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Government officials everywhere seem too often unfamiliar with the concept of sunk costs. If you buy something at a specified cost and then you find out that you can’t sell it for as much as you were expecting to (i.e., at a profit), the optimal course of action is to sell as much as you can for whatever price you can fetch. You don’t incur into a loss when you sell, the damage has already been done and the loss has already been realized the moment you made the purchase, therefore selling at whatever price can never be selling at a loss, any rupee coming in is going to be a rupee improving the bottom line. Storing the wheat in inappropriate depots is incurring into a continuous loss through depreciation and storage costs.
The Indian government should sell this wheat into the market immediately at whatever price they can fetch (including paying for the disposal of the batches in the worst conditions). Businesspeople buying the wheat (searchers, using William Easterly’s terminology) will make every effort to sell it at a profit to whoever will appreciate it most (likely poor people), which will get staple food at subsidized prices. The policy of buying wheat at inflated prices needs to end. I would propose gradual convergence of price paid to real market prices in about 5 years so not to produce a brutal shock to wheat producers.