The government’s granaries are overflowing with food stock. In May, it crossed 71 million ton (MT) when wheat procurement was in full swing and is expected to reach 75 MT when the government compiles data for June.

At first glance it may seem a good development because then it would be easier for the government to expand the coverage of public distribution system as envisaged in the food security bill.

But a closer look will reveal that it is actually a bad news for the government. It will not only increase the subsidy bill substantially, it will benefit the private companies dealing with food items like flour and biscuits, rather than the poor and needy.

Here it is how. But first, how the glut has happened.

The last 12 years’ procurement figure for June shows that between 2000 and 2009, stocks crossed 60 MT only twice (2001 and 2002), 50 MT only once (2009) and 40 MT once (2000). In 2010, it reached 60.4 MT; in 2011, 65.5 MT and in 2012, it is expected to reach 75 MT.

What is the reason for sudden upward spike in 2012? The food ministry officials say high minimum support price (MSP), coupled with high taxes and bonus that is offered by some wheat producing states, has pushed out the private players from the grain market.

This year, the government is offering an MSP of Rs 1285 per quintal (100 kg) of wheat - up from last year’s Rs 1,120. Madhya Pradesh and Rajasthan are giving a bonus of Rs 100 over and above the MSP, which takes the effective MSP to Rs 1,385. Then, there are taxes on foodgrains – 14.5 percent in Punjab, 12.5 percent in Haryana, 8 percent in Rajasthan and 7 percent in Madhya Pradesh. This means, the private companies have to shell out about Rs 1,500 for a quintal.

The private players pick up anything between 15-30 MT wheat at this time of the year. But this year, they have picked up only about 2-3 MT.

They are waiting. Because they know the government will be forced to reduce the stock by offering open market sale at MSP rate, that is Rs 1285 a quintal, sooner than later. That is the time they will pick up rest of the stock.

In fact, the process of open market sale has already begun after the government accepted a three-point formula of an inter-ministerial committee headed by C Rangarajan, chief of PM’s economic advisory council, in May.

Rangarajan had proposed (a) open market sale of 3 MT (b) export of 2 MT and (c) additional allocation of 13 MT foodgrains to states to reduce the stock.

When open market sale happens, wheat will be sold at MSP (because that is the price the government paid in the first place) in wheat producing states and at MSP + 50 percent transport cost elsewhere. Though the actual cost one quintal comes to Rs 1,822 (by adding handling, bagging, storage, transport and other such expenses that FCI and state procurement agencies incur).

This means the government will reimburse FCI and state agencies the difference of Rs 537 (Rs 1,822 minus Rs 1,275). This is the subsidy per quintal.

In effect, the government will be subsidising private players by selling wheat in open market.

Secondly, when Rangarajan committee took up the issue, the stock stood at 53 MT. At 75 MT, more wheat needs to be offloaded. More open sale means the government will shell out more subsidy and the private players will benefit.

Thirdly, the ‘additional’ allocation to the states that Rangarajan committee suggested will come a cropper. Official data suggests that the states are not in a position to take additional stock. In two years (2011 and 2012), the centre has made ‘additional ad hoc’ allotment of 18.2 MT foodgrains. But the states have picked up only 11.7 MT.

This means, more stock will have to be either disposed of through open market sale or exported.

The private players benefit if more stock is disposed of in open sale.

They do so when it is exported. How? The news is already out that India would be exporting 2 MT as per Rangarajan committee suggestion. This has brought down international price of wheat by $10-15 and stands at $260-270 per ton (10 quintal). By the time actual export happens, the officials say, the rate would fall further by $70-80.

At Rs 1,822 as cost of one quintal of wheat, the internal price should be about $36.4 a quintal (at Rs 50 a dollar), or $364 a ton, to break even. If it is sold at $200 a ton, the difference will have to be paid to the FCI and other state agencies by the central government.

This subsidy amount will benefit the private players who will pick up the exported wheat.

As international price picks up by the end of the year to $320-330 a ton, these private players can then make a kill. So, it is a triple gain for the private players.

In effect, the government of India will be subsidising wheat for the private players.

What happens to the Indian wheat that goes out in export? Poor countries like Ukrain may use it as food, but not the western countries.

Biraj Patnaik, advisor to the supreme court-appointed food commissioners, points out that Indian wheat is considered substandard by the developed countries and used as cattle feed.

So, government of India will not only subsidise wheat for the benefit of private players, it will also be subsidising cattle feed.

Got it now?