Stability and Farm Incomes: FCI and Related Issues Sisira Jayasuriya La Trobe University

Background National policy goals: – Food security – Price stability – Income stability for small and marginal farmers FCI and Policy Instruments: – PDS – Reserve grain stocks – Output price support - MSP – Input price subsidies 2

Goals and Outcomes “Simultaneous food price inflation and large reserves” (Basu, 2011) Wasteful levels of stocks: – food grain procurement for two objectives (food security for vulnerable, low income consumers and price stabilisation) – Large stocks reduce market supply → increase market prices Disincentives for private investment in agriculture, distortion of price signals to farmers, perverse incentives with socially costly outcomes 3

“Hefty increases in minimum support and procurement prices and a mindless procurement spree have raised food grain prices beyond the purchasing power of common consumers and diverted produce from market to government warehouses. Consequently, massive stocks of rice and wheat, much above the requirement, have accumulated with Food Corporation of India. Besides causing heavy burden on the state exchequer, this has, unfortunately, also reduced the availability of food grains for consumption. The burden of food subsidies has risen sharply, but paradoxically, the supply of subsidised food has declined.” (Chand, 2005) 4

MSP and Assistance to Farmers? “Higher minimum support prices for food grains are good for farmers. “ Not so. Yes, they are good for a powerful minority of farmers who have sizable marketable surpluses and ready access to government procurement programmes. But the majority of Indian farmers (especially poorer marginal farmers) are hurt by higher food prices for the simple reason that they are net buyers of food grains. And when you add in tens of millions of landless labour, it is quite clear that inexorably higher MSPs for wheat and rice are often quite damaging for rural households. (Shankar Acharya, 2011) 5

Input Subsidies and the Poor “Subsidies on food, fuel and electricity help mainly the poor. Not so. The food subsidy mainly helps better off farmers and consumers in only four or five states where the public distribution system has effective coverage. The great majority of India’s poor do not have effective access to subsidized food grains.” (Shankar Acharya, 2011) 6

Subsidy: benefits, sustainability and (opportunity) cost Price supports and absence of targeting: most benefits go to richer, larger farmers poor consumers badly served Huge subsidy burden in context of fiscal deficits – Question marks over sustainability of level of subsidies Inadequate expenditure on rural infrastructure, health and education 7

“Good policy consists of exploiting the laws of the market, not denying that they exist” (Basu, 2011) 8

Evaluating alternative paths to achieve policy goals Many alternative instruments for better targeting and improving efficiency of consumer and farmer subsidies have been identified in the current Indian policy dialogue – for example, – Food security: handing subsidy directly to poor households (e.g. Food coupons - ‘smart card’) – FCI to focus tightly on a specific task, e.g. reserve management: decouple procurement for reserve from procurement for farm income support through MSP – Shift focus of assistance to agriculture from input subsidies to productivity improvement 9

Research challenge: develop rigorous analysis of the benefits and costs of these alternatives to contribute to policy dialogue 10