In an attempt to tackle runaway prices and subsidies, the NDA government has decided to gradually avoid purchasing more grains than are needed to distribute to the poor, while asking states not to offer market-distorting cash incentives to farmers.
If implemented, the overdue reforms would mark a significant break from past food policies, which have been a major source of both inflation and subsidies.
Overflowing stocks in state-owned granaries -- more than twice the required buffer levels at 61 million tonnes as on July 1-- have led critics to blame the government for effectively acting as a "hoarder", even as cereal prices rise.
In a recent directive, the Ram Vilas Paswan-headed food ministry asked states to stick to minimum support prices (MSP) announced by the Centre and avoid padding these up with their own sops and cash bonuses. MSPs are the guaranteed prices at which the state buys produce from farmers.
Higher MSPs boost farm income but fuel price rise. According to a Reserve Bank of India study, a 10% MSP hike raises short-term wholesale inflation by 1 percentage point.
The ministry also asked states to limit purchasing rice directly from millers -- often called levy rice -- to 25%, to ensure they buy directly from farmers.
If states breach these norms, the Food Corporation of India -- the country's main food agency -- would not be obliged to acquire grains beyond levels necessary for the public distribution system as well as emergency reserves, an official said.
Lower grain purchases by the government would streamline the government's food inventory, freeing up more quantities of food for the private market that would improve supplies and aid exports, which can earn crucial foreign exchange.
In more reforms expected in the coming months, the government plans to move towards a food policy that better reflects the country's changing consumption patterns by offering attractive prices for non-cereals to boost their production.
MSPs – needed to offset higher cost of production -- have also been heavily tilted towards grains. This has resulted in a skewed food basket, stoking prices of not just scarce items, such as pulses, vegetables and cooking oil, but of even cereals.
According to a national sample survey, India's consumption of cereals is coming down, and that of proteins going up, as household incomes grow. Farmers however are producing surplus cereals but far less protein-based items, stoking prices of not just items such as pulses, vegetables and cooking oil, but of even cereals.
"A key reason for sustained uptrend in food inflation over past six-seven years is the very large MSPs hikes for cereals and more importantly, imprudent procurement policies," said Vinay Khattar, an economist with financial services firm Edelweiss.