Supplyco Economics: Do We Have An Answer To Kerala’s Food Inflation?

It is surprising how discussions on food inflation are absent in a consumer state like Kerala. The discourse is limited to news reports of prices heating up and the consequent government intervention through state entities like Supplyco. Whether such interventions result in arresting the rise in prices is almost never discussed or investigated.

Only a very few know that Supplyco is more than a mere retail chain and has an objective to control the rise in prices of essential commodities. This is because Supplyco is commonly perceived as a manifestation of the welfare state selling certain commodities at lower prices, and hardly as an answer to food inflation. Supplyco is even viewed by some as an extended part of the public distribution system (PDS).

Formed in 1974 with the primary task of purchasing food grains from other states and maintaining buffer stocks to mitigate any shortage, Supplyco later became a tool for the state to implement Market Intervention Scheme (MIS). MIS is a temporary measure where government entities purchase commodities from the market or procure directly from farmers and sell it to consumers at a lower price. It is usually carried out with an intention to control market prices when there is 10 per cent or more decrease in the production of a commodity and a consequent hike in its market price. Supplyco is the state government’s implementing agency for MIS. With currently 1,406 retail outlets, ranging from small scale outlets to hypermarkets across Kerala, Supplyco has a significant presence in the state’s retail market.

Does Supplyco Deliver?

Food articles and beverages have a weightage of 37.67 per cent in Kerala’s commodity basket, which is a fixed list of goods and services that a consumer would spend on. In this basket of food articles and beverages, there are many categories such as cereals, meat and fish, prepared meals, milk products, etc. Supplyco sells consumer commodities from categories of cereals, oils and fats, pulses, spices, and non-alcoholic beverages at subsidised prices. These categories have a combined weightage of 32 per cent in Kerala’s food basket alone. However, a comparison of food inflation figures from 2012 to 2017 shows that consumer price index (CPI) has risen by 50.61 per cent in Kerala while at the national level it rose by 37 per cent in the same period. To put it simply, food items that cost Rs 100 in 2012 will cost Rs 150.61 in 2017 in Kerala, and Rs 137 at the national level.

This raises doubts whether Supplyco has been able to deliver the intended result of controlling the rise in prices of commodities in the state through large scale MIS operations. The losses from these MIS operations are also mounting. To compensate for these losses, the annual budget allocates government grants to Supplyco each year. However, these grants never suffice for the losses. For instance, in FY 2015-16, the loss from MIS operations was Rs 249.21 crore while the government grant allocated in the budget was only Rs 99 crore.

Further, Supplyco’s MIS loss is growing at a compound annual growth rate (CAGR) of 16 per cent while the government grants are growing at a CAGR of only 4 per cent. This shows the widening gap between MIS loss and government grants. With an accumulated loss of Rs 338 crore as of 2014-15, Supplyco’s operations cost the state exchequer dearly. In fact, to transfer the intended subsidy benefits worth Rs 121.60 per person per month, the government spends an additional Rs 61 per person per month running Supplyco.

Negligible Market Share

An examination of Supplyco’s market share also throws light on the reach of this retail chain. However, before delving into this topic, it would be prudent to explore what would be the basis to calculate the market share of a public sector enterprise (PSE) with a welfare facet. Simply comparing the turnover of Supplyco with another retailer, or calculating the contribution of Supplyco towards Kerala’s total retail market turnover would not do justice since all state entities are not profit driven. However, comparing the quantity of commodities that reaches consumers through Supplyco, against Kerala’s total consumption would be sound. Such a comparison reveals that Supplyco’s share in Kerala’s consumption of those commodities is near negligible.

Let’s take coconut oil as an example; it is one of the most sold and preferred commodities from Supplyco owing to the subsidised prices. Supplyco sold an average of 49.91 lakh litres of coconut oil from 2012-17, while the total demand for consumption in Kerala is 1984.39 lakh litres. Thus, Supplyco contributes a mere 2.52 per cent towards the state’s consumption.

Similarly, other most sold items in Supplyco outlets such as dry chillies, black gram and rice have contributions of 9.28, 18.45, and 4.91 per cent respectively towards Kerala’s total consumption of these commodities. This demonstrates that Supplyco’s market share is not irreplaceable or significant, thus revealing the importance of other retail outlets in meeting the state’s consumption demand.

Short-sightedness In Controlling Food Inflation

Studies suggest that food inflation in Kerala shows a strong positive correlation with other factors in the economy such as minimum support prices (MSP) or agricultural wages. Even a MSP hike in paddy alone will improve the demand for overall agricultural labour, thereby increasing labour costs not just for paddy but all major crops. Thus the cost of production of major crops is increased and consumers will have to spend more to buy them. This, along with increased spending from improved wages, is a critical agent of food inflation. However, such drivers of inflation are well outside Supplyco’s ambit, like the recent MSP revision which was a political decision. This exposes the short-sightedness in Supplyco’s objective to control the rise in prices of commodities, and questions its ability to do the same.

A common argument propounded by the proponents of Supplyco is that it should not be considered as just another PSE because of its rationale to ensure supply of essential commodities to the economically weaker sections of society. A significant portion of consumers also believe Supplyco’s provision of essential commodities at subsidised rates is beneficial during price rises. While this is not false, we need to overlook the praise and ask ourselves whether we could have done better. This is because, fact remains, 44 years after the formation of Supplyco, we still do not have an answer to Kerala’s food inflation though we think we do. We need to introspect whether the Supplyco model of government intervention is the best way to transfer the intended subsidy benefits to the consumer effectively and efficiently.