The CAG has done well to point to the extra cost incurred by the Food Corporation of India (FCI) due to the fact that the finance ministry consistently under-pays FCI for the costs it incurs while procuring and distributing foodgrains across the country. In 2011-16, CAG says, the finance ministry released, on average, just around two-thirds of the funds FCI needed—though CAG doesn’t say, this probably helped the finance ministry show lower subsidy numbers each year. Due to this shortfall in funds, FCI has had no option but to borrow money commercially and this, according to CAG, has lead to an extra interest burden of Rs 35,700 crore in 2011-16 or around Rs 7,000 crore each year—as a percentage of the total food subsidy each year, that’s a pretty significant number, around 5%. Significant as the number is, it is probably the least of FCI’s cost, both in financial and non-financial terms. Right now, the government spends around Rs 1.4-1.5 lakh crore each year on FCI operations that include procuring grain to ensure farmers get a good deal and to help prevent price fluctuations, as well as selling it at vastly subsidised prices in ration shops. As it turns out, FCI is not doing a good job on either front.
For one, its procurement is limited to wheat and rice in a handful of states, as a result of which just 4-5% of the country’s farmers sell their produce to FCI. In Punjab, to make things worse, FCI procurement has encouraged growing of too much of wheat/rice and, as a result, a dramatic fall in the state’s water-table; at an all-India level, the MSP-system which benefits mostly wheat and rice has discouraged growing of other crops whose prices then tend to be a lot more volatile—this, in itself, is a good reason to scrap the FCI-based system. As for the need for large FCI food stocks to keep consumer prices stable, the Shanta Kumar committee had pointed out over two years ago that a stripped-down buffer stock of 10 million tonnes and government buying options/futures would be a better solution. The financial implications of FCI’s inefficiency are staggering.
Right now, under the Food Security Act (FSA), the government guarantees 5 kg of wheat/rice per month to 81 crore people. Given the difference in FCI’s economic costs and the issue price of Rs 2/3 per kg fixed in FSA, scrapping ration shops would mean people would spend Rs 20-22 per kg extra if they had to buy the grain in the open market. If the government moved to Direct Benefit Transfer (DBT), it would have to pay consumers Rs 107,000 crore to ensure they didn’t lose out vs the `145,000 crore it spends right now under the FCI-system. It is a pity that despite the evidence against the FCI system being so clear, the government refuses to act on this—the CAG, being more concerned about audit principles, not surprisingly, has missed this altogether.