Agriculture Reference
In-Depth Information
A review of the trends in foreign currency reserves and import capacity,
defined as the export value of goods and services deflated by the import price
index, indicates that the improvement over the past three decades has been re-
markable (Table 3.3). By the end of January 2007, Indian foreign currency re-
serves had reached US$179 billion. This implies that, ceteris paribus, buying
all the rice (about 28 million tons) available in the world market would cost only
a small fraction of India's foreign currency reserves.
Current Practices
The previous section has demonstrated that the key rationales for public inter-
vention in Indian grain markets have lost their significance over the years. But
have policies changed with the changing rationale? To address this question, this
section focuses on two aspects of grain policies: (1) the policies designed to fa-
cilitate FCI's operation and (2) the changes in the scale of public intervention.
Policies to Facilitate FCI's Operation
Historically, a range of government regulations has supported food intervention
programs in India. FCI's operation has been facilitated by empowering it with
monopoly control over international trade, providing it with cheap credit and
preferential access to transportation, and perhaps more importantly by impos-
ing restrictions on the movement of grain from surplus to deficit states. A sum-
mary of all facilitating regulations is presented in Table 3.4, and the economic
arguments and current practices are discussed below.
MONOPOLY ON INTERNATIONAL TRADE
. The monopoly control over in-
ternational trade has been justified on two grounds: (1) to keep administrative
control over the use of scarce foreign currency reserves and (2) to realize the
benefits of economies of scale (government as a natural monopoly). According
to the first argument, a mechanism was needed to monitor and regulate food im-
ports, which accounted for major shares of limited foreign currency reserves. It
was assumed that having monopoly control would allow the government to op-
timize the use of scarce foreign currency reserves. According to the second ar-
gument, the government, as a large buyer facing many sellers in international
markets, would have a greater bargaining power than would small private im-
porters and hence be able to negotiate lower import prices.
How valid are these arguments today? Because the value of cereal imports
is at present a tiny fraction of India's total foreign currency reserves, the first
argument is no longer valid unless current trends reverse and the country reverts
to the situation of the late 1960s and early 1970s. With regard to the second ar-
gument of achieving lower import prices, historical data suggest a reality con-
trary to central expectations: in most years India has actually imported at times
when prices were higher. Would the private sector have done better? This ques-
tion cannot be answered because data on which to base the comparison do not
