Idea of creating a government-controlled buffer stock of essential food

Source: The post idea of creating a government-controlled buffer stock of essential food has been created, based on the article “A case for creating a buffer stock of essential food items to even out price fluctuation” published in “Indian express” on 8th July 2024

UPSC Syllabus Topic: GS Paper3-issues of buffer stocks and food security

Context: The article discusses the idea of creating a government-controlled buffer stock of essential food items like pulses, oilseeds, and vegetables. This would help stabilize food prices by reducing extreme fluctuations caused by supply shocks from events like climate change or pandemics.

For detailed information on Benefits of government buffer stocks in stabilizing food prices read this article here

Why Should the Government Consider a Buffer Stock for Food?

1. Stabilize Prices: Buffer stocks of essential foods like pulses, oilseeds, and vegetables help control price volatility, crucial for both consumers and producers. This stability aids in economic planning and reduces the impact of inflation spikes.
2. Manage Supply Shocks: Climate-induced disruptions, such as irregular rainfall and heatwaves, have adversely affected crop yields. For example, poor harvests of rabi pulses and vegetables have led to price spikes.
3. Support Farmers: Creating buffer stocks allows for the purchase of surplus during good harvests, protecting farmers from drastic price drops. For instance, fluctuations in milk prices from Rs 37-38 to Rs 26-27 per liter have shown how volatile the market can be without such mechanisms.
4. Reduce Policy Burden: With buffer stocks, there is less need for restrictive measures like export bans or trader stock limits, promoting a freer market environment conducive to growth.

How Do Food Prices Affect Inflation and RBI’s Decisions?

1. Impact on Inflation Rates: Elevated food prices directly affect overall inflation. For instance, despite core inflation being low at 3.1%, retail food inflation remained high at 8.7%.
2. RBI’s Monetary Policy Dilemma: High food inflation complicates the Reserve Bank of India’s decisions regarding interest rates. The volatility in food prices makes it challenging to decide whether to cut, raise, or maintain rates.
3. Influence on Economic Stability: Stable food prices are essential for economic predictability, influencing consumer spending and business investments. Volatility in essential items like food disrupts this stability.

What are the Benefits of a Buffer Stock Policy?

1. Reduces Price Volatility: Buffer stocks help stabilize prices of essential food items, mitigating extreme fluctuations caused by supply shocks due to climate change or other disruptions.
2. Eliminates Restrictive Measures: Buffer stocks reduce the need for anti-farmer policies like export bans or imposing stock limits on traders, promoting a freer market.
3. Economic Efficiency: Selling stored food during shortages prevents inflation spikes and supports economic stability.

Question for practice:

Discuss how government-controlled buffer stocks of essential food items can stabilize prices and support economic stability.