Agriculture Reference
In-Depth Information
exist in India, where private-sector imports are not allowed. However, the ex-
perience of Bangladesh can shed some light on this issue. During the devastat-
ing flood of 1998, both the government of Bangladesh and the private sector
imported rice to address the food crisis brought on by crop damage. Although
the size of government imports (average consignment of 82,000 tons) was much
larger than that of the private sector (average consignment of 300-400 tons),
the government paid higher prices and took much longer to complete each trans-
action (see Chapter 5). Given the level of bureaucracy, one would probably have
expected the same pattern in India, if private sector imports were allowed along-
side government imports.
RESTRICTIONS ON MOVEMENT OF FOODGRAINS
. The policy of movement
restrictions originated during colonial rule in the early 1940s. It was designed
with the dual objective of preventing hoarding and building stocks for distribu-
tion in major urban centers. The objectives, however, changed when price sup-
port policies were adopted in the 1960s. It was then being enforced to bring the
prices down to the minimum support price level in surplus areas, so that FCI
could procure sufficient grain for its buffer stocking and public distribution op-
erations. In the 1970s, policymakers realized its failure and officially lifted the
restriction in 1977. However, restrictions kept reappearing until the 1990s. Even
today, India enforces movement restrictions in selected states on the grounds of
preventing smuggling to neighboring countries.
CHEAP CREDIT FACILITIES FOR FCI
. The government's credit policy in In-
dia has favored FCI in many ways. Three of them are worth noting. First, al-
though interest rates have been adjusted periodically, the FCI has enjoyed pref-
erential credit access since the early 1970s. Compared to market rates, the
interest rates on FCI credit (food procurement credit) were about 7 percentage
points lower during 1972/73 to 1982/83, 5-6 percentage points lower until
1995/96 (Gulati and Kahkonen 1996), and has been 2-3 percentage points lower
since 1997 (Jha and Srinivasan 2004). Second, unlike other trade credit, there is
no payoff deadline attached to FCI's credit. Third, under the Selective Credit
Control policy, the Reserve Bank of India (RBI) has restricted private traders'
borrowing of working capital. In addition, RBI frequently revises interest rates
and credit ceilings under this policy, creating uncertainties for the private sector.
What implications do these policies have for markets and the economy?
There are at least three important economic consequences. First, FCI has his-
torically obtained a very large volume of credit for its operation, reducing credit
availability for other sectors. Second, cheap credit discourages private traders,
as their transaction costs become higher relative to FCI's or affiliated agencies.
Finally, the negative relationship between price stability and FCI's credit de-
mand (e.g., higher stability implies lower credit demand) can impose signifi-
cant adjustment costs on the rest of the economy.
Where does Indian policy stand today? With some periodic adjustments
and revisions, the broad credit policies toward FCI continue; the evidence of
