Explaining how the public sector Food Corporation of India (FCI) was suffering from diseconomies of scale due to higher procurement incidentals like hefty state levies and largesse, the Commission for Agricultural Costs and Prices (CACP) has said in a recent note that the FCIs operations need to be contained, not expanded.
While wheat production has risen from 78.6 million tonnes in 2007-08 to 94 million tonnes in 2011-12 (which in an undistorted market would have been more than enough for supply to match demand), the wholesale price of this key grain in the open market rose 20% year-on-year as per the October inflation data. Rampant procurement by FCI and other government agencies have created artificial scarcity in the market while also dissuading farmers, with the lure of the high minimum support prices (MSP), from cultivating other crops in demand like oilseeds, the rising imports of which have become a big burden on the exchequer and is fuelling inflation.
Public monopoly is as bad as private one... This (unbridled procurement at inflated costs and keeping stocks well above the buffer level while infrastructure is decrepit) is not sustainable in the long run and could lead to a complete collapse of competition in wheat markets, CACP chairman Ashok Gulati told FE.
A CCI official said the CACPs proposal is under consideration. There could be a case (for a CCI probe into the matter). We will study it, he said.
What adds to FCIs procurement cost are various taxes and levies imposed by three of the largest wheat producing states: Punjab, Haryana and Madhya Pradesh.
Including market fee, agent commission, value-added tax and rural/infrastructure development cess, the tax incidence in Punjab is the highest at 14.5%, followed by 11.5% in Haryana and 9% each in Uttar Pradesh and Uttarakhand. A special bonus of R100 per quintal (about 8% of the MSP) given by Madhya Pradesh enabled it to become the second biggest wheat procurer in the marketing year 2012-13, only to cause an acute storage crunch and wastage of the grain.
Around Rs 7,000 crore or 10% of the food subsidy in 2011-12 has been collected in the year from FCI through levies in states like Punjab, Haryana, AP and MP, CACP said in its Price policy for rabi crops report.
Haryana, Punjab, Uttar Pradesh, Madhya Pradesh and Rajasthan account for about 98% of the total wheat procurement in the country. The CACP also pointed out that in these states where the market prices of wheat have been ruling below the MSP, 85-90% of the grain arrival is procured by the government, crowding out private players and leashing market forces. The commission also expressed doubts about the efficacy of the price policy in terms of ensuring remunerative prices to farmers, who it said do not always get the MSP and are forced to sell in distress.
As the accompanying tables show, thanks to the open-ended procurement policy, FCI and other state agencies have ramped up their purchases without due consideration of the market realities. Procurement in Madhya Pradesh has more than doubled during the last three years to 8.4 million tonnes.
We have been providing bonus to wheat farmers over the last few years and want to become the single biggest contributor of wheat to the central pool in the next few years, chief minister Shivraj Singh Chouhan had told FE earlier.
The record wheat procurement of close to 39 million tonnes (41% of the total output) by FCI and state government-owned agencies from this years production of close to 94 million tonnes has deprived the processors of any source to buy the grain other than the government. We are forced to depend on wheat under the government's open market sale scheme because of lack of availability of wheat in the open market, said Adi Narayan Gupta, president, Roller Flour Millers Federation of India.