A case for creating a buffer stock of essential food items to even out price fluctuation

The Reserve Bank of India (RBI) maintains foreign exchange reserves, now at over $650 billion, not to interfere with the normal functioning of the currency market. It seeks, instead, to ensure that exchange rate movements, while market-determined, are “orderly” and there is no “excessive volatility”. A similar approach is arguably required in food. The government must consider building a buffer stock not just of rice and wheat, but even pulses, oilseeds, sugar, skimmed milk powder (SMP) and staple vegetables. The idea, again, is not to set prices or supplant the market, but to curb too much volatility that’s neither in consumer nor producer interest and also makes the RBI’s job harder: When “core” inflation (that is, exclusive of food and fuel) is at a record low of 3.1 per cent (year-on-year for May), but retail food inflation stays elevated at 8.7 per cent, does the central bank cut or raise interest rates? Or leave them unchanged, as in the current uncertain scenario?

The increasing volatility and unpredictability of food prices has primarily to do with climate change — fewer rainy days and extended dry spells, interspersed with intense precipitation, and also shorter winters and heat waves. The latter’s effects have been felt this time in poor crops of rabi pulses, tomato, potato and even wheat in central India. Such supply shocks — whether induced by climate, war or pandemic — typically engender very large price spikes. Farmers respond by massively ramping up production that, in turn, leads to steep price declines. Take milk. Last year, in February-March, dairies were paying farmers Rs 37-38 per litre for cow milk. The same dairies have today slashed procurement prices to Rs 26-27 because of SMP realisations crashing to Rs 200-210 per kg, from their February-March 2023 peaks of Rs 315-320. These low prices, discouraging dairies from procuring and farmers from feeding their animals properly, could be a precursor to milk shortages and inflation next year.

Creating a buffer stock of essential food items — procuring from farmers/processors during years of surplus production and offloading the same in times of crop failures — can go some way in evening out such extreme price fluctuations. The fiscal cost shouldn’t be much, as the stocked commodities (potato, onion and tomato can even be stored in dehydrated form such as flakes, paste and puree) are to be disposed of during scarcity/inflationary periods at near-market rates. The government did undertake such open market sales of wheat and chana from its previously accumulated stocks, which helped moderate cereal and pulses inflation. A buffer stocking policy in food items will also do away with the need for regressive anti-farmer measures such as banning exports or imposing stock limits on private traders and processors.