States bonuses artificially increase the procurement price and creates inflation-inducing shortages in the open market. Higher procurement by FCI also adds to the Centres subsidy bill.
Because of bonus announced by Rajasthan and Madhya Pradesh in the last few years, FCIs wheat procurement from these states has risen. The two states agencies also procured grain from bordering districts in Punjab, Haryana and UP.
While Chhattisgarh since the 2012-13 kharif marketing season has offered a bonus of Rs 270 a quintal over the paddy MSPs, MP had announced a bonus of R150 for the current rabi marketing season. Bonuses tend to be around 10-12% of the MSPs.
The food ministry has told states: FCI, in consultation with the Union food and public distribution department, will decide how much wheat or rice stocks it should acquire in a particular season, and restrict its central pool procurement to that extent, leaving the rest of the surplus stock to be disposed of by the state government, at its own risk and cost.
The ministry added: Such declaration of bonus by the state government distorts the market of the concerned commodity and drives private sector buyers out of the market in the state. This also generates possibilities for malpractices.
Due to the bonus factor, wheat procurement in Madhya Pradesh has risen to more than 7.1 million tonnes in the current season from 6.3 million tonnes in the previous year, while in Rajasthan, purchase of the grain has risen to more than 2.1 million tonnes from 1.2 million tonnes in the previous year. Similarly, paddy procurement has seen a sharp increase in the last few seasons in Chhattisgarh thanks to the bonus offered by the state to farmers. Concerned over this practice, the Union food ministry has said: The state government would be responsible for the disposal of any surplus quantity procured in the state over and above the required quantity and bear the financial burden in that regard.
With the food security law being implemented, the Centre's food subsidy bill is expected to be Rs 1.34 lakh crore in FY15, compared with Rs 92,000 crore last year.
The step to restrict procurement would be effective from the next rice procurement (October 2014-September 2015) and wheat purchase (April 2015-March 2016) seasons.
Besides, the food ministry has also warned the non-decentralised procurement states such as Punjab and Haryana that in case they also declare a bonus over and above MSP, FCI will not take part in the MSP operations in the state concerned and state agencies will have to mobilise resources and take care of entire MSP operations in the state on their own.
At present, FCI in collaboration with state government-owned agencies like Pungran (Punjab) and Haryana State Cooperative Supply and Marketing Federation carry out rice and wheat procurement in the states.
Rajasthan, Madhya Pradesh and Chhattisgarh, among others, are part of the decentralised procurement system, where the respective state government-owned food and civil supplies corporations purchase grain from the farmers and get reimbursed by the food ministry through FCI.