Cost of grain inventory more than FY14 divestment target
After the current harvest season, Indian granaries will stock about 100 million tons of wheat and rice. At FCI's estimated Rs 6.12 per kg, the storing cost for 100 million tons of grains comes in at at Rs 60,000 crore a year, which interestingly is larger than the FY14 divestment target of Rs 40,000 crore.
India's breadbasket regions in the northern states of Punjab and Haryana are set to accentuate the existing imbalance between storage and procurement of grains this season. These two states store half of the grains produced in India and a bumper crop in the coming season will mean encroaching on the ever-shrinking storage space. Being land-locked, moving grains from Punjab and Haryana to other states is a costly option, points out Kotak Institutional Equities in its report named Game Changer Perspectives.
Storing inventory comes with a cost; after the current harvest season, Indian granaries will stock about 100 million tons of wheat and rice, which the FCI estimates at Rs 6.12 per kg for year-end September 2014. The storing cost for 100 million tons of grains will come at Rs 60,000 crore a year, which interestingly is larger than the government's FY14 divestment target of Rs 40,000 crore.
The upcoming Food Security Bill requires 62 million tons every year to feed poorest of the poor; and India carries an excess stock of Rs 60000 crore — which makes a strong case for inventory-pruning.
In its report Kotak suggests that disposing of excess stock should be feasible for the economy. Drawing heavily from United States' experience in managing wheat inventory, Kotak offers a three-point suggestion to tackle the problem in India.
The first suggestion revolves around exports. It highlights three components of exports: a) Subsidize exports, b) Implement acreage reduction programs and c) permit market prices to fall while compensating producers with "deficiency" payments when market price falls below a legislated target price.
The second option talks about using the inventory to change the agri mix. "The US paid its farmers to idle away land associated with wheat. This pay-for-doing-nothing was very successful in reducing acreage by 23% (to 61 mn acres over 1954-56 from 79 mn in 1953). India can use the opportunity to focus on crops in which it needs sufficiency, say pulses. We note that 18 million tons of pulses production is no match for 100 million tons of wheat and rice annually," the report notes.
The third point concludes that reducing inventory will eventually cut inflation. The US recognized support prices that it was offering for what it was: A support payment. "India is reaching a situation where, by using UID it would be able to send payments to farmers directly. Maybe it is time to re-couple wheat and rice prices with global prices – that can meaningfully reduce inflation in India, where 43% of the CPI basket is food."