What govt needs to do to clear FCI mess

Govt needs to implement the recommendations of Shanta Kumar committee to reorient the role of FCI.

What govt needs to do to clear FCI mess
Illustrations: Rohnit Phore

By Sanjeev Nayyar

The unpaid and ballooning food subsidy is in the news because its funding is not fully included while calculating the fiscal deficit. The question is, was that always the case?

From 2001-02, the percentage of subsidy released, in the year in which it was incurred exceeded 74%, barring 60% in 2011-12. Things changed when The National Food Security Act (NFSA) was introduced in September 2013. Its full impact was felt starting 2014-15. The accompanying table shows subsidy amount leapfrogged. It went up 92% between 2011-12, and 2018-19RE. However, the gap between the subsidy burden of FCI and the amount reimbursed by the government has increased starting 2014-15.

It is pertinent to ask if the then government followed Nobel Laureate Abhijit Banerjee’s experimental approach to poverty alleviation. Were “randomised trials of this intervention among the poor with control groups set up for the sake of comparison to draw evidence directly from the actual people who were expected to benefit?”

Realistically, can any finance minister budget for food subsidy of `1,84,220 crore without exceeding the fiscal deficit target by a mile?

NFSA guarantees 5 kg of food grains per person per month to entitled beneficiaries. The Antyodaya Anna Yojana households, which constitutes the poorest of the poor, guarantees 35kg per household per month. The Act mandates that 67% of the population (75% in rural areas and 50% in urban areas) must receive highly subsidised food grains? Allocation of food grain is skewed in favour of wheat and rice.

According to PRS India report, the expenditure on food subsidy is increasing while the ratio of people below the poverty line is falling. The ratio was 21.9% and the number of poor 26.9 crore in 2011-12. “A similar trend can also be seen in the proportion of undernourished person in India, which reduced from 24% in 1990 to 15% in 2014.”

This begs the question as to why the subsidy has gone up substantially? NDA-2 inherited NFSA. However, it has kept the per kg rates unchanged since 2014, i.e., rice Rs 3, wheat Rs 2 and coarse grains `1, while cost of procurement and storage have increased. If prices were increased regularly, the subsidy bill would have been much lower.

Two, the number of beneficiaries stood at 81.3 crore according to a July 2019 Press Information Bureau release, as against about 35 crore prior to introduction of NFSA.

Three, ‘open ended’ purchase has led to excess grains stocks being held by Food Corporation of India (FCI). According to a Business Standard report, stocks held by FCI as on Sept 1, 2019 were wheat 41.49 mt against a buffer of 20.52 mt, and for rice, 26.14 mt against 10.52 mt. Stocking norms were laid down on January 22, 2015, and have not been revised thereafter.

Four, it seems that despite a decline in poverty rate, the non-poor are still identified as poor by the government.

Five, according to a 2011 report, leakages in PDS were estimated to be 46.7%. Ashok Gulati wrote that, “Later on, the Modi government introduced PoS machines and weeded out some fake ration cards. But, still, leakages continue, and rough estimates range from 30-40%. Leakages can be reduced if issue price is linked to, say, 50-75% of MSP.”

Borrowings from the National Savings Fund and increase in short-term borrowings helped FCI meet its liabilities.

Note that NSS borrowing started in 2016-17, when the Central government had to fund pay-outs on account of the 7th Pay Commission, whose annual outflows were estimated at `1,02,100 crore in 2016-17. As food and salary pay-outs increased so did NSS borrowing.

Despite the Centre spending over `4 lakh crore, excluding what the state governments spend, the cries of farmer distress are only getting shriller. Is the shortage of funds cause for distress or is there another reason?

We forget that agriculture is a State subject, and a legacy of the Government of India Act 1935, but we relentlessly expect the Centre to reduce farmer distress.

Instead of scrapping the APMC Act (Agriculture Produce Marketing Act), introducing laws for contract farming and agricultural land lease, promoting drip irrigation, States have been writing off farmer loans, and providing free or subsidised power. States have not agreed to an even Mandi Tax Rate for e.g. “a company procuring grain had to pay 6% tax in Punjab, 4% in Haryana and 0.2% in Madhya Pradesh. For pulses, mandi tax in UP is 2.5%, in MP it is 2.2% while in Gujarat it is 0.6%.”

Subsidy ensures the vicious cycle of farm distress continues and leaves the states with lesser resources for investment in agriculture R&D and water management (excluding national waterways)·again a responsibility of the State government·benefits of which shall accrue to farmers in the long-term.

Having said that, the Centre must launch a communication campaign with these objectives. One, a change in the mindset, i.e. from being a food-deficient to a food-surplus nation. Two, educate people on what the state and Central governments are responsible for accountability is known. Three, enlighten people of the benefits from consuming millets, whose production fell post the Green Revolution (Area under millets cultivation was at 14.72 million hectares in 2015-16 as against 37 million hectares in 1965-66), and traditional rice varieties.

Set up in 1965, FCI best symbolises the shortages mindset. Modi had set up the Shanta Kumar Committee. The brief was how to make the entire food grain management system more efficient by reorienting the role of FCI in MSP operations, procurement, storage and distribution of grains under Targeted Public Distribution System (TPDS). Some recommendations, made in the January 2015 report, are worth revisiting.

One, “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.”

Two, FCI should accept only the surplus grain (after deducting the needs of the states under NFSA) from these state governments (not millers) to be moved to deficit states. “As on December 2017, only 17 states have adopted decentralised procurement.”

Three, “the statutory levies including commissions, which vary from less than 2% in Gujarat and West Bengal to 14.5% in Punjab, need to be brought down uniformly to 3%, or at most 4% of MSP, and this should be included in MSP itself.”

Four, “GoI needs to revisit its MSP policy. Currently, MSPs are announced for 23 commodities, but effectively price support operates primarily in wheat and rice and that too in selected states.” Importantly, if subsidised wheat and rice are partially replaced by high protein pulses it would discourage their production and save water-subsidy too.

Five, committee findings “reveals that 67% coverage of population is on much higher side, and should be brought down to around 40%, which will comfortably cover BPL families and some even above that.” Compare list of beneficiaries with other government databases to weed out the non-poor.

Six, to reduce excess stocks “A transparent liquidation policy, which should automatically kick-in when FCI is faced with surplus stocks than buffer norms” is required.

Also, the Centre must use the PM-KISAN scheme to get the states to hasten the process of digitisation of land records and collect farmer data. Once done, the reliability of farmer details would increase allowing government to explore payment of subsidy via DBT and providing farmers in real-time.

By nature, most Indians are resistant to change. They accept change when a crisis erupts like it did in 1991. Are we waiting for crisis in agricultural to reform?

The author is Chartered Accountant and founder He does not claim to be an expert on agriculture.

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First published on: 02-11-2019 at 00:24 IST