Column: Restructuring FCI realistically

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Updated: December 13, 2014 1:21:54 AM

The disappearance of FCI rice stock worth R10,000 crore...

The disappearance of FCI rice stock worth R10,000 crore ($1.6 billion), of approximately 6 million tonnes (mt)—from four eastern states, Bihar, Odisha, Jharkhand, and Chhattisgarh—reported by FE ( is symptomatic of the inherent malaise of the procurement by the FCI and state government agencies (SGAs) and the public distribution system (PDS). Leakages in the PDS are almost warranted, given the procurement is at Minimum Support Price (MSP), which is above the market price, and the sale is made at subsidised prices, much below the retail rates. In this specific instance, which is just the tip of the iceberg, merely “visible and known” losses can be inferred. What about the disappearances that have remained unexplained, or have gone unreported, since the inception of the PDS in 1965?

There are also “invisible” losses that are not readily detected during bulk procurement and distribution. For example, the over-weighing of bags with impermissible foreign matter (stones, grass, dust, mud, threads, rags, pins), which means purportedly carrying 50 kg may contain net grains of 48-49 kg or less; sacks of grains that don’t conform to the prescribed quality parameters, like a higher-than-permitted broken-grain percentage or damaged and discoloured cereals; packages reflecting excess weight when “moisture weight” is induced by spraying water on bags. There are thousands of arthiyas, commission agents and surveyors involved as intermediaries in this system.


When bulk cargo is moved by rail or road, shortage under the head of torn or missing bags can be amplified for justifying illegal diversion. Grains weighing nearly 3 mt are being stored in CAP (cover and plinth) storages, or ‘roofless warehousing’, with plinth below, and plastic sheets above. Chapter 5 of the CAG report on FCI (published May 7, 2013), on “internal controls”, mentions that the actual audit coverage against what was planned was between 67-85% during 2006-2012.

There is no single-point accountability for availability of grains due to the involvement of multiple agencies, the report notes. Since official procurement has far exceeded the requirements under PDS, wastage/losses/disappearance has also shot up. Thus, the existence of “more” phantom stocks, i.e., a gap between paper stocks and physical stocks, cannot be ruled out.

The PDS has a leakage of 40-45%. Thus, the nominal efficiency of this model is 55-60%. But adjusted against handling and carrying costs and other administrative expenses, the economic efficiency could fall to even 30%. Against the average economic cost of R24,000/mt ($387) for wheat and rice, and about 60 mt of annual procurement, the budgeted estimate is R1.44 lakh crore ($23 billion) while the expenses and losses are up to 70%, or R1 lakh crore  ($16 billion)!

The government order of August 20, 2014, on the setting up of a High Level Committee (HLC) for restructuring of FCI reads, “FCI is plagued today with several functional and cost inefficiencies, which need to be removed for efficient management of food grains and saving costs.” That is a very candid admission of the messy situation that the management of the public stockholding of grains is in. The concept of PDS has run out its utility. If farmers and consumers, after 50 years of ‘price-support’, are not deemed well-off, then a new arrangement has to be put in place in a phased manner before an ‘income-support’ system is fully operationalised.

What needs to be done for rice? The commonly-held view, that farmers will be deprived of MSP if PDS model is disbanded, is devoid of facts. The accompanying chart reveals that only 8% of the farmers are beneficiaries of this system. If 92% of India’s farmers can dispose of their produce in open market what is the rationale behind the retention of such a discriminatory arrangement?

The National Food Authority (NFA), in Philippines, and the Bulog, in Indonesia, also undertake procurement, storage and distribution of rice in their respective countries, but they do not deal with purchase and processing of paddy. They deal in rice alone. Thailand dealt with paddy in the last three years and has landed itself in a near-irretrievable mess.

The FCI & SGAs have a dual policy for rice procurement—25% levy rice for all states, except Punjab and Haryana, where FCI/official agencies pay farmers for procurement of paddy at MSP and stocks are stored with rice millers under the Custom Milling of Rice (CMR) agreement. As of  January 1, 2014, about 23 mt of paddy (equivalent to 15 mt of milled rice) was held by millers alone, costing around R31,000 crore ($5 billion) at an MSP of R13,450/mt ($217). There is an extended lifting period of rice from the millers.

Millers act as the Bailee of state agencies —having possession but not ownership of paddy. Since long-term stocking of paddy is challenging—they dispose of paddy or milled rice in market and replenish FCI when demanded, by purchasing it back from the market. This amounts to unchecked misuse of official funding/leakages/breach of trust and unreasonable enrichment.

The remedy is that FCI should limit itself to procurement of ‘milled rice’ and dispense with dealing in paddy. A fresh/revised Custom Milling of Rice agreement should be issued, with a list of approved millers or guidelines for approval of the same, with the responsibility of funding and procurement of paddy resting on the millers. The current procedure of distribution to beneficiaries at subsidised prices may continue.

Thus, the official agencies will remain insulated from the paddy operations and the resultant bungling/diversion-to-open-market; double-handling will cease, transportation cost will be economised. This reform will mean the restructuring of nearly 50% of FCI operations.

Vested groups will cry wolf—saying that farmers will realise only below-MSP rates from millers under the new CMR arrangement. To offset such a situation, the government can vest with itself the power of intervention, as is the case with maize and cotton.

As for wheat, unless the concept of polypropylene or gunny bags is dispensed with and bulk-handling, with seamless rail connectivity, linked to steel silos is initiated, there cannot be any real reform with respect to pilferages and shortages. For lower procurement by FCI  and SGAs, the government may upgrade some selective specifications, so that general-purpose wheat is automatically diverted to the market. But that may be a bitter pill to swallow politically. The author is grains-trade expert

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