Reforming FCI not a piece of cake

The NDA’s PDS reforms have been half-hearted measures. Mounting arrears towards food subsidy budget settlement pose a serious question mark on the Centre’s fiscal management. The new government has its task cut out to deal with large food subsidy arrears payment and huge grains stocks with the FCI.

Reforming FCI not a piece of cake
The offtake of foodgrains by the states under PDS has increased from 47.41 million tonnes (MT) in 2013-14 to 52.75 MT in 2018-19, a rise of 11%.

As the new government assumes office in a few days, it would be pertinent to look at India’s public distribution system (PDS) and the impact of the reforms initiated by the Narendra Modi-led NDA government in the last five years. The BJP, the lead party in the NDA government, had promised in its manifesto (in 2014) of incorporating best practices of successful PDS models. Stating that the new regime would be the “government of the poor, marginalised and left behind,” the BJP manifesto five years ago had proclaimed to ‘unbundle’ the Food Corporation of India (FCI) operations into procurement, storage and distribution—towards greater efficiency.

Subsequently, after a huge mandate to the NDA, the Modi government took charge and appointed a high-level committee (HLC), chaired by former food minister Shanta Kumar, on restructuring of the FCI in August 2014. The HLC, in its report submitted in January 2015, recommended, among other things, that “the FCI hand over all procurement operations of wheat, paddy and rice to states (Andhra Pradesh, Chhattisgarh, Haryana, Madhya Pradesh, Odisha and Punjab) that have gained sufficient experience in this regard and have created reasonable infrastructure for procurement.”

The HLC had also recommended the FCI should accept only the surplus grain (after deducting the needs of the states under the National Food Security Act—NFSA) from these state governments (not millers) to be moved to deficit states. “The corporation FCI should move on to help those states where farmers suffer from distress sales at prices much below Minimum Support Price (MSP), and which are dominated by small holdings, like eastern Uttar Pradesh, Bihar, West Bengal, Assam, etc,” the HLC had recommended.

After more than four years since the HLC gave its recommendation, restructuring of the FCI remains a dream, and the corporation continues to depend on the same set of states for procurement of grains and procurement operations have not been revamped in eastern states. On the PDS reform, the HLC had recommended that the government should relook at the coverage (67% of the population) under the NFSA as it’s on the ‘higher’ side and it also stressed the need for computerisation of the PDS process for checking the pilferage of PDS grains.

In terms of the PDS reforms, the Modi government’s achievement has been rather a mixed bag. According to the official data, all the existing 23 crore ration cards have been digitised and most of the cards have been seeded with Aadhaar numbers. The government has stated that 2.75 crore ration cards have been deleted during 2013-17. Food ministry officials have often stated that deletion of ration cards has ensured better targeting of beneficiaries. In order to ensure transparency in grain sale process in the PDS, the electronic Point of Sale (ePoS) machines have been installed in 3.88 lakh fair prices shops (FPSs) out of nearly 5.33 lakh FPSs in the country. But all these measures in reforming the PDS have not yielded tangible results. The offtake of foodgrains by the states under the PDS after deletion (bogus) and digitisation of ration cards has not declined in the last five years. The offtake of foodgrains by the states under PDS has increased from 47.41 million tonnes (MT) in 2013-14 to 52.75 MT in 2018-19, a rise of 11%.

Rising food subsidy dues & loans

While the new government will assume office in a few days, it would face a tough situation to manage the rising food subsidy, along with huge outstanding dues to the FCI, the key procurement agency. Along with ballooning of the food subsidy budget, there is a fiscal juggling or innovation taking place as far as FCI’s finances go. The total outstanding dues to the FCI stand at `1.85 lakh crore as on March 31, 2019, because of the mismatch between budget allocated to the corporation and the actual expenses incurred (to the corporation). The actual expenditure towards food subsidy has been rising because of two factors—the annual rise in MSP for paddy and wheat given to farmers for procurement, and ‘open ended’ purchase operations leading to excess grains stocks held by the FCI.
The finance ministry has devised an innovative strategy to raise loans for meeting food subsidy expenses, which soon would be difficult to handle. As on March 31, 2019, the total loans raised by the Centre on behalf of the FCI towards the food subsidy expenditure have reached `2.48 lakh crore, of which the total loans from the National Small Savings Fund (NSSF) amount to `1.82 lakh crore and the rest of the loan amount was raised from cash credit limit of banks, short-term loans and bonds. The annual interest liability towards the loans availed by the government for the FCI was around `13,400 crore, which pushes up the overall food subsidy expenditure. This implies that the central government expenditure is being substituted with loans raised through the NSSF. This innovative method is adopted to maintain fiscal prudence in the central budget.

Another factor contributing to the rise in the food subsidy bill is the Centre’s reluctance to increase the price of highly subsidised foodgrains supplied under the NFSA, 2013. Under the Act, the price of `3/2/1 for rice, wheat and coarse grains, was capped for three years, which ended in 2016. Each rupee (per kg) increase issue price of grains could result in savings of food subsidy of over `5,000 crore annually. For 2018-19, while FCI’s issue price of grains to the states under the NFSA remains at `3 per kg for rice and `2 per kg for wheat, the economic cost of grains is `33.1 (rice) and `24.45 (wheat) per kg, respectively. Over the years, FCI’s economic cost (procurement, distribution and storage of holding foodgrains) has been rising sharply, contributing to rising food subsidy expenses.
As on April 1, 2019, the FCI had 46.38 MT of grains stocks compared to the required buffer norm of 21 MT. The HLC had recommended “gradual introduction of cash transfers in the PDS, starting with large cities with more than 1 million population; extending it to grain-surplus states, and then giving an option to deficit states to opt for cash or physical grain distribution.” However, on cash transfer to PDS beneficiaries, the progress has been minimal. Only Chandigarh, Puducherry and parts of the Union Territory of Dadra and Nagar Haveli have opted for cash transfer in the PDS.

The NFSA—which has the objective of providing for food and nutritional security by ensuring access to adequate quantity of quality food at affordable prices to the people to live a life with dignity—is gradually turning out to be huge financial burden on the central government. The mounting burden of the food subsidy budget is compounded by huge surplus grains, and this has put enormous pressure on the central government’s finances. The short-cut method of raising loans against food subsidy arrears has to be curbed immediately.

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