FCI stock, PDS: Centre can get Rs 1,50,000 crore by taking two bold reforms

By: |
June 22, 2020 5:35 AM

While liquidating FCI’s Execss stocks could give the govt `100,000 crore, PDS reforms could free up another Rs 50,000 crore

As on March 31, borrowings from NSSF were Rs 254,600 crore, on which FCI pays an interest rate of 8.4-8.8% per annum. As on March 31, borrowings from NSSF were Rs 254,600 crore, on which FCI pays an interest rate of 8.4-8.8% per annum. (File image)

India is staring at stressful months ahead. Fighting Wuhan virus, on the one hand, and defending borders from Chinese incursions, on the other, will require mobilising large resources. Most economists are projecting fiscal deficit (Centre and states combined) at ~10-11% of GDP. Going beyond that may not be very prudent. It requires urgent scanning, and pruning of unproductive public expenditures to the maximum extent possible. While the sale of non-strategic state enterprises has been on the cards for quite some time, the Modi government hasn’t been successful on that front so far. And, now given the recessionary outlook, it may not be easy to get a good price for “state silver”.

However, there is one area from where Modi government can tap more than Rs 100,000 crore, provided it takes bold steps. It is the “mountains of grain” that the Food Corporation of India (FCI) has accumulated. As on June 1, FCI had unprecedented grain stocks of 97 million metric tonnes (mmt) in the central pool (see graphic).

Even on July 1, when procurement of rabi ends, FCI is likely to have grain stocks of about 91-92 mmt, against a buffer stock norm of 41.12 mmt required for the Public Distribution System (PDS) plus some strategic reserves. So, compared to this norm, on July 1, FCI will have “excess stocks” of at least 50 mmt.

The estimated economic cost of rice in FY21 is Rs 37,267/tonne, and that of wheat is Rs 28,838/tonne. Even if one takes a conservative and lower ballpark figure of Rs 30,000/tonne (for simplicity) as the combined economic cost of rice and wheat, the value of this “excessive stock” beyond the buffer norm, is Rs 150,000 crore.

This is unproductive capital locked-up in the central pool of FCI. Unlock this by liquidating “excess stocks” in open market operations as much as that can be done by inviting private sector in a big way to hold these stocks, at whatever reasonable market price it can get. It will not recover its full economic cost, as they are much higher than the prevailing market prices. But, by not liquidating it, FCI will keep incurring unnecessary interest costs of about Rs 8,000-10,000 crore per annum. This is simply dumb food policy.

The Modi government’s recent amendment of the Essential Commodities Act, via the ordinance route, can come handy in instilling confidence in the private sector for building large scale storage. The ordinance assures that stocking limits will not be imposed on the private sector, except under exceptional circumstances such as natural calamity, war, etc. It should, however, delete the clause of ‘extraordinary price rise’ if it really means business on inviting private sector to build large and modern storage facilities (silos). It can then push investments into building more efficient food supply lines. The only condition could be to register large storage facilities under the Warehousing Development and Regulatory Authority (WDRA) to know stock position and location with the private sector.

The other two ordinances relating to agri-marketing are already commendable. The “The Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Ordinance, 2020” creates multiple channels for farmers to sell their produce outside the APMC mandi system, and also helps build an unfettered, all-India market for agri-produce. Of course, it will be resisted by many states that are taking undue advantage of the APMC mandis’ virtual monopoly. But, if the central ordinance is implemented in its true spirit, it will be a game-changer. The other ordinance, “The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Ordinance, 2020”, aims at encouraging contract farming. The basic idea behind this is that farmers’ sowing decisions should be made in view of the expected prices of those crops at the time of harvest. It is forward-looking and more aligned to the likely demand-and-supply situation. The current practice, where farmers sowing decision are more influenced by the last year’s price, often leads to the problem of a boom-bust cycle. Although honouring an assured price remains a challenge when actual market conditions differ widely at the time of harvest, there are ample cases of success with various models of contract farming hedging the price risks of farmers. Together, all the three ordinances are in the right direction, and with minor refinements as they become law, they can lay the foundation of a much more efficient agri-marketing system in India than the existing one. The Modi government needs to ensure they are implemented properly by states, which will benefit both the farmers as well as consumers. The main losers in this game would be some arthiyas (commission agents), who had been scooping unduly large shares in agri-value chains. Some local political leaders with close nexus with the arthiyas’ lobby may also lose clout.

The other related area to mobilise additional resources is in the area of food subsidy inherent in the PDS. In the budget for FY21, a sum of Rs 115,570 crore was provisioned for food subsidy. This number is highly misleading as FCI has been asked to borrow more and more from other sources, especially the National Small Savings Fund (NSSF). As on March 31, borrowings from NSSF were Rs 254,600 crore, on which FCI pays an interest rate of 8.4-8.8% per annum. So, the real food subsidy bill for 2020-21 would amount to Rs 370,170 crore (Rs 115, 570 crore plus Rs 254,600 crore). Let the Modi government listen to its own chief economic advisor, what his team had to say in The Economic Survey: (a) Reduce the coverage under PDS; (b) link issue prices to at least half of procurement prices; and (c) move gradually towards cash transfers in PDS. These steps will save a minimum of Rs 50,000 crore annually. And, the country needs these resources desperately to save lives, both from the virus and at the borders.

The author is Infosys Chair Professor for Agriculture, ICRIER
Views are personal

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