Functional markets in grain

THE government’s proposal to buy food grain at market rates for its PDS when the procurement is low, as with wheat this year, is welcome. That would delink procurement from the PDS. The drop in wheat procurement indicates that farmers have been able to sell their produce at above government prices to private purchasers. The government would do well not to press the panic button and, instead, strengthen the institutional framework to allow even larger private purchases. Besides increasing the options for farmers, a greater play to market forces would help limit the government’s role in the food grain economy to that of a distress buyer at the minimum support price (MSP). Despite a marginally higher expected production this year, wheat procurement has fallen sharply to 9.2 million tonnes by June 2 — about half the procurement for the corresponding period last year. This is largely because the open market price of wheat is higher than the government’s Rs 700/quintal. That major producers such as Punjab and UP have allowed large corporates to procure wheat directly may have also undermined government’s procurement. Besides sourcing grain for various social schemes, government procurement at the MSP provides farmers an assured price for their produce. But the need for government procurement is obviated if farmers get higher prices. The government could, however, source the PDS shortfall directly from the market, without hiking the MSP. Although this would increase the PDS subsidy, it would establish MSP as a distress price. This calls for a re-look at the buffer norms.
The reduced government procurement and the resultant low stocks could encourage private parties or traders to hoard wheat to obtain higher prices. That apart, in the event of mostly private purchases, there’s the possibility of large purchasers forcing down prices. Speculation in wheat can be pre-empted through quick import of wheat or the mere threat of imports. On the other hand, the threat of private players beating down prices can be countered through allowing sufficient and diverse set of buyers to purchase grain directly.


-- The Economic Times Editorial