Government Policies Responsible for Food Inflation

Government Policies, not hoarding, responsible for Food Inflation

Government Policies fueling Food Inflation and Discouraging Investments

Do you know, state governments charging 19.5% taxes at first point of sale between farmer and buyer on basic commodities.

 

According to Economic Survey 2015, it is now clear that major cause of food inflation of agriculture commodities is state government policies. 

It is very strange that where commercial entity like traders are charging about 1 to 2% commission in commercial transactions, so called welfare state working for the cause of consumers and farmers are charging as high as 19.5% taxes as market transaction tax (i.e. mandi tax) and related charges. 

Is there any other place in the world where basic agriculture commodities (without any value addition) is taxes so heavily? 

Modi government is making all attempts to invite investments but not able to make the impact because of these policies of state governments.

State Governments survive on taxing basic commodities:
Please see the table below. This is more than profit of any highly profitable companies.  It is also very strange that state governments blame middleman for price rise and hoarding whereas they are the biggest contributor for black marketing and forcing people to by-pass the tax laws.

 

Why Investment in Food processing is not coming?

It is also not surprising to say that the states which are charging high taxes are also not able to attract investment in food processing activities.

I will not be surprised if the existing traders and food processing companies in high tax states may be working on systems to by-pass the high tax regime to survive.

High Tax regime is Discouraging Investment:

Please see the table below. Punjab is one of the biggest producer of wheat but there is hardly any investment in wheat mill in Punjab. why?

State governments are organizing investment submit to attract investment. Why policy makers are not realizing that investors have to compete in open market. It is more sensible for any person to buy wheat flour from other state and sell in Punjab and rather then to do wheat processing in Punjab. 

It will be worth an effort to study how any mill located in Punjab can survive in wheat milling business without by-passing the local taxes. This will open a new management theory of competitiveness. 

Prime Minister is talking about invetsment in food industry, Union Minister for Food processing is from Punjab and from the ruling party in Punjab, but still they are not able to convince the Punjab government to reduce these illogical taxes which hurting Punjab economy.

Who is benefiting from High states taxes?
In the name of food secuirty state governments are exploiting central government. Is this any different than any middleman exploiting common consumer by creating cartels?

Food Corporation of India is milking cow for these states. From the above table it seems that Punjab, Haryana and MP are actually exploiting FCI by charging such high taxes because these taxes are source of revenue for the state. 

Future of High Tax State is dark:

What will happen if FCI will stop buying from these states. Farmers will suffer badly and state economy will crash.  

As long as FCI will continue to buy at High tax rates, no investment will come to these states. The day FCI will stop buying from these states, there will not be any buyer to buy from farmer. Investment will take time to come. farmers and state economy will suffer badly.

This is also the reason why these state governments force central government to increase Minimum Support price (MSP) because high MSP means more revenue for the state. This is forcing inflation on poor consumers for the whole country. 

In high tax states, as mentioned above, investment in processing will not be viable for law abiding corporates because it will be difficult to compete with tax evading units. 

My Suggestion:

1. Please do not exploit food security needs of common man by charging heavy taxes on basic foods with rent seeking attitude of state governments.

2. Make state taxes sensible to promote investment otherwise investors will never go for high tax areas.

3. Existing units will also suffer due to competition from low cost regime of other states.

4. This will hurt employment opportunities in high tax areas as well as other revenue opportunities. 

5. My suggestion to Punjab and Haryana farmers is to move away from Wheat and Rice to Oilseeds like Hyola and Pulses, these crops will always remain in short supply in India and will always give better returns to the farmers if same effort is done what they are doing for wheat and rice. 

6. Any corporate with surplus cash should invest in warehousing in Haryana and Punjab and FCI should be happy to rent them out IF they want to save rotting and wastage. 

What is your opinion on this vital subject. Please circulate this to promote sensible debate on food inflation.