What’s procurement price?
In each farm marketing season, the government announces the prices at which it guarantees to procure wheat
and rice, if market prices fall below the announced price. The Commission for Agricultural Cost and Prices
(CACP) makes price recommendations on the basis of the long run average production costs that cover costs
and reward efficient farmers. These prices are meant to prevent distress sales in years of glut, and ensure
affordable prices for consumers. Over time, support prices have become a guaranteed income support rather
than a price risk hedge.

How is the price policy responsible for huge stocks of food grain?
The misuse of the price policy has created a huge food management problem. Procurement prices for wheat
and paddy have been rising every year, creating a distorted incentive for farmers to switch to rice and wheat
cultivation.

Price policy has an impact on the cost of procurement operations and ultimately on distribution costs, both on
the open market and on the PDS. Food Corporations India (FCI) is the central agency responsible for
procurement, transportation and storage operations and rising procurement prices raise economic costs of its
operations.

To cover part of the costs, PDS prices have been raised throughout the nineties, especially after 1997-98. This
turned away most PDS customers, since market prices were below PDS prices. So, while rising prices have led
to a huge supply response form farmers, PDS offtake has fallen. As result, grain stocks have ballooned over the
past few years.

Has anything been done to correct the problem?
Targeted PDS was introduced under which two sets of PDS prices were announced, one each for Above Poverty
Line (APL) and Below Poverty Line (BPL) users. Since their inception, APL prices had to be raised to cover the
rising costs of FCI. As consumers fled the PDS, issue prices had to be lowered to 70 per cent and 48 per cent of
costs to FCI for APL and BPL users, respectively. Another policy that is being tried is decentralized
procurement, whereby states are individually responsible for procurement storage operations. Some states like
West Bengal have been following this practice, but most states complain of inadequate finances and
infrastructure to under take this operation. Among the most vocal opponents, of decentralized procurement
and Punjab and Haryana, who will have to confront farmers lobbies on their own? Food for work programmes
have been implemented which make grain available to states at BPL prices, yet the programme has shown
some results only in Rajasthan.

What are the fiscal implications of higher prices?
Recently issue prices were cut even further to encourage PDS offtake. This will put more pressure on food
subsidy. As the bulk of the Rs. 18,000 core food subsidy bill is actually a producer subsidy; consumers hardly
derive any benefit from the PDS. In addition, FCI pays for procurement with food credit, and higher
procurement prices lead to unwarranted diversion of ingestible funds.