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Look before you leap

FCI’s inefficiency is because of policies behind its value-chain, not its institutional structure

Published: January 26, 2015 3:37 AM

Reforming institutions is always necessary, especially so as they tend to stagnate and, at times, outlive their purpose. This was felt about the Planning Commission which has been replaced by the NITI Aayog. It is not surprising that the Food Corporation of India (FCI) has come under the lens in terms of restructuring given that the value-chain of food delivery—which is what the FCI is involved in—has been reviewed and found to be sub-optimal. Alternatives are being discussed as to how to procure foodgrains and distribute the same in a better manner.

To ensure that we do not end up doing the same thing through different names, we need to understand the raison d’etre of FCI. The function of FCI is primarily three-fold (looked at directly and indirectly). The first is to procure foodgrains, store the same and distribute to the households. While FCI has been blamed for all the ills in this chain from wastage, slack and leakages in distribution, the major issue is with the policies that are behind this chain rather than the institution. By changing the institutional framework, and not the approach, we may only be scratching the surface.

Procurement in India is an open-ended scheme where all farmers can sell at a predetermined price to FCI. Quality specifications are specified and farmers are free to sell anywhere they want. The idea was to ensure that farmers are encouraged to grow more rice and wheat and they are fairly compensated through the MSP. Do we want to change this motivation behind the procurement policy?

Further, by making it open-ended, farmers sold a progressively increasing quantity which had to perforce been taken up by FCI making it an expensive affair. The procurement incidentals are 25% of the procurement cost for both rice and wheat. Do we want to retain this kind of procurement or keep it within limits?

But if the idea is to provide an income and encourage output then it has to be kept open-ended, in which case the replacement agency has to bear this cost and be compensated with a commission. Otherwise, it is a high-cost business where the returns are low. FCI borrows today under the food credit system at an average cost of 10.7%. Few private players will be interested in such a model considering that the procurement centres have to be replicated (FCI has 14,000 such centres).

Therefore, as long as the procurement ethos does not change, the basic issues remain. Also, with such procurement and absence of a policy to deal with surplus grains, FCI is the largest hoarder of foodgrains—in 2013, at one point of time, they had stocks of over 70 million tonnes (currently 39 million tonnes). The fault is not really with FCI.

While theoretically a cash transfer can be given to farmers on recorded production (though there will be an incentive to cheat to get this benefit), procurement is needed for the PDS as well as maintaining a security buffer. In the absence of the latter, the cash transfer would be possible theoretically at the first point of sale in pre-specified selling points. How do we tackle the PDS?

The distribution part is also a major cost for the system where incidentals are 30% for wheat and 25% for rice on the pure cost of grains. But while decentralised distribution is spoken of, it is not that easy in reality as production regions and distribution centres are not the same and someone has to move the wheat from Punjab to Kerala. If FCI is not efficient, can anyone do it better as both crops are grown in one season (rice has a small share of rabi crop), and has to be stored for a year until the next crop arrives. Therefore, grains have to move from the production areas to distribution centres and have to be stored for a year. There is no option really in the practical sense.

This brings the issue of cash transfers to the fore. Can we have cash transfers given that we are treating Aadhaar as a panacea for all distribution of benefits? While theoretically it sounds good, pricing is an issue even if we look beyond the practical reality of the money being diverted away from foodgrains. The price of common variety of rice ranged from R24-56 per kg. Wheat ranged from R16-36. How do we transfer the money given that a fixed sum will make some better-off and others worse-off? It is very likely that once the cash transfer sets in, there will be lots of criticism of a replication of a dole system, a la MGNREGA.

In fact, the ethos of the PDS was to ensure that everyone got a standardised product at the same low price. There will be political lobbying for claiming higher cash transfers as we will not know the fair price. Once there is cash given and even assuming that it is spent on rice and wheat, then automatically market prices will start increasing, which will lead to inflation concerns. Also, given that inflation increases every year, we will have to revise these numbers across states and districts. Have we made any calculation of this cost by back-testing the results based on targeted distribution numbers?

Ideologically, if we are antagonistic on providing foodgrains to the people on grounds of systems being inefficient or that the targeting is skewed and leakages abundant, then we just need to do away with the PDS. Let everyone buy their own foodgrains at the market price and the government can save on the incidental procurement and distribution cost, which are around 50%. Even a cash transfer makes little sense if it becomes a dole.

Similarly, can the procurement stop and FCI only buy the strategic buffer and roll over the stock through the market? Let the markets take over. Are we prepared to do this?

We need to be clear of our objectives or else there will be more contradictions.

By Madan Sabnavis
The author is chief economist, CARE Ratings. Views are personal

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