Cost Factors: Trim the ancillary procurement costs

January 11, 2021 7:00 AM

Given MSP’s impact on the govt’s fiscal burden, and the fact that MSP can’t be ended at present, the Centre must look at factors such as gunny-bag price, grain moisture, etc

Start with the cost of acquisition, which includes market-fee, commissions and cost of gunny bags.

By T Nanda Kumar

MSP is here to stay. The Union government has made it abundantly clear; mandatory or not, MSP will continue. The financial burden will continue to escalate (, posing serious fiscal challenges. A surgical strike appears to be a ‘no-no’ at this stage.

Let us ask: Who benefits most from the MSP? Who, other than farmers, benefit? Whose (other than farmers) interests could be hurt if the present operations of MSP are changed? Without reducing a single rupee due to the farmers, is it possible to reduce the food subsidy burden?

Let me start with the construct of ‘cost’ in the reports of Commission on Agricultural Costs & Prices (CACP). ‘Cost’ in the ‘cost (A2+FL) plus formula’ is the weighted average cost of production of all producing states; ‘weight’ being the share of production. In any such formula, there are low-cost producers and high-cost producers. The lowest-cost producers are; Punjab, Haryana and Madhya Pradesh for wheat and Punjab, Chhattisgarh and Andhra Pradesh for paddy. MSP operations, therefore, give a margin higher than 50% of ‘cost’ to farmers in these states, quite appropriately, a reward for being efficient! The accompanying graphic shows the percentage margins over cost for farmers in key producing states. Understandably, farmers in these states have higher stakes in the continuance of MSP. No surprise then that these states, which get margins above 50%, contribute 84% of procurement of wheat and 74% of rice. This is the obvious part.

There are other details which often escape scrutiny. Let us consider rice as an example.

Start with the cost of acquisition, which includes market-fee, commissions and cost of gunny bags. The story of market-fee (APMC cess) being different in different states is well known. The ‘arhatiya’ commission is controversial. My view is that the provisions in the APMC Act does not authorise the Mandi Board to fix any such commission. Services of ‘commission agents’ are, by nature and by law, voluntary and have to be paid for by the person who engages them. A circular issued by the Andhra Pradesh government (2005-06) states that farmers are free not to use the services of commission agents; but if they do, they have to pay for it. The question therefore is: Should the FCI pay the mandated commissions? Even if it engage agents, should it not be a market-determined charge for services rendered? Can it save 1.5% of the economic cost by not using the services of such agents?

Gunny bags (4% of the cost) are procured through a rate contract under which prices for B-Twill bags are fixed by the Jute Commissioner, basis Tariff Commission formula. The rationale for this mode of procurement comes from two factors; MSP for jute and the Jute Packaging Materials (compulsory use of jute in packaging etc.,) Act 1987. The cost data comes from jute mills. This data is not available in the public domain, but I have had the occasion to see some ‘interesting’ data challenges here! An attempt to discipline inefficient jute mills was stayed by the Kolkata High Court. The government could have saved about Rs 3,000 per ton (9 lakh tons of jute bags are procured by the government). Obviously, an issue worth revisiting.

The specifications governing procurement are a major factor impacting the cost. Procurement guidelines for paddy allows 17% moisture, 3% immature grains, 5% damaged & discoloured, and 6% admixture of lower quality. Rice received from the millers allow an upper limit of 14% moisture. Brokens are permitted to the extent of 25% for raw and 16% for parboiled rice. Focus on the big ones: moisture and brokens. Admitted that rice is hygroscopic in nature, and these are upper limits. There is evidence that 13% moisture levels are achievable for rice in normal conditions. But, 25% and 16% brokens? Surely, time to rethink? Many reports show that milled rice from procured paddy do not necessarily have such levels of brokens. But rice delivered to FCI miraculously ‘achieves’ a level of brokens 24-25%. Is there something that we do not know?

What about those farmers who bring paddy at moisture levels much less than 17% and get paid the same MSP? Would it make sense if they poured a few buckets of water to reach 17% moisture and get paid for the effort? Is there market-wise collection of data to decide on a median moisture level and payments made on measurable parameters (e.g., milk procurement by co-ops) to incentivise those who bring better quality? If our rice mills are producing 25% brokens, it is time we took a serious view of them! Where will such rice sell other than in ration shops? While conditions during harvest and the hygroscopic nature of grains need to be factored in procurement guidelines, there is a case to redefine standards, albeit with accommodation for lower quality with a value-cut. This will save the government some money and incentivise farmers.

At the distribution end, there are 5.5 lakh ration shops managed mostly by individuals. There are livelihoods, commissions and ‘leakages’ involved here as well! Given the fact that MSP will continue to increase the fiscal burden of the government and surgical strikes are ruled out for the time being, continuous nibbling at cost factors will not do harm, it may actually do good!

Government could start by looking at fixing better specifications as the ‘reference’ for MSP, retaining the current maximum permissible limits with appropriate value-cuts. Analysis of samples across various procurement centres could give us a real picture. A re-look at the costing of jute bags might yield some dividends. The permissible percentage of brokens can be brought down significantly based on a series of sample milling trials. A considered view on whether FCI should use commission agents in procurement and the question of legality of APMCs mandating a commission can make some difference.

And finally, the government of India should mandate that all payments on account of MSP will be transferred directly to the accounts of the farmers and not through any third party. This step alone will make a difference.

An afterthought: if MSP is made mandatory, do we need FCI and all this paraphernalia? After all, government ensures a minimum price for sugarcane without procuring even a single ton!

The author is Former food & agriculture secretary, GoI
Views are personal

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