THE PARADOX OF BUMPER CROPS and HIGH CEREAL PRICES

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Picture Courtesy: Indian Express

Context: The discrepancy between government estimates of record rice and wheat production and the persistence of double-digit cereal inflation, along with the imposition of export restrictions and stock holding limits, is indeed puzzling.

Background of the paradox of bumper crops and high cereal prices in India

Cereal Inflation

• Persistent High Inflation: Cereal inflation refers to the rising prices of essential cereals like rice and wheat. In India, this inflation has been consistently high, with double-digit year-on-year inflation recorded since September 2022. This indicates a sustained increase in the cost of these fundamental food items.

National Food Security Act (NFSA)

• Key Social Welfare Program: The NFSA is a pivotal social welfare program in India, aiming to provide food security to a significant portion of the population.
• Coverage: It covers approximately 813.5 million beneficiaries, a substantial portion of India's total population of over 1.4 billion people.
• Subsidized Food Grains: Under the NFSA, eligible individuals and households receive subsidized food grains, primarily rice and wheat, through the Public Distribution System (PDS).

Change in NFSA Entitlement

• Higher Entitlement till January 2023: Before January 2023, NFSA beneficiaries were entitled to receive a substantial monthly allocation of 10 kg of rice or wheat at highly subsidized rates. This allocation was more than sufficient to meet a significant portion of their cereal consumption needs.
• Reduction in Entitlement: However, starting from January 2023, the NFSA entitlement was reduced to the original level of 5 kg per person per month. This change meant that beneficiaries now had to purchase the remaining grain they needed from the open market.
• This change in entitlement occurred in the backdrop of persistently high cereal inflation, which exacerbated the financial strain on households, particularly those belonging to vulnerable and low-income groups.

The paradox arises from the fact that even though India has experienced bumper crops and record grain production, cereal prices have not significantly moderated. This contradiction between increased production and high prices has led to confusion and concerns about food security. The imposition of export restrictions and stock-holding limits by the government also suggests concerns about domestic grain availability, which further adds to the paradox.

Reason for the paradox

• Reduced Subsidized Grain: The reduction in NFSA entitlement meant that beneficiaries who were previously receiving a larger quantity of subsidized grain (10 kg per person per month) were now entitled to only 5 kg per person per month.
• Increased Dependency on Open Market: As a result of this reduction, beneficiaries had to purchase the remaining grain they needed from the open market at prevailing market prices.
• Double-Digit Inflation: Concurrently, cereal prices, particularly for staples like rice and wheat, have been experiencing double-digit inflation since September 2022. This meant that the cost of purchasing grain from the open market was significantly higher.
• Financial Burden: The combination of reduced entitlement and high cereal prices placed an increased financial burden on NFSA beneficiaries, especially those from vulnerable and low-income groups.
• Impact on Food Security: This change in entitlement had implications for food security, as it made it more challenging for beneficiaries to access affordable food grains, which is crucial for their well-being.

In summary, the reduction in NFSA entitlement, coupled with double-digit cereal inflation, created a situation where beneficiaries had to bear a higher cost for their cereal needs, leading to the paradox of bumper crops coexisting with high cereal prices and concerns about food security.

Impact of this paradox

Increased Cost of Living

• Financial Strain on Households: Rising cereal prices, particularly for staples like rice and wheat, have led to an increased cost of living for ordinary citizens. Households, especially those with limited financial resources, feel the pinch of higher food expenses.
• Budget Constraints: Low and middle-income families, in particular, may find it challenging to manage their budgets as a substantial portion of their income is allocated to purchasing essential cereals.
• Impact on Disposable Income: The higher cost of cereal grains reduces the disposable income available for other essential and non-essential expenses.

Food Security Concerns

• Vulnerable and Low-Income Groups: The reduction in NFSA entitlement from 10 kg to 5 kg per person per month has raised concerns about food security, particularly among vulnerable and low-income groups.
• Access to Affordable Food: The need to purchase a larger portion of cereals from the open market at prevailing market prices can make it difficult for some households to access affordable and nutritious food.
• Nutritional Impact: Food insecurity can have a detrimental impact on the nutritional intake of individuals, especially children and the elderly.

Political Implications

• Electorally Sensitive Issue: Food inflation is a politically sensitive issue in India. Rising food prices can affect voters' sentiments and influence their choices during elections.
• Government Policies: The government may face pressure to implement policies aimed at curbing food inflation or providing relief to affected populations. Such policies can have economic and political implications.
• Public Perception: The government's handling of food inflation and its impact on people's daily lives can shape public perception of its performance.

Steps Taken by India

Export Restrictions

• Ban on Wheat Exports: Starting from May 2022, India imposed a ban on the export of wheat. This restriction aimed to ensure that an adequate quantity of wheat remains available in the domestic market.
• Rice Export Restrictions: In July, exports of all white (non-parboiled) non-basmati rice were prohibited. This move was also aimed at bolstering domestic rice availability.
• Basmati Rice Exports: Even basmati rice, a premium variety, faced export restrictions. Only grain priced above $1,200 per tonne is being permitted to leave the country.

Stockholding Limits

• Limits on Cereal Stocks: In June, the government introduced stock holding limits, restricting the quantity of cereal that wholesale traders and big retailers can hold at any given time. This measure was implemented to prevent hoarding and ensure that grains reach the market.

Duties on Exports

• Levying Duties on Rice Exports: On August 25, a 20% duty was imposed on parboiled non-basmati rice exports. This duty made rice exports less attractive for traders and encouraged more grain to be channelled into the domestic market.

These steps collectively reflect the government's efforts to address concerns about domestic grain availability, curb potential hoarding, and stabilize cereal prices. They also aim to ensure that essential food grains are accessible to the general population, especially those dependent on government welfare programs like the Public Distribution System (PDS).

Challenges

Changing Consumer Behavior

• Reduced NFSA Entitlements: The reduction in NFSA entitlements from 10 kg to 5 kg per person per month has changed consumer behaviour. NFSA beneficiaries, who were previously reliant on subsidized grain, are now purchasing more cereals from the open market. This increased demand in the open market can contribute to rising prices, creating a cycle of inflation.
• Financial Burden: The increased cost of purchasing cereals can be a financial burden on households, especially those with limited incomes. This can affect their overall quality of life.

Supply Chain Issues

• Supply Chain Disruptions: Disruptions in the supply chain, such as transportation bottlenecks, storage constraints, and distribution inefficiencies, can lead to higher prices and market distortions. These issues can prevent grains from reaching consumers in a timely and cost-effective manner.
• Storage Challenges: Inadequate storage infrastructure can result in post-harvest losses and wastage, affecting the overall availability of grains in the market.

Agricultural Practices

• Production Surpluses: Agricultural practices and infrastructure may not always align with market demands. This can lead to production surpluses in certain regions, while other areas face shortages. Surpluses can put downward pressure on farm gate prices but may not necessarily translate to lower retail prices for consumers.
• Price Mismatches: There can be a mismatch between the prices farmers receive for their produce and the prices consumers pay in the market. This can be attributed to various intermediaries in the supply chain and market dynamics.

Way Forward

Enhanced Procurement

• Increasing procurement from farmers at remunerative prices means that the government should purchase agricultural produce from farmers at prices that cover their costs and provide a reasonable profit margin. This not only supports farmers' incomes but also ensures an adequate supply of essential commodities for the Public Distribution System (PDS), which helps in food distribution to low-income households.

Modernization of Supply Chains

• Investing in modernizing supply chains involves upgrading infrastructure, such as transportation, storage, and processing facilities. Reducing wastage during transportation and storage, as well as improving the logistics of getting products to market, can help stabilize prices by reducing losses in the supply chain.

Promoting Diversification

• Encouraging farmers to diversify their crops means advocating for the cultivation of a variety of crops beyond just rice and wheat. This diversification can help reduce the risk of crop failure due to factors like pests, diseases, or adverse weather conditions. It also helps balance supply and demand for different food items.

Market Reforms

• Market reforms in agriculture typically involve changes in regulations and policies that govern the buying and selling of agricultural products. These reforms aim to improve price discovery, reduce middlemen's involvement, and make markets more efficient. This can help ensure that farmers receive fair prices for their produce and that consumers have access to affordable food.

Effective Implementation of Social Programs

• The effective implementation of social safety net programs like the National Food Security Act (NFSA) is crucial for ensuring that vulnerable populations have access to affordable food. Proper distribution of food grains and other essential commodities under such programs is essential to achieving food security goals.

International Trade

• Exploring international grain markets for imports during production deficits and easing export restrictions during surpluses is a strategy to stabilize domestic prices and maintain food security. It ensures a stable supply of food even when domestic production is insufficient and prevents oversupply in times of surplus.

Conclusion

• The paradox of bumper crops and high cereal prices in India reflects a complex interplay of factors including government policies, changing entitlements, and supply-demand dynamics. Addressing this issue requires a comprehensive approach that balances the interests of farmers, consumers, and the overall economy while ensuring food security for all.

PRACTICE QUESTION Q. What are the key factors contributing to the rising food prices in India, and what are the economic, social, and nutritional impacts of this trend? Additionally, what challenges does India face in addressing these rising prices, and what strategies should the government and stakeholders consider as a way forward to mitigate these challenges and ensure food affordability and security for its population?

https://indianexpress.com/article/explained/the-paradox-of-bumper-crop-and-rising-cereal-prices-8922879/