Sunday, January 18, 2015

raising the quarterly buffer stock and strategic reserve limits of Food Corporation of India

Recently the government approved raising the quarterly buffer stock and strategic reserve limits of Food Corporation of India (FCI) for both wheat and rice, for the first time since 2005. Examine the reasons and its implications.

India has over 30% of population under poverty line and 40% of children are malnourished, Government PDS and role of FCI ensures food security and play central role in Indian agro-economy. Our procurement policy has come under sharp criticism from both domestic and foreign economists. We are in dilemma of handling paradoxical situation of record production and persistent food inflation.
The cabinet approval of raising quarterly buffer stock is triggered by following reasons:
1) Our buffer stock is way higher then stipulated norms. As we can't export and sell in open market, FCI is said to be violating norms. To avoid violation, raising reserve limits will be a quick-fix to problem.
2) Because of deficient rainfall, rabi harvest is likely to be low. To avoid any shortage of food for PDS, government wanted to procure grains beforehand.
3) To implement National Food Security Act, 2013, we need a huge quantity of grains and cereals to feed 66% of population which is 80 crore people.
4) By diverting these stocks to open market, we can bring retail inflation (CPI) down which is key measure to our monetary policy.
However there are certain implications in holding huge reserves:
1) As FCI storage capacity is limited, there will be huge carrying costs. It might result in bad quality of grains and pilferage.
2) Hoarding by vested interests can be controlled.
3) We can align our domestic markets with international markets. When commodity prices are high in markets, we can export and bring prosperity to agrarian community.
We need to diversify our food production base, develop food processing industry and open our agriculture sector to markets to transform farmers lives. We can't tackle poverty, inflation, underdeveloped agri market with less-optimal tools like APMC, MSP, loan waivers.

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