Agriculture Reference
In-Depth Information
crowding out is perhaps stronger than in any other countries that pursued sim-
ilar policies. Total volume of food credit in India has always been high and con-
stituted a significant proportion of credit to other priority sectors, such as agri-
culture and small-scale industries (Table 3.5). By international standards
(20-30 percent of agricultural credit), these numbers are staggering. Except
during 1988-90, food credit has consistently amounted to significant percent-
ages of agricultural credits, reaching as high as 65 and 80 percent in 1982-84
and 2000-02, respectively. During 2000-02, when public stock skyrocketed,
total outstanding food procurement credit to FCI averaged Rs 470 billion (more
than US$11 billion), equivalent to 83 percent of total outstanding credit to both
agriculture and small-scale industries and an incredible 244 percent of total
wholesale trade credit in the country. These statistics constitute the strongest
evidence of the crowding out of credit to other sectors of the economy.
RESTRICTIONS ON PRIVATE STORAGE
. A common perception about
traders that has dominated food policy in India is that traders are speculators
who profit by hoarding, thus artificially increasing prices. Although other poli-
cies included regulations to prevent this trade behavior, a more direct and de-
liberate policy was outlined under the Essential Commodities Act 1955, which
set specific limits on the level of cereal stock a trader can have at any given time.
Although officially lifted by the central government, this policy continues to be
invoked sporadically by many states.
RESTRICTIONS ON PROCESSING
. The restrictions on sales of milled rice in
India started under the Rice Milling Industry Act 1958, 7 years before the for-
mation of FCI. Again, the idea was to increase procurement for government's
buffer stocking and distribution through rationing channels. Under this Act, rice
millers are forced to supply a certain proportion (levy) of processed rice to the
FCI at a fixed processing margin. The levy rates and processing margins, both
of which vary across states, seriously hinder millers' profitability. In the four
surplus states—Andhra Pradesh, Haryana, Punjab, and Uttar Pradesh—where
FCI procures more than 80 percent of rice, millers have to supply 60-75 per-
cent of the total processed rice to FCI at prices that are 30-40 percent lower
than the market price. The processing margins (levy price minus rice-equiva-
lent minimum support price) also vary widely across these states. For example,
the margin in Punjab has been significantly higher, sometimes twice as high as
the margins in other states.
11
The adverse effects that rice levies have on the markets are obvious: they
discourage rice millers' investment, increase private traders' transactions costs,
breed corruption, and create rents for special interests. Because millers are not
allowed to sell in the open market until the levy requirement is met and the mar-
11. The levy prices and processing margins are from figures 5 and 6 of Umali-Deininger and
Deininger (2001).
