How long can government sustain FCI’s operations?

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Published: August 29, 2019 1:01:10 AM

Ration-shop sales falling, stocks rising & per unit subsidy up dramatically; govt dues up to Rs 2 lakh crore already

Food Corporation of India, Narendra Modi, BofAML, subsidised food, minimum support prices, WTO rules, National Food Security ActNormally, FCI could think of exporting this stock, but given Indian MSPs are higher than international prices, this can only be done by selling the stocks at a discount, but that is against WTO rules. (Reuters photo)

Over the last six years, the country’s food subsidy bill has roughly doubled, yet the amount of heavily-subsidised food being sold through ration shops has fallen by around 10-15%. If this situation continues, it is not clear how much longer the government will be able to sustain the Food Corporation of India-led procurement-cum-ration-shop system where long-term debt levels have crossed Rs 200,000 crore, in addition to around Rs 80,000 crore of short-term debt that is rolled over in relatively shorter periods of time. Food subsidy payments rose from Rs 92,000 crore in FY14, the year before Narendra Modi became prime minister for the first time, to Rs 184,220 crore that has been budgeted for FY20; FCI’s sales of foodgrains from all its schemes fell from 52.7 million tonnes in FY14 to 45.2 million tonnes in FY18, the latest year for which data is available. The reason for this, as a BofAML research note points out, is that while FCI’s costs of procurement have been rising at a steady pace thanks to the hike in minimum support prices (MSPs) by the government, the prices at which the grain is sold at ration shops has remained unchanged since the National Food Security Act was introduced in 2013 by the UPA; the NFSA also meant the number of beneficiaries jumped from 35 crore to 80 crore. The gap between FCI’s costs and its revenues rose from around Rs 1,000 per quintal in FY14, to Rs 2,200 in FY18 in the case of wheat and, in the case of rice, from Rs 1,800 to Rs 2,850 in the same period.

While FCI’s offtake is slowing, indeed falling, even though FCI’s procurement of grain has remained remarkably stable at around 50 million tonnes a year, this has meant a rapid and unsustainable level of stocks; in August 2019, the last month for which data is available, stocks were 71.1 million tonnes as against the recommended buffer of 41.1 million tonnes on July 1. Normally, FCI could think of exporting this stock, but given Indian MSPs are higher than international prices, this can only be done by selling the stocks at a discount, but that is against WTO rules. It gets worse since, given the 90-95% level of subsidies—as compared to the market price—the bulk of FCI’s revenues actually depend on how regularly it gets its subsidy payments from the government. Data from BofAML shows that FCI earned just Rs 38,357 crore in FY14 from sales while it was to receive Rs 90,153 crore from the government to take care of the subsidy element; that is, the subsidy-to-sales ratio was 2.35. In FY19, the ration shop sales were budgeted to be around Rs 24,485 crore versus the subsidy of Rs 131,787 crore; the subsidy-to-sales ratio worsened dramatically to 5.38.

With the government badly strapped for cash, however, it has not been able to make payments to FCI and, as a result, while the government owed FCI around Rs 45,000 crore in FY14, this shot up to around Rs 200,000 crore in FY19. Naturally, FCI has had to borrow this amount; since no banks can possibly lend all this, even though bank borrowings have risen, FCI’s borrowings from the National Small Savings Fund rose from Rs 70,000 crore in FY17—this was its first borrowing—to Rs 191,000 crore in FY19. Clearly, this is not a situation that can sustain since, while there is no way the government can possibly pay FCI Rs 200,000 crore in one go, FCI can’t keep borrowing either. Even if the government issues bonds to pay FCI, this will mean a Rs 13,000 crore annual expenditure in just interest costs. Right now, FCI’s costs are spiralling and while raising the issue price of foodgrains from ration shops will help—if the government does this—this will slow the pace of growth, but it will do nothing to reduce FCI’s existing deficit. Sooner rather than later, a comprehensive solution will need to be found.

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