Why the plan to revamp FCI has holes

By Sandeep Dikshit

A permanent visual soon after the release of audit reports on the Food Corporation of India (FCI) for the past several years has been the endless stacks of foodgrains, mainly wheat, spilling out of sacks with the accompanying narrative describing the loss in hundreds of crores of rupees. Efficiency, clearly, has never been considered to be FCI’s strong point.

The previous government was conscious of the several interlinked issues that needed reform but pussyfooted around some owing to the sensitivity of United Progressive Alliance chairperson Sonia Gandhi to any tinkering with the National Food Security Act (NFSA), and retrenching the departmental workforce whose per person earning has been reckoned by the Narendra Modi-commissioned Shanta Kumar Committee at Rs 80,000 per month.

Chaired by former Union food minister and former Himachal Pradesh chief minister Shanta Kumar, the Committee recently released its report after six months of consultations. It fell short of recommending unbundling of the FCI, an idea that Prime Minister Modi had proposed at an election rally last February. He wanted FCI to be trifurcated: one division meant for procuring gains, the other for storage and the third for distribution.

The Committee, instead, has proposed a wholesale cleaning of what it regards as “Augean stables” in the organised agri sector that benefits petty pilferers and organised interlopers to the tune of Rs 50,000 crore every year. The report’s range is wide. It includes a revamp of the NFSA, uniform countrywide levies, shutting down many of FCI’s 200-odd offices and shifting operations to the neglected states of eastern and central India. It also wants decontrol of the heavily subsidised urea, outsourcing of stocking operations, slashing strategic reserves of foodgrains and wholesale modernisation of storage and movement. However, read without an explanatory text, each major proposal gives rise to uneasiness.

Doing away with levies
For Punjab and Haryana, the worrying proposals are the withdrawal of FCI from purchasing wheat and rice and sharply reducing the double-digit cess charged by both on transactions. The financial loss could be recouped via a diversification package (other crops that farmers may sow, mainly pulses) and the soon-to-be-introduced Goods and Services Tax. And the buying of wheat, paddy and rice could be taken over by half-a-dozen experienced states, including Haryana and Punjab. FCI will remain partly in the game, its role limited to buying the surplus after the states have met their NFSA and other welfare scheme obligations.

Problem with it
Will states be fully compensated for the loss of cess? This is particularly critical for the agrarian economy dependent Punjab. Unlike Haryana, it does not have the advantage of being in the National Capital Region and benefiting from its growth. Also, diversification of crops does not depend on government fiats and this suggestion reflects the panel’s apprehension of private traders not really filling the breach due to FCI’s recommended withdrawal.

Warehouse receipts
The Negotiable Warehouse Receipt System (NWRS), the report says, should take care of the issue of adequate prices. Under this system, farmers can deposit their produce to the registered warehouses, and get about 80 per cent advance from banks against their produce valued at the minimum support price (MSP). They can sell later when they feel the prices are good for them.

Problem with it
The banks have not been taken in the loop. Given the high percentage of defaults in the farm sector, partly on the expectation of waivers, it remains to be seen if banks will do as the Committee expects them to.

Only a few benefit
The report seeks to knock the bottom out of arguments about the universality of benefits by putting out telling statistics, though most are copies of what then Finance Minister P Chidambaram had to say about FCI. Just about 6 per cent of the 9 crore agricultural households sell paddy and wheat at MSP. And it is far worse for other staples. The geographical area too is limited to Punjab, Haryana, Andhra Pradesh and, lately, Madhya Pradesh and Chhattisgarh.

The report seeks to build further on the absence of the universality theme by pointing out that currently, MSP is announced for 23 commodities but generally operates in wheat and rice and that too in selected states.

Problem with it
The report fails to mention why private traders — who it says were crowded out in wheat and rice segments due to the presence of government procurement agencies — did not operate in the commodities shunned by FCI.

Indirect benefits
The report concedes the possibility of indirect benefits but refrains from commenting on their extent.

Problem area
Farm experts have always maintained that MSP does influence the price at which private traders make purchases. The report also does not try to find out whether farmers have the financial resilience to bear the shock of price volatility if private traders corner the lion’s share of procurement. Rather, farmers of UP and Madhya Pradesh have been known to dump their produce by the roadside or set fire to the crop on not getting a price that covers even the transportation cost.

Supply chain flaws
One source of heavy leakages is the supply chain because of the absence of bulk handling facilities. The report’s recommendation for outsourced depots, silos and the like is an approach that was being implemented by the previous government such as the massive silos in Mansa and Hisar.

Ground reality
At least half of the modern warehousing suggested by the Shanta Kumar panel has already come up and through the private route it desires.

Problem area
The committee should have suggested their integration with setting up of cold storage chains that have been a constant endeavour since the Rajiv Gandhi days.  

Total computerisation
Two other solutions the report proposes are end-to-end computerisation and containerisation of rail operations.

Ground reality
If total computerisation was a panacea for all ills, the Mahatma Gandhi National Rural Employment Guarantee Scheme would have been flawless. As for rail operations, Railway Minister Suresh Prabhu has been drawing attention to the dire financial straits of the railways and this means private investment here too has to be sought. Railways has always seen the private sector slowly warm up to proposals. Also, IRCON’s dominance has traditionally been a drawback.

Direct subsidy transfer
The Shanta Kumar report goes beyond delving into FCI’s travails by suggesting direct cash transfer of input subsidies (Rs 7,000) to farmers on a per hectare basis. This, it suggests, should be done by totally deregulating urea prices and decanalising imports at zero duty.

Problem with it
The Jan Dhan Yojana is still nascent and Aadhar cards have issues. The entrenched lobby that benefits from the subsidy would also put up resistance. And how prudent would be cash transfer if it is at once diverted for personal needs and habits?

Relook at food security
In addition to calling for virtually rolling up FCI in its traditional strongholds, the reform of the National Food Security Act is another area where the Committee diverges from the previous government’s approach. Calling for a second look at food security, the panel wants it deferred in states without end-to-end computerisation, bringing down coverage from 67 per cent of the population to 40 per cent, raising grain allocation per person from 5 kg to 7 kg under priority coverage, linking the Antyodaya household allocation to about 50 per cent of MSP and giving them six months of ration at one go to reduce storage costs of government agencies. Finally, cash transfers should be gradually introduced.

Problem with it
Even though the statistics underpinning the logic might be accurate, the government will be branded anti-poor. Will the Modi government risk bearing this cross at a time when industrial growth has not shown signs of accelerating?

Strategic reserves
The report suggests a path the previous government wouldn’t have contemplated that physical stocks, and another 5 MMT should be in the form of foreign exchange reserves.

Problem with it
The panel is assuming a global surplus in food production. India is also a mega buyer and international traders could firm up prices if it finds New Delhi is desperate to make up for a shortfall. Even if the forex reserves are not as thin as earlier, is it wise to earmark a portion for buying foodgrains and pulses?   

So, concludes the report, the new face and structure of FCI will not be of a large procurer of grains in established states, but of an organisation that will “explore new vistas”. It will venture in areas where farmers even after 50 years of procurement operations have not been offered MSP. Its ultimate vision is of carving FCI into an “Agency for Innovations in Foodgrain Management Systems”, along with modern bulk handling at lower costs. “This is the need of the hour,” it says, based on the premise that there is no need for massive market intervention operations because for the past five to seven years public stocks are overflowing and these are costing thousands of crores of rupees to the exchequer. More so in rice, where India has emerged as the highest exporter in the world along with the shifting of consumption patterns away from cereals.

"Implementing this report will be beneficial. When crores of farmers who are deprived of the benefits of minimum support price start getting direct input subsidy in cash, they will feel someone is looking out for them. When FCI work is cut or simplified, the scope for corruption will also reduce." Shanta Kumar, chairman of committee on restructuring of FCI

Food Corporation of India’s role

• FCI was set up in 1965 against the backdrop of a major shortage of grains, especially wheat.
• Its main objectives are procurement of foodgrains from farmers at remunerative prices; distribution of foodgrains to consumers through the public distribution system (PDS); and maintenance of buffer stock of foodgrains for food security and price stability. FCI coordinates its functions through a country-wide network of offices.
• The Central government extends price support for procurement of wheat, paddy and coarse grains through the FCI and state agencies. All the foodgrains conforming to specifications are bought by the public procurement agencies at the minimum support price, plus incentive bonus announced, if any. Under the Decentralised Procurement Scheme (DCP), introduced in 1997-98, foodgrains are procured and distributed by the state governments themselves.
• FCI feeds the public distribution system so the Centre fulfils its objective of helping the poor. The National Food Security Act aims to cover 67 pc of population. So far, 11 states and UTs have implemented NFSA: Haryana, Delhi, HP, Rajasthan, Punjab, Karnataka, Chhattisgarh, Maharashtra, Chandigarh, Bihar and MP.

Shanta Kumar Report recommendations

• FCI should hand over all procurement operations of wheat, paddy and rice to states with experience and infrastructure: Punjab, Haryana, Andhra Pradesh, Chhattisgarh, Madhya Pradesh and Odisha.
• FCI should accept only the surplus (after deducting needs of states under Food Security Act) to be moved to deficit states.
• FCI should help states where farmers suffer from distress sales and which are dominated by small holdings, like eastern Uttar Pradesh, Bihar, West Bengal, Assam.
• Centre should make it clear to states that in case of any bonus being given by them on top of MSP, it will not accept grains under the central pool beyond the quantity needed by the state for its own PDS
• The statutory levies including commissions, which vary from less than 2 pc in Gujarat to 14.5 pc in Punjab, need to be brought down uniformly to 3 or at most 4 per cent of MSP, and this should be included in MSP itself. States losing revenue thus can be compensated through a diversification package.
• Do away with levy on rice millers.
• Centre (through FCI and Warehousing Development Regulatory Authority) can encourage building of warehouses with better technology, and keep an online track of grain stocks.
• Revisit MSP policy. MSPs are announced for 23 commodities, but effectively price support operates for wheat and rice.
• While the country is short of pulses and oilseeds (edible oils), their prices often go below MSP without any effective price support.  Pulses and oilseeds deserve priority.

Recommendations on PDS

• Centre should have a second look at National Food Security Act. Given that leakages in PDS range from 40 to 50 per cent, Government of India should defer implementation of NFSA in states that have not managed end-to-end computerisation; have not put the list of beneficiaries online, and have not set up vigilance committees to check pilferage from PDS.
• Bring down food security coverage of 67 per cent of population to 40, which would cover BPL families; increase 5 kg of grains per person to priority households to 7 kg.
• Give targeted beneficiaries 6 months’ ration after the procurement season ends.
• Introduce cash transfers in PDS. It can save exchequer Rs 30,000 crore annually.

Recommendations on stocking

• FCI should outsource stocking operations to Central Warehousing Corporation, State Warehousing Corporation, private sector and even state govts that are building silos through private sector on state lands.
• Phase out covered and plinth (CAP) storage and introduce silo bag technology.