The Reserve Bank of India (RBI) recently approved a proposal to restructure around Rs30,000 crore of food credit given to Punjab state agencies, allowing for the conversion of cash credit into a 20-year loan at a lower interest rate. The central bank also sanctioned a cash credit limit of Rs26,000 crore for this year’s procurement by state agencies.
The fact that food security of the entire country is dependent on Punjab’s agricultural performance may have prompted the RBI to adopt this liberal stance. But it raises a crucial question—will window-dressing cash credit of missing stock set a bad precedent for other agrarian states that are heading towards a similar predicament?
In the case of food credit, the procedure involves lending to the corporation, procurement of grains, storage in state godowns and monitoring of stocks by the state government. The cash credit given to procure grains should thus meet the amount of hypothecated stocks. When this does not happen, there is a clear case of discrepancy or missing stocks.
During April this year, missing stock worth around Rs20,000 crore was discovered in Punjab’s food purchases, following which the RBI instructed the affected banks to make provisions for the potential losses. The instruction was despite the general rule that all state government borrowings are treated as sovereign debt—that is, the debt should be paid automatically when the Central government releases food subsidy.
A 2014 investigation by the Comptroller and Auditor General uncovered the magnitude of the scam in Punjab. Of 3,319 trucks hired for paddy transport by the Food Corporation of India and four of Punjab’s nodal agencies, 3,232 were non-existent and 15 were vehicles other than trucks. The report goes on to show that Rs843 crore of losses was incurred due to the inefficiency of the Punjab State Warehousing Corporation because of delayed availing of loan from the National Bank for Agriculture and Rural Development, delayed handing over of godowns to the FCI, non-adoption of FCI’s storage and preservation norms, inadequate control over milling activities and failure to recover transportation charges.
The issue is not restricted to the state of Punjab. The situation prevails across the country and requires redressal at a fundamental level—better supply management. This is as essential for controlling inflation as it is for food security.
Although India’s productivity is not optimal, over the years the country has achieved enough, even surplus, production levels. The problem, therefore, lies in preserving this output for future use. According to the Food and Agriculture Organization, around 40% of the food produced in India is wasted and this includes vegetables, fruits, meat, milk, cereals and pulses. Wastage from the public distribution system, which is meant for ensuring food security in the country, makes up almost half of the total. Considering that India ranked a lowly 97th of 118 nations in the recently released Global Hunger Index, spoilage and pilferage are not things the country can afford.
The unified National Agriculture Market launched this year will go a long way towards settling transaction costs and information asymmetry problems by integrating the market and facilitating price discovery. But warehousing and storage problems will need to be addressed separately.
The concept of a Negotiable Warehouse Receipts system, as proposed by the Shanta Kumar Committee for restructuring FCI, is one way to break the monopoly of state agencies and incentivize farmers. It allows farmers to deposit their produce in registered warehouses for an advance and sell it later when market prices are high. According to the 70th round of National Sample Survey Office data, currently only 13.5% and 16.2% of the paddy and wheat farmers, respectively have sold their produce to procurement agencies.
Strict adherence to quality standards and norms should be made mandatory for the registered warehouses, private or otherwise. A combination of private and public agencies is essential to handle the vast and diverse agricultural output in the country.
Meanwhile, the FCI, which has been failing repeatedly in its initial objectives, should be streamlined and allowed to focus on states’ surplus produce meant for distribution in other states. Most of the produce meant for a state’s own consumption should be left to the state agencies.
Provisions must also be made to liquidate stocks as and when they exceed buffer stocks to minimize wastage.
Efforts should be made to revamp the food processing sector in India to reduce the perishability of food items. The setting up of mega food parks and cold storage chains as part of the Make In India project, and 100% foreign direct investment through the Foreign Investment Promotion Board (FIPB) route in the marketing of food produced and manufactured in India is welcome in this context.
A robust food-supply chain, which can make value additions through better storage, distribution and processing, will ensure that the agricultural sector remains competitive, transparent and profitable. This may perhaps also change banks’ negative perceptions of the sector.
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