Topic 1 : The wheat test
Introduction: Wheat stocks in government warehouses are at a seven-year low of 16.4 million tonnes (mt) as of January 1. This may cause concerns for the next government to manage the food inflation that will be caused by a reduced quantity of wheat in the market.
What is the Buffer stock of grains in India?
- Buffer stock refers to a reserve of a commodity that is used to stabilize price fluctuations and unforeseen emergencies.
- The concept of buffer stock was first introduced during the 4th Five Year Plan (1969-74)
- In India, buffer stocking of food grains is conceptually seen as a method to deliver strategic food and agricultural domestic support policies.
- Through these, the government caters multiple objectives such as providing famine relief, ensuring food security to consumers and providing production incentives to farmers.
- Commodities are bought when there is a surplus in the economy, stored, and are then sold from these stores when there are economic shortages in the economy.
Present status of Buffer stock
- The present stocks are more than the minimum buffer of 13.8 mt to meet the operational requirements of the public distribution system, plus a strategic reserve, for the next three months.
- By then, the new crop would start arriving in the mandis.
- Besides, the government has sufficient rice stocks to more than compensate for any shortfalls in wheat.
- That should keep both cereal and overall retail food inflation — at near double-digits now — somewhat under control, at least till the national elections scheduled in April-May.
- The measures taken so far — banning wheat and non-basmati white rice exports, not permitting large retailers and traders to hold more than 1,000 tonnes of wheat, and selling grain from the Food Corporation of India’s stocks in the open market — are good enough for that.
What are the concerns?
- The problem, if any, would be after the elections.
- If the current wheat crop, due for harvesting only from March-end, turns out not too good, it’s the next government that will have to deal with the ensuing supply challenge.
- The incumbent government, to its credit, has been proactive in supply-side management with regard to pulses and edible oils; imports of these have been allowed at nil or low duties till March 31, 2025.
- The same alacrity hasn’t been seen in wheat, rice and sugar — perhaps because the growers of these crops are politically more organised than pulses or oilseeds farmers.
- While exports have been restricted, along with curbs on diversion of cane juice and intermediate-stage molasses for ethanol production by sugar mills, the incumbent government has refrained from opening up imports.
- But given the finely balanced supply situation — the new 2023-24 sugar season, too, has begun with six-year-low stocks and no clarity on actual production — imports may be inevitable sooner than later.
The policy flip-flops and farm sector in India
- Ideally speaking, keeping the import window open (like in edible oils and pulses) without resorting to any export and stocking controls (going against the letter and spirit of the Modi government’s now-repealed farm laws) is what’s required in all agri-commodities.
- India’s farm sector, unlike industry and services, has suffered the most from lack of policy stability and predictability, impacting investments in processing, warehousing, marketing and research.
- The preoccupation with short-term goals has meant deploying the sledgehammer approach in response to every inflation event in onions or pigeon pea — and not doing anything when prices crash.
- It has taken the focus away from long-term policy that is in the ultimate interest of both producers and consumers.
Conclusion: A strategic vision for Indian agriculture, going beyond food inflation, should be a priority for the next government.
Topic 2 : The capex push
Introduction: After an increase in deficits due to the COVID-19 pandemic, state governments have veered towards the path of fiscal consolidation. In both 2021-22 and 2022-23, the aggregate fiscal deficit of state governments was actually under 3 per cent of Gross Domestic Product (GDP), despite the Union government providing them greater space to borrow, capping their deficits at 4.5 per cent and 4 per cent respectively.
States’ revenue and capital expenditure trends
- State governments, put together, spend more than the central government.
- In fact, they account for over three-fifths of total general government expenditure.
- In the past few years, states have been focusing more on revenue expenditure (money spent on paying salaries, pension, interest, subsidies, etc.).
- However, in 2023-24, there has been a shift in their spending priority with more allocated towards capital expenditure.
- The capital outlay of states (excluding Arunachal Pradesh, Goa, Manipur and Meghalaya) jumped 45.7 per cent, while their revenue expenditure grew by a modest 9.3 per cent during April-November 2023.
- The quality of their expenditure — ratio of capital outlay to total expenditure — which effectively implies the proportion of funds channelled towards productive assets stands at 14.1 per cent, an eight year high, during this period.
- This is growth enhancing. A one per cent increase in the capital outlay effectively leads to a 0.82-0.84 per cent increase in the states’ GDP.
Reasons behind states’ Capex push
States’ capital expenditure (capex) is being fuelled by an interplay of two forces.
1. The timely devolution and disbursements of the Centre’s fund
- The advance release of the monthly tax devolution and timely disbursements of funds for the special scheme on capital assistance.
- The Union government has been proactive in releasing the advance instalments of tax devolution in the past few years.
- In 2023-24, the customary advance instalments which were usually released at the end of the fiscal year (until 2021-22) were released in June and December.
- In addition, the Union government has approved capital expenditure worth Rs 973.74 billion and released Rs 590.3 billion under the scheme of special assistance to states for capital investment till November 2023 out of the budgeted Rs 1.3 trillion in 2023-24.
Rise in States’ revenue (tax and non-tax)
- States’ own revenues have been fairly buoyant.
- The states own tax revenues (SOTR) and own non-tax revenues (SONTR) have grown at a good pace of 11.5 per cent and 19.5 per cent respectively during the first eight months of the year.
- Tax revenues are generally a function of economic activity.
- It has to be noted that nominal GDP growth has been muted and likely to be 8.9 per cent as per National Statistical Office’s First Advance Estimates.
- With own tax revenues growing at a faster pace than nominal GDP growth, it suggests efficiency of tax administration and increased formalisation of the economy leading to improvement in tax capacity.
- Also, revenue from mining industries forms a significant chunk of collections under SONTR.
- The mining activity (in real terms) has grown at a strong pace due to reforms such as e-auction of mining leases, etc. However, the benefits are limited to mineral rich states.
The underperformance of states’ revenue receipts growth
- Despite this healthy growth in states own revenues, their overall revenue receipts have grown at an average pace of 5.5 per cent during this period owing to a shortfall in grants from the Union government.
- These fell 29.2 per cent during this period.
- The tepid growth in overall revenue receipts has meant that the states have had to resort more to market borrowings for funding their expenditure this year.
- In fact, as per the latest data available, the states’ gross market borrowings were at a record of Rs 5.8 trillion during the first nine months of the year.
- Higher borrowings are, however, largely utilised for capex.
Conclusion: Based on the current trends and the NSO’s expectation of a pick-up in net taxes in the second half of the year, states may find it a bit difficult to achieve their aggregate fiscal deficit target of 3.1 per cent of GDP. A marginal slippage of 20-30 basis points can’t be ruled out.