India's National Magazine
From the publishers of THE HINDU

Vol. 16 :: No. 04 :: Feb. 13 - 26, 1999

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PRE-BUDGET REVIEW

Tinkering with PDS prices

SUDHA MAHALINGAM

ON January 28, the Government announced a steep increase in the Central issue prices of foodgrains distributed through the public distribution system (PDS). The increase ranged from 29 per cent to 64 per cent. This decision hit hard the poorest of the poor households that draw just 10 kg of foodgrains a month from the PDS. The issue price of wheat for consumers below the poverty line (BPL) was increased from Rs.2.50 to Rs.3.25 a kg; for those above the poverty line (APL) the increase was from Rs.4.50 to Rs.6.50 a kg. The price of rice was increased from Rs.3.50 to Rs.4.52 a kg for consumers in the BPL category and from Rs.7 to Rs.9.05 for those in the APL category. The price of levy sugar was increased from Rs.11.40 to Rs.12 a kg. Consequently, the total quantum of subsidy on sugar went down from Rs.647 crores to Rs.275 crores. The food subsidy bill, estimated to be around Rs.8,500 crores, would come down by Rs.2,900 crores for 1998-99, it was announced. Simultaneously, the price of urea, a key fertilizer, was increased from Rs.183 to Rs.200 for a bag of 50 kg.

The Associated Chambers of Commerce and Industry and the Confederation of Indian Industry, which usually seek lower duties and taxes and more concessions and reliefs, welcomed the decision.

The Opposition parties reacted sharply to the price hike. The Congress(I) said that it would coordinate with other parties to formulate an effective response although the more cynical would say that its response was prompted by political imperatives rather than any real concern for the poor. The Left parties, which have taken a consistent stand against any cut in the food subsidy, called for a nationwide agitation on February 9 to press for the withdrawal of the price hike. The Rashtriya Loktantrik Morcha announced that it would organise two rallies, in Varanasi and in Lucknow, in protest against the price rise. Tamil Nadu Chief Minister M. Karunanidhi condemned the price increase; the Tamil Maanila Congress (TMC) called it an attempt by the Centre to pass on its financial burden to the poor. TMC president G.K. Moopanar criticised the Government for its reluctance to tax the rich. To reduce expenditure, he said, the Government should cut down on foreign visits by Ministers and officials.

However, it was resistance from its constituents and allies that forced the Bharatiya Janata Party-led Government to announce a partial rollback of the price hike a week after it was announced. Andhra Pradesh Chief Minister and Telugu Desam Party president N. Chandrababu Naidu demanded that the decision to increase the prices be kept in abeyance until a meeting of Chief Ministers discussed the issue. Andhra Pradesh, which adds its own subsidy component to the Central subsidy on PDS supplies, would have been hit hard with its subsidy burden going up by some Rs.440 crores if it wanted to maintain earlier price levels. With the Trinamul Congress, the Haryana Lok Dal (Rashtriya) and the National Conference joining the Samata Party, the Shiromani Akali Dal and the Shiv Sena in a chorus of protest in the coalition's Coordination Committee meeting on February 2, the BJP was forced to agree to a partial rollback which left the subsidy on foodgrains supplied to the BPL consumers untouched. On February 4, Union Minister for Chemicals and Fertilizers (with additional charge of Food) Surjeet Singh Barnala said that the rollback would cost the Government Rs.692 crores; that is, the subsidy bill which would have gone down by Rs.2,900 crores had the Government adhered to its earlier decision would now go down by Rs.2,200 crores. The National Development Council will discuss the issue of administered prices, among other things, at its meeting on February 19.

M. MOORTHY
At a PDS outlet.

Economists believe that the PDS price increase will result in a significant fall in the offtake of foodgrains from the PDS. They point out that earlier increases in the Central issue prices had failed to lower the subsidy burden because, with prices for the APL category approaching market prices, the offtake from the PDS by this category declined and the Government was left holding excess stocks. Last year, the shortfall in the offtake of rice was two million tonnes and of wheat, four million tonnes. This year it could be even higher, if the APL population decides to keep off the PDS.

As against a buffer requirement of 18 million tonnes, the Government already has a stock of 25 million tonnes of foodgrains - 11.6 million tonnes of rice and 14 million tonnes of wheat. Wheat cannot be exported since Indian wheat is priced out of the international market. As long as the stocks last, the Government cannot hope to realise the targeted reduction in subsidy and as such the move is counterproductive, they point out.

Also, while many States have identified consumers in the BPL category and issued them distinctive cards, there is no mechanism to ensure that the cheaper foodgrains meant for the poor actually reach them. The incentive for corruption increases as the gap between BPL and APL prices widens. In Bihar and Uttar Pradesh, the entire grain lifted is targeted at the BPL while 90 per cent of the households in Kerala are APL consumers. In Andhra Pradesh the APL section constitutes 84 per cent of the population, in Gujarat 70 per cent and in West Bengal and Karnataka 62 per cent each.

Finally, with every increase in the Central issue price there is usually a clamour for an increase in the minimum support price, the price at which the Government buys foodgrains from farmers. If that happens, the projected subsidy cuts will actually trigger further price rises.