FCI hasn’t delivered, to farmers or consumers
Given that under 6% of farmers actually sell their produce to the central/state procurement agencies at the minimum support price (MSP), and that there is a 47% leakage in ration shop grains, it is obvious the FCI-centred procurement system isn’t working. Apart from costing R1.15 lakh crore a year, there are other consequences brought out by the High Level Committee (HLC) on restructuring of FCI, headed by former Himachal Pradesh CM Shanta Kumar. As a result of high MSPs in wheat and rice, HLC points out, farmers have got incentivised to grow just these crops, and this causes shortages—and inflation—in other crops like fruits and vegetables. And since FCI procures most of the marketable surplus in key states, this drives out the private trade. Since this is matched by high inefficiency costs—as compared to the wheat MSP of R1,400 per quintal, FCI’s economic cost is R2,200 per quintal —this also drives up consumer costs. Work by Ashok Gulati—Gulati, an FE columnist, was a member of HLC—and Shweta Saini has shown that, in the poorer states, ration shop leakages are the highest and, as a result, the poor ending up spending more than they would in a non-FCI situation. As a result of FCI’s ballooning costs, from R23,000 crore in FY06 to R1,15,000 crore in FY15, the government is left with little money to spend on either giving direct cash subsidies to farmers or to, instead, spend serious money on creating rural infrastructure including irrigation and canals. A by-product of the excessive wheat and rice cultivation in states like Punjab and Haryana has been the dramatic rise in salinity and a fall in the water table.
So, as Shanta Kumar recommends, it is time to wind up the FCI system as we know it, and use the money wisely. So, if direct cash transfers are given in place of PDS rations, this will—once it is fully rolled out—save R50,000-60,000 crore or more each year, to give to farmers directly or to invest in agriculture infrastructure. If farmers are given cash transfers, all of them can get this instead of just the top 6% who get MSPs today. Giving such subsidies will also allow government to decontrol urea which, in turn, will increase its production and also get farmers to use it more judiciously. Winding down FCI-type operations will also create more space for private trade and bring in serious economies of scale as compared to FCI’s diseconomies of scale. More rational buffer stocking— the HLC recommends 10 million tonnes versus an average stock with FCI of 54 million tonnes today—of which only half will be kept in physical form will also free up R1 lakh crore of funds for the cash-strapped finance ministry and also earn billions of dollars of foreign exchange given how competitive India’s farm produce is; under what has been recommended, once the buffer crosses the norm, all extra stock will have to be liquidated, including for the export market.
Naturally, there will be losers and prime minister Narendra Modi’s challenge is to navigate this. Nearly 36,000 of FCI employees will resist the move to push them eastwards, to procure in states where there is no procurement today, and in crops like oilseeds where India has a serious deficit. Among those objecting will be some states who stand to lose thousands of crore of unacceptable mandi taxes they levy on FCI purchases, and also the political class that feasts on the rich FCI diet. Against this are the farmers and consumers, the two classes which will benefit the most, as also the trading class which is the BJP’s core constiuency—good economics can also be good politics if the report is implemented in its entirety, and quickly.