»Vivek Kaul's Diary

MSP Leads to Excess Procurement of Rice, Which Leads to Waste of Water and Money
12 JULY 2018

28

In yesterday's piece we looked at the multiple problems the country faces because of the minimum price support system for agriculture. In today's piece, we will look at one of the points in greater detail.

The central government declares a minimum support price(MSP) for 23 crops every year. Over the years, it has primarily bought paddy (or rice) and wheat, directly from the farmers at the MSP. This direct buying has led to excess stocks of both rice and wheat piling up with the Food Corporation of India (which basically means the government).

Take a look at the following Table 1:

Table 1: Excess reserves of rice with the Food Corporation of India.

Rice
Date Operational reserve
(in Lakh MT)
Strategic Reserve
(in Lakh MT)
Grand total
(in Lakh MT)
Actual reserve
(in Lakh MT)
Excess reserves
(in %)
July 1, 2017 115.4 20 135.4 210.44 55.4%
Oct 1, 2017 82.5 20 102.5 163.07 59.1%
Jan 1, 2018 56.1 20 76.1 162.06 113.0%
Apr 1, 2018 115.8 20 135.8 248.73 83.2%
Source: Author calculations on data from Food Corporation of India.

What does Table 1 tell us? It tells us very clearly that at any point of time, the government of India, through the Food Corporation of India holds more rice than it is required to. As on April 1, 2018, it held around 113 lakh MTs in excess.

--- Advertisement ---
Don't Buy Any Blue Chip Before Reading This…

We both know that Blue Chips are some of the safest stocks in the stock market…

And we also know that for BIGGER Gains, the answer lies in solid small caps…

But what if you could take some risk and get both?

Yes, we are talking about a Special category of small caps which are effectively GIANTS in their small niche and thus, offer a lot more safety than other small caps. PLUS, they also offer the great money-making potential that lies in small caps…

We call such small caps - Junior Blue Chips - And we have 3 Junior Blue Chips you could consider adding to your portfolio right away.

Click here for full details…
------------------------------

Let's say that all this excess rice was bought at last year's MSP of Rs 1,550 per quintal. Hence, just buying these extra reserves cost the government Rs 17,515 crore in total. We are not even going into the cost of movement, storage etc.

Let's now look at Table 2.

Table 2: Excess reserves of wheat with the Food Corporation of India.

Wheat
Date Operational reserve
(in Lakh MT)
Strategic Reserve
(in Lakh MT)
Grand total
(in Lakh MT)
Actual reserve
(in Lakh MT)
Excess Reserves
(in %)
July 1, 2017 245.8 30 275.8 322.75 17.0%
Oct 1, 2017 175.2 30 205.2 258.66 26.1%
Jan 1, 2018 108 30 138 195.62 41.8%
Apr 1, 2018 44.6 30 74.6 132.31 77.4%
Source: Author calculations on data from Food Corporation of India.

Table 2 clearly tells us that the government of India, through the Food Corporation of India, holds excess reserves of wheat. What does this cost? As on April 1, 2018, the excess reserves amounted to 57.71 lakh MT. Let's assume all of this wheat was bought at last year's price of Rs 1,735 per quintal. This works out to around Rs 10,013 crore.

Hence, the cost of holding on to excess rice and wheat works out to around Rs 28,528 crore, which is much more than the annual budget of many ministries.

The thing is that the excess reserves of rice that the Food Corporation of India has are likely to go up in the years to come. The answer lies in the fact that the productivity of rice in India is still very low in comparison to other countries.

As the Commission for Agricultural Costs and Prices(CACP) points out in a document titled Price Policy of Kharif Crops - The Marketing Season of 2018-19: "For rice, all-India yields (2400.2 kg per hectare) are only 51.7 percent of the world average (4636.6 kg per hectare). In fact, yield in even the most productive state i.e. Punjab (3974.1 kg per hectare) fell below the world average. Further, all-India yield for rice is roughly one-third of the China (6932.4 kg per hectare) which has the highest yield among the major rice producing countries."

If we look at data for rice productivity, it clearly has had an upward trend over the years (though there have been downward years as well). In 1985-1986, the productivity of rice stood at 1,585 kg per hectare. By 2015-2016, it had jumped to around 2,400 kg per hectare. In between, in 2012-2013, it managed to touch a peak of 2,461 kg per hectare.

The point being that as farmers produce more rice, more of it is likely to end up with the government. Also, it needs to be mentioned here that the procurement system for rice has improved over the years. This also means more procurement than is required by the government to meet its requirements under the Food Security Act.

The problem is that this excess rice is of no use and simply costs the government a lot of money, which it could have otherwise used somewhere else. The larger point here is that India is currently producing more grains (both rice and wheat) than it needs. And this is largely a result of the MSP policy of the government.

At the same time, it is not producing enough of other crops like pulses and oilseeds, for which MSPs are announced, but the procurement mechanism is not as strong (though the procurement of pulses has improved over the years).

Also, it needs to be mentioned here that rice is a water guzzling crop and every extra kilo of rice procured by the government not only leads to waste of money, it also leads to a wastage of water. This is a cost that needs to be quantified.

One state which produces a lot of rice and it shouldn't, is Punjab. The paddy procurement system works very well in the state, encouraging farmers to grow rice in a semi-arid region.

This excess production of rice in the state is leading to water shortage. As The Price Policy for Kharif Crops: The Marketing Season for 2015-16 points out: "Given that this water is extracted by mining groundwater, as is being done in much of... [the] Punjab and Haryana belt (particularly in [the] case of rice), where [the] water table is receding by 33 cm each year, thereby shrinking its per capita availability."

As I keep saying, the first order effects in economics are easy to figure out. But it's the second order effects which are more difficult to figure out and which cause more damage in the long run.

But then who is bothered about the long run?

Regards,

Vivek Kaul
Vivek Kaul
Editor, Vivek Kaul's Diary

PS: When the markets nosedive, that's the best time to put wealth building in motion. Small caps are crashing - that only means there is more opportunity than ever to buy them up - get our market-beating small caps recommendations here.

Disclaimer:
The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and has not been authenticated by any statutory authority. The author and Equitymaster, do not claim it to be accurate nor accept any responsibility for the same. Please read the detailed Terms of Use of the web site.
© Equitymaster Agora Research Private Limited