April 3, 2013

While India has achieved status as a major food exporter with rice, wheat and buffalo beef, Indian policies which emphasise minimum support prices for farmers and subsidised crops for the poor have in turn spurred food inflation, price volatility, overproduction of grains and overworked land. The government purchases about one third of all cereal output, yet pro-cereal policies hinder production of non-cereals like fruits, vegetables and dairy products, which benefits other export nations like Canada or Australia.

Sound food policy should be a priority for India, on track for the world's largest population by 2025. Despite misgivings by economists, a food security bill guaranteeing low prices for more than two thirds of India's population is winding its way through parliament.

India's newfound position as leading food exporter will be short-lived, however. Government policies that prioritise the production of rice and wheat and a new right-to-food law that's now before the parliament will not increase food security. Instead, policies will drive food inflation, accelerate India's transformation into a net grain importer and increase its dependency on global markets for non-cereal foods. India will be forced into the global food marketplace and not on its own terms.

The government's commitment to open-ended purchases of wheat and rice at ever-higher minimum support prices (MSPs) has led to a cycle of ever-increasing procurement. The government buys approximately one-third of total cereal production. This also contributes to food inflation. Elevated MSPs and state taxes keep private traders out of the grain market and discourage high stock levels. So open market availability of wheat and rice falls after the end of the procurement season - thus boosting prices. Wheat and rice prices rose 23% and 10% on-year, respectively, through November 2012, even as the country was exporting.

High levels of procurement have resulted in rapid accumulation of grain stocks, now 66 million tonnes, more than double the required buffer. To place this in perspective, India's wheat stocks are equivalent to Australia's entire annual production of the grain, while its stocks of rice are 50% more than Thailand's yearly output.

The level of stocks far exceeds the government's storage capacity and results in significant wastage. The government has estimated preventable post-harvest losses of food grain at about 20 million tonnes per year, equivalent to 10% of total production. Faced with excess stocks and need to make room for the next harvest, the government is forced to resort to exports.

Those exports, and the entire cycle of events making them necessary, are unsustainable. India's breadbasket states are reaching the limits of productive capacity. The overproduction of grains due to ever-rising MSPs has rapidly depleted underground aquifers and sharply reduced soil fertility. With the government concentrating procurement activities and agricultural investment in terms of capital, fertilisers and infrastructure in northern and western states, productivity in the country's eastern states, primarily rain-fed, has stagnated despite attempts to raise yields. The government will have no alternative but to increasingly depend on international markets when output in the major grain-producing states starts to lag demand.

Perversely, the government's planned National Food Security Bill will only accelerate this process. The bill creates a right to food for two-thirds of India's 1.2 billion people and requires the government to distribute heavily subsidised food grain on a massive scale.