On Wednesday evening, the Modi government announced the formation of a new committee to restructure the Food Corporation of India (FCI). It is expected that the FCI, which is the main government instrument to procure, store and distribute grains, will be broken into three separate entities to make it more efficient. The move follows the ruling Bharatiya Janata Party’s election promise to address the inefficiencies in food grain management of the country. For the better part of the past six years, India has been struggling with high food price inflation despite having record levels of buffer stocks of grains. The anomaly was one of the key factors why the two-term old United Progressive Alliance (UPA) government led by Manmohan Singh received a thrashing in the recently concluded national elections.

The appointment of a new committee, however, has a very familiar tone to it. Just a couple of elections ago, in 2004 the newly elected UPA had asked consulting firm McKinsey and Co. to suggest ways to improve the functioning of the FCI. This too was a manifesto declaration by the UPA.

Even that was odd since, the Bharatiya Janata Party-led government had appointed the Abhijit Sen led committee in 2002 to look into the long term grain policy to address these very same concerns of mismanagement.

And to round off things, one might recall the even the Administrative Staff College of India also gave its recommendations around 2002.

Needless to say, none of the past governments implemented any concrete suggestions. And that is how we find ourselves with another committee in 2014.

So what is so wrong with FCI and why is it so difficult to reform?

The FCI is mandated to achieve two key objectives for the government. One, it must procure the foodgrains from the farmers at the prices dictated to it by the government. These prices are commonly called the Minimum Support Prices (MSPs). The idea is to provide price security to the farmer. Two, the FCI must store and then distribute, along with state entities, food grains to the poor citizens of the country at prices dictated by the government. Such prices are know as the issue prices of grains. The idea is to be self sufficient as a country in terms of food grains as well as protect the poorest from hunger.

As it happens, almost every year, especially closer to elections, government tends to raise the MSP in a move to win over farmers. Although the MSP is recommended by an expert body called the Commission for Agricultural Costs and Prices (CACP) yet the final say belongs to the government. Often enough, state governments too pitch in and increase the MSP. This essentially means that the FCI maintains a steady procurement pattern, irrespective of whether the market prices otherwise are depressed or profitable. With more or less stable agricultural growth, this policy has led to increasing levels of food stocks with the FCI. One increasingly comes across evidence of food grains rotting in the open since FCI and the state-level entities do not have enough storage space.

Apart from the wastage, the excess procurement poses another big problem – that of increasing levels of subsidies. Subsidy is basically the difference between the economic cost of procuring, storing and distributing the foodgrains and the sales realization by the FCI (which is done at the issue prices.)

What leads to increasing levels of subsidy is the fact that while MSPs keep increasing, the issue prices hardly ever do. And FCI has control over neither of them. In fact, there is precious little that FCI can actually control under the current regime since even payments to labour etc are bound by government strictures.

So FCI can determine neither the purchasing price nor the selling price. It can determine neither the quantity it wants to buy nor the quantity it wants to sell.

To the extent it is free, however little it may be, the FCI performs just as efficiently as the next government office.

The anomaly of high foodgrain stocks and rising food prices too are not something that the FCI on its own can address. That too is a policy decision.

That begs the question: What kind of restructuring is possible?

The government cannot privatize the FCI without letting go of all the policy control it has.

If it does not privatize, even then since most of problems are not generated within FCI, how far would breaking FCI into three entities help? Unless, of course, the government is willing to reform itself in terms of giving up populism and adopting a more pragmatic approach to both procurement and distribution.

It seems unlikely that the government can satisfy both the constituencies — farmers and consumers — at the same time. With the right to food law in place, government is now duty bound to provide subsidized food for the time being.

So if the government still promises the farmers a guaranteed purchase of their produce then FCI would, for one, have to ramp up storage facility. Such a job perhaps is better done by involving the private sector. However, the experience of the first four years of the National Warehousing Development Authority, which is charged with the promotion of privately held warehouses, has been fairly disappointing.

The other element would be to give much greater operational autonomy to the FCI in deciding how it treats food stocks, which are in excess of the buffer requirements.

Can the government do it? A recent press release from the ministry of agriculture on 8th August effectively dissuaded state governments from announcing a mark up on the MSPs declared by the central government. That is a clear signal that Modi is willing to cut down on populism, at least at the level of the states.

Policy Puddle runs every Thursday and comments of public policy developments.

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